Three perspectives on the coming Grexit

The Greek referendum and the hype leading up to it have gone exactly according to my script of 8 days ago, where I predicted a resounding ‘no’ vote and a Grexit to stop the bank-run, with the other European politicians too offended and belittled by Tsipras and Varoufakis to organise another bailout.

The Grexit is now very likely, so likely in fact that Varoufakis’ friend Jaques Delors is writing open letters to European newspapers to implore the rest of Europe not to let Greece go!

To get a good view of what has happened in the last 15 years and what is going to happen in the coming months, let us take the perspectives of three fictitious people: that of an informed Greek businessman, that of an informed Dutch politician, and that of an American commentator.

The Greek business man, February 2015

Syriza has just had its moment with a landslide victory in the elections, getting the population to believe that the Eurozone countries will indefinitely support their pensions and welfare, and allow Greece to not reform in any meaningful way. Party time!

The election after-party was great, with lots of Ouzo and olives, but I know it can’t last. The other Europeans might have seemed gullible to the extreme so far, but even they will not want to be to be hung out to dry in the media like saps, month after month. At some point, the EU countries will stop lending money to anything Greek and ask to be paid back something, whether that is a government, a bank, or a business. How to plan for this, what to do?

Let’s think about what I stand to lose if the Greek government starts issuing that awful Drachma again, worth a fraction of the current Euros.

Firstly, my bank accounts in Greece will halve in value, if not worse. So I am going to take out all the money from my deposits and park it in Northern European banks, or Northern European treasury bills. Moreover, I will give my uncle, the bank manager, a call so as to invite him for dinner and discuss the possibility of taking out a long-term loan with his bank, Euros I will then also park in Northern Europe. When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe. I am going to get rich from this!!!

Secondly, once the Drachma comes back, my holiday resort will have Greek workers paid in Drachmas and foreign guests who want to pay in Euros. That should work just fine and, since I know my workers will then be paid a lot less, I can start to withhold their pay in the months just before the reintroduction of the Drachmas. I will then pay them later in fewer Euros or perhaps not at all if the mess is big enough and I manage to go bankrupt for the fourth time this decade. All the assets are in my 2-year old son’s name anyway, so I should be able to get away with that trick again. By the same token, I can make a deal with my old school-mate who is now a tax auditor so as to delay paying my taxes until just after the reintroduction of the Drachma.

Thirdly, I am going to have to think about all that German beer I stock for the tourists and thus have to pay for in Euros. There has got to be a way I can use the coming Grexit to have my beer and not pay at all. They don’t trust me at all over there in Germany, which means they insist I pay beforehand, but perhaps I can wriggle out of that if I have to for a few months. Oh, I know what to do: I am going to set up a post-office business in the Netherlands via which I then buy lots of beer with credit, which I then transport to my resort. Those post-office businesses provide a means for American companies to hide from their tax authorities, so why shouldn’t I set one up to defraud a German beer company? By the time they find out what has happened and have traced things back to me, all the intermediary companies will be bankrupt anyway and I will have that beer but no need to pay for it.

Now, what other opportunities will open themselves up? Surely, there will be a humanitarian crisis here once the Grexit happens. How can I make money off that? Perhaps my daughter, who studies in Paris, can set up an aid agency for ailing Greek Islands like the one I live on. I should plan the aid brochure, which incidentally makes advertisements for my resort: those aid workers have to stay somewhere and they need to rent some place for those starving old ladies!

The price of particular supplies might also skyrocket at such moments. I bet the Internet can tell me what kind of goods usually increase in price, so if I start hoarding those, preferably using loans, then I will be in a great position to profit once our two political leader have taken us out of the Euro. Hmmm, this Grexit might work out beautifully for me….. hurray for Syriza ….. perhaps I should have lunch with my old mate Varoufakis and ask him just when he plans to blow the current deal with the Europeans so that I have everything in place at the right time….

The Dutch politician, June 2015

That bloody Greek crisis again, man!!! I had the main Dutch pension fund on my back when this thing went pear-shaped in 2008/2009, blabbering on about how they had hundreds of billions of Euros forthcoming from these Southern European banks and governments. Something about interest-rate swaps where they were on the right side of the bets. The mega-deal with the Greeks, Italians and Spanish secured them most of those profits, but has that been the end of it?

Not in the least. It has been one thing after the other with those damned Greeks. If only they could be like the Spanish, or better still, the Italians. With the Italians you know you are going to have a good glass of wine in the evening, talk about shit and compare mistresses, whilst you do a quiet deal that is not too bad and out of the media in the morning.

But with the Greeks? In the evening you have to read in the Greek newspapers that you are a Nazi stealing from old Greek ladies. In the morning, you get to read in your own newspaper that that peroxide-blond right-wing nutcase in your own parliament has called you a weak-kneed heroin-pusher again. And in the meantime you have to hear how undemocratic you are and how much better for the world if you simply lent all the money you were ever going to have to lend out and then keep quiet and be ashamed of how uncool you are. It’s like being at university again, infuriating, you just can’t win!

What was it this time last year? Last year, you had this great deal sown up with Samaras, a very reasonable-spoken Greek prime minister, where he agreed that they would finally start laying off some of the teachers and doctors who never actually showed up at the schools and hospital they supposedly work for and simply get salaries for no output. He would blame me for forcing him into this in his own media and I would say I finally got Greece to be responsible. Being portrayed as a Nazi again in Greece was a bit of a bugger, but I wasn’t planning on going on holidays there anyway (the mistress prefers the lakes in Finland), so that was ok.

Now, as a result of his ‘outrageous concessions to Northern European Nazis’, the Greek population, with unproductive teachers and doctors in the front row, has voted themselves a party that promises to re-hire everyone who was fired for gross incompetence. That old show-off Varoufakis now flat-out refuses to even pretend to pay back those generous new loans Greece was given not much more than a year ago. Man, the ingratitude of some people!!

Worse, I have been to college with some of those Greek jokers now in the government, and they are all the same politicians and their advisers again. They just jumped ship from the old Pasok party to this new-fanged Syriza gang. But they are all still the same people, whom Christine Lagarde has told me are individually dodging their own taxes and have large bank accounts in Switserland. I know exactly what it is they are hiding, but I don’t have the freedom to release that information to the press since Christine wants the Greeks to sort out their own tax evaders. What was she thinking of? It is like expecting the foxes to ramp up security to the chicken coop!

What do these Greeks want now? They want the ECB to keep lending their banks unlimited amounts of Euros via the ‘Emergency Loan Assistance’ scheme, presumably until all the Greek deposits have left that country and are safely in one of my own banks. And they want me to openly support their demand that they won’t ever have to pay anything back of the loans made to the Greeks over the last 15 years, even though I already agreed to halving their loans in 2010-2013 in return for reforms that they didn’t implement.

I hence am going to have to take my economic advisors seriously who have been telling me for years now that a Grexit is inevitable. Ok then, man-up and think this through, what are my risks?

First off, openly admitting that Greece is bankrupt means that the European Financial Stability Facility will come knocking on my door because we helped to guarantee the loans they gave to Greece. I remember the great party where we agreed to this, but now this is going to come back and bite me. We will have to openly admit a loss of some 10 billion Euros (if not more, hard to remember just how much it was. How much were we liable for again with the ECB? Have to ask in the morning!). This of course means budgetary pressure for years, which might cost me the next election.

I am going to have to find a way to blame the Greeks for this. To that end, I am going to have to quickly start portraying them as lazy junkies who have lied to all of us all this time. Easy peasy because the population already is prone to believing that. I know that blonded right-wing rat-bag will yell ‘I told you so’ from now till the next election, but if I just keep calling him a racist, the electoral fall-out shouldn’t be too bad.

Perhaps I can go one better though and avoid having to own up to that 10 to 20 billion Euro mistake entirely. Maybe I can get together with the other Northern European countries and argue to the EFSF and the ECB that we take on this loan onto our own books as other Eurozone countries, but that they should lend us the money to pay these loans back, with the loan tied to what Greece does. Perhaps special bonds that we will only have to pay back if Greece pays back its loans to us? Hmm, it sounds a bit too dodgy when it is put as clearly as this, but perhaps we can get the whizzes in our financial unit to think of a more complicated way to have the loss converted into something that needn’t be visible till a few elections down the road and I am safely retired, enjoying stints in the board of directors of the major Dutch banks. The media release will have to use the words ‘threat of contagion’ liberally. That always sounds scary to the population and yet is too difficult for them to understand and hence allows for a bit of discretion.

Second off, those bloody Greeks are threatening to open their borders and let in millions of Africans and Asians smuggled via Turkey into the EU. We are going to have to talk about strengthening border patrols around Greece, for which I need to talk to their neighbours – Bulgaria and Macedonia. Those politicians are a corruptible mess themselves and I know that the Schengen-neighbours just wont trust them to do our bidding, so we are going to also have to think about setting up controls in the next ring up – Hungary, Austria, and others. We are also going to have to insist with the airlines that they start checking passports again for passengers on any flight from that region. God, this is going to be messy!

Third off, even though the Greek elite has gotten super-rich from all this, it will still be a tragedy for the majority of the Greek population and I can’t be seen to be uncaring, so we are going to have to be seen to have some humanitarian plan ready. What will they need? Shelter, food, health care, and water: the basics. We are going to have to talk to the Greek ministries about ways in which we can support just those basic provisions in Greece without being seen to bail out the whole country and I know this is going to simply open up another gushing financial wound: the Greek political system is now set-up to take advantage of such outside funds, slushing it to Switserland or banks in my own country (but owned by them, not me, so that if I ever organise a bailout for my own banks, I will be bailing them out!).

Fourth, we are going to have to think about the legalities of having Greece in the Eurozone whilst they also have a drachma. With all that grand-standing that the Greek politicians have been doing the last 20 years – insisting only their cheese is called ‘feta’, blocking Turkey’s entry into the EU, and blocking Macedonia’s association with the EU just because they dare call themselves the same name some Greek province does – I just know that they are going to fight us tooth and nail if we try to kick them out of the Eurozone deliberations and structures. Those nit-picking European courts are going to agree with them as well, even if we just bar them from the ESFS and ESM system in the future. It is like walking around with a goddamned junky on your tail who won’t stop clinging to you as long as you have something to share.

Damn, what a mess!!! Why on earth didn’t we just let them go bankrupt in 2010 and simply supported our own banks and pension funds from the fall-out if that was really necessary? I need a Finnish holiday….

The American blogging economist, June 2015

My audience of econ grad students expects another juicy piece on Greece.

Of course, my audience doesn’t even know where that country is or how the Byzantine politics of Europe truly works, let alone that no-one is really in charge there. But it’s in the econ-news and you can’t be a self-respecting economist without having all your pet theories confirmed in this saga, so I gotta write something.

What am I going to go for this time? Have a go at Krugman who keeps bleating that the Europeans should print more money for Greece and not force them into austerity? He is easy to refute, simply by pointing out the massive capital flight from Greece: there has been no shortage of money going to Greece at all. It simply doesn’t get spent there as it leaves the country almost as soon as it arrives, ending up in old socks or Northern European treasury bills. It is the incredible political dysfunctionality of the political elite in that country that is the economic problem there, not a lack of money or any true austerity (an austerity which generations of Greek politicians have simply refused to actually implement). Indeed, if the Greek saga shows anything, then it is that throwing nigh unlimited funds at a small country will not help it avoid a big recession once the political and bureaucratic system has metastasised to nearly pure rent-seeking. Having loans of 180% of GDP plus extra ELA loans, and having lots written off already, it is hard to argue that not enough money has gone to Greece! So I can have a go at the old Krugger for abusing the Greek saga to score an ideological point, but the argument might not be understood by my audience because I will then be seen to pick on the poor but-oh-so-brave Greeks.

What other story important in the States can I pretend is definitely settled by the Greek saga? Perhaps how you need a fiscal union if you are going to have a monetary union? No, that wont play out so well with all the individual states here who are simply allowed to go bankrupt if they spend too much. Hard to argue that Greece should have indefinite bailouts when we allow our own states to go bankrupt. I’d have to argue it should never have been bailed out in the first place, which wont play well with pictures of starving old Greek ladies soon in the news.

How about blaming the Germans for being German then? Stories of inflexible and insensitive Germans normally go down well. I can pretend that Merkel is the one who gets to decide what happens to Greece and berate her for demanding the impossible of Greece, conveniently ignoring the other 20 governments and 10-odd institutions that have to agree and that are dominated by Southern Europeans. My audience probably won’t know all of that and many like to believe the worst of the Germans anyway, so I can shove that under the carpet. I can detail the idiotic things that the Troika has asked of the Greek government over the years, such as increasing the pension-age to near-US levels, or making it possible to actually fire Greek civil servants who previously had a constitutionally guaranteed job for life…

Ehmmm, no, skip that argument and those examples, I will clearly have to stay away from actual details. I can go for older stuff though, such as how the French and Germans didn’t hold to the Maastricht criteria either, or have ignored various experts at various times who told them how the Greeks and others were cooking the books. I guess that would work somewhat towards making them sound like meanies towards Greece, but there will still be a nagging doubt in the minds of much of my audience that someone who lends money has some right to demand good behaviour from the other side. The Germans might come off looking too sympathetic with any angle that portrays it as a simple game between a lender and a borrower.

I know what to do: I can of course go for that golden oldie and blame the European bankers for all the woes of Europe. Easy to do that, for the ECB has been guilty of printing money for them via those easy loans they offered to big banks, hidden behind the name ‘market sterilisation’. The bankers’ bonuses are huge; the boards of banks are full of ex-politicians; the ECB has refused to become a people’s bank; and the European institutions have pretended to start to monitor banks whilst there is still no institution with the actual manpower to do the monitoring. So I can point all that out and seem an informed person when I then make the leap to say the politicians have all been hoodwinked by the bankers when it came to Greece. My audience will lap it up. It is not quite fair to lots of European politicians whose first thought was their voters and their own pensioners, and it doesn’t fit the reality of how lots of rich investors have lost their shirts over Greece, but one cannot spin a good old morality tale without taking a few short-cuts.

Starving Greek ladies paying for European fat bankers and being made an example off for daring to stand up against the capitalists of Europe? Yeah, that has a nice ring to it. Even if you turn out to be wrong with a story like that, you sound sympathetic. You are almost bound to be on the right side of what ends up as the written history of this saga.

My Perspective

The Greek saga has been an unanticipated cluster f-up all round. I don’t believe for a second that the Greek politicians in 2008 saw the misery of their own country coming, nor that the main politicians doing the deciding in 2010 knew what was coming.There are too many decision makers involved in many different types of institutions for any single interest to have been decisive in the decision making. No, the prolonged Greek recession and the descent of the entire Greek political and bureaucratic system into rent-seeking apathy has caught them all out.

The main policy failure has thus been of not reading correctly how Greek politics and the Greek economy would evolve when put in a situation of almost unlimited loans and a troika that would come round and ask them to do sensible things that went against the interest of the politically powerful. They should have seen coming that the Greek politicians would start to blame the people who were feeding them the money, even though that money supported their political clients. They should have seen coming that huge loans and open conditions would make things far worse, not better.

It is thus a failure of political theory, both in economics and other social sciences, that is to blame. The European elites are steeped in historical education on politics but were nevertheless naive about the internal dynamics within Greece and stuck to that naivety for far too long after it became crystal clear round about 2011 how hopeless the situation within Greece truly was.

My take-away message: don’t lend vast amounts of money to parasitical political elites and don’t send them more once you found out you were mistaken about them earlier! It is not good for their populations, nor your own.

This entry was posted in Uncategorized. Bookmark the permalink.
Subscribe
Notify of
guest
22 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Dave
Dave
6 years ago

Hi Paul,

Not trolling here. All questions are genuine not rhetorical.

I’m having a hard time reconciling two of your statements.

The first from your comment to Nicholas in his post prior to yours:

“With 180% of GDP loans and massive further recent loans (via the ELA), I don’t know what more pump-priming one could possibly expect to see in Greece. There has been no austerity in Greece, quite the opposite in fact. The failure is a total blockage of the Greek political and bureaucratic system. One can blame the glut of money being channeled via the wrong people for that (for which the European elites can be blamed, as I already did in 2011!), but not austerity.”

And, this statement on behalf of the Greek businessman:

“Firstly, my bank accounts in Greece will halve in value, if not worse. So I am going to take out all the money from my deposits and park it in Northern European banks, or Northern European treasury bills. Moreover, I will give my uncle, the bank manager, a call so as to invite him for dinner and discuss the possibility of taking out a long-term loan with his bank, Euros I will then also park in Northern Europe. When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe. I am going to get rich from this!!!”

I get that under the SNA funds are flowing into Greece via the ECB, but how does one equate this with no austerity if the funds are immediately flowing back out via ethically corrupt channels and so not being spent within the Greek state?

Isn’t the whole purpose of pump priming that the government designs expenditure programs to deal with unemployment? Alternatively if Greece had a central bank, it could do what only it can do?

For me this is similar to Indonesia’s financial crisis on mogadon, where the mogadon is prescribed by Dr. ECB. Yes, Greece is a cluster*&@k, and the EU’s response is the result of its byzantine (pun intended) structure, but they let them in so now surely they have to live with the consequences of their actions in the same way the US had to deal with AIG, Lehmans, Bear Stearns etc.?

paul frijters
paul frijters
6 years ago
Reply to  Dave

Hi Dave,

I guess it comes down to what you think ‘austerity’ means. I think of it as limiting the expenditure of the average person in the population. Sensible, no?

Well, under that definition, the average Greek person has spent an awful lot in recent times, but has spent it to buy up overseas assets in return for loans and promises that are not credible. The loans of both the government and private Greek parties are now in the hands of overseas institutions. Because this borrowing boom is not sustainable, I see it as a kind of transfer to Greece as a whole, leading to the opposite of austerity.

Now, this is certainly not to deny that the Greek economy is doing very poorly as the unemployment rate (even accounting for the grey economy) is high and good young Greeks are thus finding jobs abroad. Nor is everyone is cashing in on the possibilities of lending from abroad, quite the opposite: the true winners are a small group of people, exemplified by the 2000 Greek tax evaders on the Lagarde list who make up much of the Greek elite.

So the ‘best’ way to see the issue of austerity is that the small group of politically connected and savvy Greeks are successfully grabbing resources of both the larger population of the Eurozone, as well as the rest of the Greek population. The debt boom has strengthened their hand and influence, not lessened it, supported by a population for whom any change means pain. We are thus now in a scenario where large groups of the Greek population are hanging on to whatever meagre entitlements they think they still have, which often involve the state, but where production in Greece is stagnating and probably going down more in the near future, not really due to a lack of spending but due a complete loss of trust in the viability of the whole system. That is why I talk of a kind of paralysis of the Greek political economic system, which in part is an issue of the wrong prices (anything connected with the state is still overpriced) but also of entrenched corruption and sheer rigidity (how many fully-paid but not working teachers can a country support? Try to buy land there and see how far you get!).
Putting the economics of production in Greece simply: no amount of lending has been able to change the fact that the state and many of its workers are over-priced. No amount of additional lending or spending will change that either. More lent money will simply be used to buy up more foreign assets.

Dave
Dave
6 years ago

I agree with your stance except the most important point/assumption where you state: “I guess it comes down to what you think ‘austerity’ means. I think of it as limiting the expenditure of the average person in the population. Sensible, no?”

Sorry, but I can’t agree.

If the fiscal multiplier means anything (which is debateable at least), then surely it must be evaluated within a state. If as you say the ECB is facilitating transfers from the non-Greek EMU to Greece and then Greeks are transferring these funds back to the non-Greek EMU then this is not expansionary for Greece. Surely it’s a wash as far as the Greece economy is concerned?

Yes, it’s an absolute boon to the Greek business perspective you outlined, but if it’s an inflow one second and then an outflow soon after, it’s not a flow of funds to the Greek economy in which case it’s not expansionary for Greece. Isn’t the only way it’s expansionary is if the Greek businessperson then uses the funds within Greece? I would think if this has happened or has happened since 2010 on a sufficient scale then it would surely be noticed in the Greek national accounts.

Dave
Dave
6 years ago
Reply to  Dave

Also, while no fan of Piketty, doesn’t he have a couple of good points about debt: https://medium.com/@gavinschalliol/thomas-piketty-germany-has-never-repaid-7b5e7add6fff

paul frijters
paul frijters
6 years ago
Reply to  Dave

that is fine, we dont have to agree. Of course it is a problem for the Greek economy that the spending is not done in Greece, but to see this as somehow ‘austerity inflicted by Europe’ is very strange to me. No-one can force the Greeks to spend the money inside Greece that they are given, loaned, or earn.

dahl
dahl
6 years ago

Mankiw linked today to the following Friedman piece from 1997. His grasp of these matters was prophetic.

‘The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.’

http://www.project-syndicate.org/commentary/the-euro–monetary-unity-to-political-disunity

derrida derider
derrida derider
6 years ago

Friedman was far from the only economist to make that point at the time – and those critcs included plenty of European ones and plenty of lefty ones too

The less forgiveable error was not to recognise this in 2010 and have the Grexit then.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
6 years ago

Agreed. I think a fair few people are saying that.

dahl
dahl
6 years ago

Sort of agree on the 2010 issue. The (sort of bad) thing of note that it did do from what I have read is insulate the private banks from a potential default.

I can understand why avoiding default would have occured (linked up nature of global banking and capital etc made all too clear from the GFC meltdown so let’s be risk averse). The thinking being we must avoid another great big banking freeze as occured a year earlier…

But it also allowed French and German banks to insulate themselves by securitising greek debt and selling it off (at least that’s my read of the following analysis). Conspiracy theorists could have a fun time with this though.

http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf

However, I’m not so sure that the euro decision (1990s) is as forgivable as your comment indicates if plenty of other economists were (correctly) saying that monetary, but not fiscal or politcial union was a major problem in the making. Thinking through the possible consequences for millions of people (or potentially hundreds of millions) should have been enough for a sensible flat analysis to lead to a no monetary union decision (for some at least) – which the British did incidentally.

I don’t think this is a left/right issue by the way.

I do think that Friedman’s quote was the most clear, succinct and best prediction of events that have since unfolded that I have come across. Hence the need to share.

If you have others that sum things up so nicely I’d very much like to read them.

Chris Lloyd
Chris Lloyd
6 years ago

“Let’s think about what I stand to lose if the Greek government starts issuing that awful Drachma again, worth a fraction of the current Euros. Firstly, my bank accounts in Greece will halve in value, if not worse.”

I have no idea what you are talking about Paul. Introducing the Drachma need not have any effect at all on Theo’s Euro bank account. Are you implying that his private assets in Euros will be forcibly converted to Drachmas at a non-market FX rate? Surely the reason for the bank run is that people are scared the national banks will fail and they will lose all their money. Perhaps you are saying that if they did fail then the Greek govt might honour the debts in Drachma, but at a non-market FX rate. If so, you should say that. But Greece running a separate currency (which they did until 2002) is a distinct issue from bank failure.

paul frijters
paul frijters
6 years ago
Reply to  Chris Lloyd

see if someone else who says the same thing is clearer to you:
http://www.cesifo-group.de/cesifo/newsletter/0615/Original_Sinn_June_2015.html.

Chris Lloyd
Chris Lloyd
6 years ago
Reply to  paul frijters

Nothing in that links adds support to the section of your post that I put in quote marks.

paul frijters
paul frijters
6 years ago
Reply to  Chris Lloyd

you say “Firstly, my bank accounts in Greece will halve in value, if not worse.”

I have no idea what you are talking about Paul. Introducing the Drachma need not have any effect at all on Theo’s Euro bank account.”

As I explained in my prior two posts on the Greek crisis and the comment threads of those (which you could have looked up in stead of being so aggressive), there are many things that could happen within a bank run and with one or two currencies. The situation I am referring to in the post is one whereby Greek banks run out of Euros and there is thus a complete freeze on bank operations, leading the government to bail out the banks with a new currency (drachmas) which then allow the banks to pay their customers in that new currency, effectively converting the Euro deposits into drachmas at a lower rate. That expectation is to a large extent driving the bank run, I argue (alongside many other commentators, which made me a bit dubious how genuine you are when you say you have no idea what I might be on about).

Sure, many other scenarios are possible. One whereby banks indeed get bailed out in drachmas but have to keep reimbursing in Euros (in which case the freeze continues for a long time). One whereby there is no new currency and the banks go bankrupt. Others where there are different asset classes, etc.

I think the conversion into drachmas is the more credible one, but we will see.

paul frijters
paul frijters
6 years ago
Reply to  Chris Lloyd

over at Core Econ (where I crosspost) you will find a discussion relevant to this where the issue of alternative forms of bank bailouts also came up (http://economics.com.au/?p=10117#comment-221235):

Casey says:
July 6, 2015 at 7:55 pm

Again congratulations on another interesting post.

While an awful lot has been written about Grexit, little has been written by economists about the mechanisms of how an exit “should” be executed.

From my distant view it seems there a series of bad and even worse options. One of your straw men suggests:

“When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe.”

Maybe redenominating all Greek domiciled financial assets and liabilities to Drachmas is the way it will play out, but it is a terrible solution. Indeed, your straw man himself explains why.

In a Grexit the government is going to have to say to its creditors “we cannot pay you what is owed, so you best write off your losses”. That is rather what happens in a conventional bankruptcy, only in a corporate bankruptcy the creditors seize all the assets of the borrower”. Well, unless there is to be an invasion of Greece to enforce reparation (and that does not seem likely) then it is best to think of the Greek government debt as non-recourse loans from Northern Europe.

Having defaulted on its borrowings, Greece can no longer print (I use the term in its general sense) Euros. That does not mean that the Euros that it has previously printed cease to be good money – they remain a claim on the ECB.

My shopping list of major challenges for Greece would at least include:

(1) Non-military retribution by its creditors – and one can think of lots of ways Greece can be spanked both inside and outside the EU. I guess one asks for mercy.

(2) Euro denominated debt held by the Greek domiciled banks has to be “made good”. That means the Greek government cannot default on its bonds held by domestic banks. Greek banks have liabilities in Euros. If those bonds technically default along with all other Greek government bonds, then the Greek government must immediately gift a comparable amount of new bonds to the Greek domiciled banks – a recapitalization. The Greek government must promise to meet interest payments and ultimately repay those liabilities in Euros, even if that debt is restructured in some sensible way.

(3) The Greek government still has to pay its bills. Since it cannot print Euros, it will have to:

(a) not have its budget in deficit (which it will be close to achieving with interest expense savings after defaulting on all government debt held outside of Greece) and pay bills in already issued Euros;
(b) print a new currency (Drachmas) that will be new claims on the Greek central bank. This new currency would presumably start at an FX rate of par with the Euro. Greece, at least for a period, becomes a dual currency economy. If the world believes that the new post-default Greek budget will not go into deficit again, the new drachmas will maintain value, but if the budget goes into deficit the drachmas will rapidly depreciate. Maintaining the value of the drachma (and avoiding internal revolt) will be the ultimate long term discipline on the Greek government budget setting.

As a practical matter, there is a real question of whether the Greek domestic banks are capable of running a dual currency banking platform. At least one large bank needs to be able to manage dual currency transactions. I raised this in Athens three years ago. Let’s see.

Between Scylla and Charybdis.
Reply

Paul Frijters says:
July 6, 2015 at 9:05 pm

Hi Casey,

thanks. I agree it is important to try and think through practicalities and am glad to see you approve of my ‘straw man’ device to do some of that practical thinking.

A couple of further bits of information that might help here:
– The Greek Central Bank does actually print Euro bills with particular series numbers. In principle, the amount they bring into circulation has to be agreed to by the European Central Bank, but there is the ‘nuclear option’ of printing as many Euros as the Greek government asks them to print. It is a particular form of Grexit that might be easy in terms of administration for the Greeks, but it would be burning an awful lot of bridges with the rest of Europe. However, it is not inconceivable that the Greek Central Bank prints Euro-like bills that differ enough to be recogniseably different (the Drachmas) so as to have little problems with bank machines and such.
– Greek private banks apparently don’t own many Greek government bonds. Rather….

Chris Lloyd
Chris Lloyd
6 years ago

“…believe that the Eurozone countries will indefinitely support their pensions and welfare.” Actually, Greece has increased its retirement age from 58 to 67 (even though some can avoid it).

paul frijters
paul frijters
6 years ago
Reply to  Chris Lloyd

and where do I suggest the opposite in the post? Indeed, I already mention the increased pension age when talking about the troika. And indeed, we can discuss the difference between the official pension age and the actual one that applies in terms of who actually works at what age.

You seem to understand the post perfectly well, Chris, but appear to dislike it intensely for a reason you have not yet articulated.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
6 years ago

Paul F,

You’re crashing out in this debate – you’re not responding helpfully to people’s challenges – just linking to other articles, an old trick of a former author here.

paul frijters
paul frijters
6 years ago
Reply to  Nicholas Gruen

partly, I have a day job and partly, I often cannot put it all that more clearly than in the post (I for instance think I responded perfectly adequately to your question on my point to your post, but clearly you disagree). Besides, no-one can respond to all the questions put to them (do you?). With lots of seemingly non-genuine questions, I am increasingly seeing the point of the advice of Ross Gittins to never respond to comments.

To show you my goodwill, I will respond to CL again then.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
6 years ago

Yes, I try to respond to all questions that seem bona fide.

The thing I want you to respond to is your assertion that by taking their money out of their Greek banks and investing it elsewhere, that this is a rip off of the Europeans. I can see that in the broken monetary union that the Greeks are withdrawing money from insolvent banks which are then backed by the ELA – funded by the ECB. So from the European POV this is the Greeks helping themselves to European euros. But the point of the monetary union and the pact with the Greek people in the European monetary union is that if they have euros, those euros are safe, bankable etc. They’re not Greek euros. They’re euros. So handing the Greeks euros today for for euros that have reposed in their accounts since yesterday or for years doesn’t seem to be particularly corrupt or anything else. It’s making good the promise.

As part of this cockamamie monetary union the ECB has an obligation to act in concert with the Greek central bank. That’s Draghi doing “whatever it takes” in the PIIGS countries. Whatever it takes until oh wait, until it isn’t prepared to do whatever it takes any more.

paul frijters
paul frijters
6 years ago
Reply to  Nicholas Gruen

Nick,

I do get your point (and I did so last time!). As I responded already, and as the post has tried to make clear with the story of the greek entrepreneur and his family member who runs a bank, the rip-off occurs via the loans made in Greek banks: when one expects a grexit, borrowing euros in Greece against the expectation that you pay back in drachmas becomes a very lucrative deal. This is also what Sinn talks about.

dahl
dahl
6 years ago
Reply to  paul frijters

It’s the arbitrage opportunity with possible inside information (or in a worst case, power of decision) that makes it problematic yes?

I think it’s perfectly reasonable to point out that opportunity (and it seems a likely scenario playing out given what you’ve described re capital flows).

I also like the multiple perspectives as it helps to understand the issue from those involved. But…

The one you missed was the older greek gentleman sitting crying in front of the bank the other day (of twitter and interwebs fame).

Replace the US based economics blogger with that chap and you’d have put the arbitrageurs in the correct context.

I am and will always be Not Trampis
I am and will always be Not Trampis
6 years ago

I have never heard of Paul’s definition of austerity at all.

I have always thought of austerity ( and i have written quite a bit on the subject) as reduced government expenditure as to detract from growth. This is what Keynes thought it was as did Hayek!
On this basis it is quite easy to see why Greece has experienced a depression which of course made things worse for the Greeks and for creditors.

If you are going to take on a unity ticket of Kruggers, Brad De Long, David Glasner, David Beckworth, James Hamilton, Simon Wren-Lewis et al then you are either very brave or stupid.

There is NO evidence whatsoever that Greece has had an expansionary fiscal policy.