Greek referendum: Why is this surprising?

Imagine for a moment that you have a gang of feral youth on your street who have the habit of stealing everything from car keys to roses from the front lawns; and then hawking them off back to you and your neighbours from the street corner; living off the proceeds quite grandly with new clothes, sneakers and long beach holidays. One fine day after an old woman is mugged by this gang all of you get together and decide to teach these youth a lesson but cannot decide whether a long spell in jail or a short spell in backbreaking community service is the best way forward.

So, you decide to ask the gang of youth to decide amongst themselves, democratically of course, which punishment they prefer; and if they preferred none they would need to leave your street. The gang of youth put to the vote two different questions though — namely do they reject your authority or accept your authority (not the two choices between jail and community service you had outlined). Predictably, more than 60% of the youth vote to reject your authority; and instead want you to be more accommodating given their youth and upbringing. Next morning, you express surprise at their decision.

For anyone scratching their heads about just what happened over the weekend, the above story is a simplification – but not by much – of what just happened in Greece over the weekend (see “Bubble and Squeak” and “Politics IS Economics” on these pages). To be sure, a lot of blame is to be passed around, more or less equitably between the EU and Greek politicians. Alex Tsirpas and Yanis Varoufakis twisted the question to be about austerity (which the Greeks didn’t want) rather than about the euro (which they do want); and now they claim a national mandate for demanding debt relief (which was never in question even before the referendum).  For their part, European politicians have played fast and loose with the facts, failed to confront reality and pretty much done everything that I predicted they would do on these pages many moons ago, when I wrote “The men without qualities” – Oct 29, 2011. Note to self – even though two of those leaders changed with Sarkozy and Berlusconi out of the picture – nothing else changed; hence the golden constant for European politics remains that all politicians are beige.

From the point of view of someone more sympathetic to the Austrian school of economics, the current crisis in the euro merely proves a few things that were well known for a while:

  • You cannot borrow your way out of a debt crisis
  • “Bagehot principles” must be adopted when rescuing banks
  • Productive capacity must expand to justify money printing
  • It’s always better to take a loss today than postpone your losses to tomorrow

What are the “Bagehot principles”? Named after Walter Bagehot, there are 3 rules for central banks to rescue commercial banks that are in the middle of a bank run or otherwise facing massive losses – rule 1, make adequate liquidity available; rule 2, only accept good collateral and rule 3, charge a penal rate of interest

Instead, the EU adopted a number of rules that violated these precepts, sometimes egregiously:

  1. The Greek government – a bad credit – was allowed to borrow more money; thus a credit crisis was mis-diagnosed as a liquidity crisis.
  2. Despite a near default and serial downgrades by rating agencies, the ECB acting on political instructions expanded the definition of allowable collateral repeatedly to include Greece sovereign debt. Despite this, on every rollover and refinancing, private banks sold off their Greek government bond positions, leaving almost the entire amount in the hands of public institutions (only about €50bn of the €320bn of Greek sovereign debt is now thought to be in private hands; its quite likely that the net figure is a lot lower).
  3. Strangely despite the relaxation of credit standards, the EU did not provide adequate liquidity so the Greek government never had sufficient liquidity to plan anything for over a few weeks at a time.
  4. Interest rates were set far too low to effect any change of behaviour from the Greek government; indeed instead of allowing the market to set rates the EU explicitly acted against free markets by banning the shorting of European government bonds and synthetic shorting by purchasing protection through CDS contracts; this had the effect of switching off a spaceship’s radar when trying to fly through an asteroid belt. Without any reasonable market input from the marginal risk taker (i.e. anyone willing to purchase risk at a given time), interest rates were set far too low for the Greek government; in turn perpetuating bad behaviour and postponing the day of reckoning when all debts fell due.

So what are the options now? Broadly, there are two camps:

  1. Greek exit from the euro, but stay inside EU. Just like other countries including the UK and Denmark which are inside the EU but outside the common European currency, Greece can revive the drachma. This would mean a few things:
    1. Greek sovereign debt is written down (haircut) by creditor countries
    2. Domestic obligations such as pensions are converted to drachma, hence heavily devalued in effect
  • Greek government will now have to find investors for bonds denominated in the new currency and pay market rates of interest for the same
  1. Not to put too fine a point to it, the needs of (ii) and (iii) would clearly necessitate significant and real austerity by the Greek government
  1. German subsidies continue. This is the scenario that the Greeks are playing for:
    1. Greece remains inside the euro for strategic (NATO), humanitarian (sympathy from other members) and political considerations
    2. There is a massive haircut on sovereign obligations, and alongside, a continuance of the current welfare regime
  • Without an ability to impose structural reforms and demand austerity, in effect the Greek economy would be socialized across the broader European economy; free to run its deficits and behave as Syriza would like them to

I think the final scenario would be some sort of amended version of Scenario 2, but only if the first scenario is taken seriously and understood by the Greek population. On current indications, this is extremely unlikely over the short-term. Meanwhile, German politicians are likely to emerge from the woodwork demanding that Scenario 2 never plays out; therefore there will be a lot of noise in the next few weeks.

If any reader had been planning a quiet summer holiday, forget it.

(Copyright 2015 Asia Times Holdings Limited, a duly registered Hong Kong company. All rights reserved. Please contact us about sales, syndication and republishing.)



Categories: AT Top Writers, Chan Akya

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  • Mr. Bernard Wijeyasingha

    The article is well stated. the Greek voter elected this liberal government on the basis that this government will maintain the status quo of a “cradle to grave” “womb to the tomb” socialist policies. The very policies that was driving the Greek economy to bankruptcy.
    When the economic burden became too unbearable Athens wanted other European economies that have adopted more sensible economic policies, to bail Greece out. When they stated that they would only do this if Greece is willing to accept certain austere policies, Athens refused. Athens then wanted to “have the cake and eat it too” .
    When the rest of Europe refused to bail out Greece if she maintained the same habits, the politicians of Greece blamed the creditor nations of Europe for her problems.
    What amazes me is that the Greek voter seeing the collapse of the Greek economy happening in front of their eyes went on to vote against the Creditor nations in an incredible display of “in your face” arrogance. Not once did any of Greek’s leaders state that Greece is in no position to make this stand for no creditor nation would lend any money unless Greece shows good faith. Not once.

  • Jay

    To be fair, Greeks aren’t the only ones living in a fantasy world nowadays.

  • Mr. Bernard Wijeyasingha

    You are right, but I was addressing the article which covered Greece. If it covered the US or India I would have gladly given my opinion on how badly these economies are being run.

  • tttbnr

    A ridiculous analogy. The gang is one of mature, corrupt men, who are often referred to as the Troika; they have been punishing the Greek people for the crimes committed by them, Greek elites, Goldman Sachs, and European bankers.

  • tttbnr

    The Greeks voted against the EZ’s grave to cremation policies.

  • Mr. Bernard Wijeyasingha

    Not from what I understood it. the “cradle to grave” policy was for Athens to take care of her people from the moment they are born to the moment they die. The Greeks also supported government Unions. Athens promised not to change the ‘gravy train’ policy. There was no austere plans in Athens

  • Skalla

    Do you really think that parody and sarcasm are appropriate when the lower class and the most vulnerable (pensioners, children, etc.) of a society suffer ? You really should review your priorities …

  • Sandro Valentini

    Is this dude a comedian or what?? Dude, borrowed money was mostly used to repay banks not to cover for Greek people debt [same as American QE]. You’re depicting Greek people like the one that had spent too much and this is what happen when you do that?
    I’ll give you a news then, all western countries do that, and they’re heavily in debt.
    So, don’t sell the same old propaganda.
    You’re quite right when you say “Politics IS Economics” but you haven’t got a clue of what Politics means.
    Btw you’re also confused on who the gang is: you should have paid more attention at school to the teacher, not to your friends bank-sters.

  • Sandro Valentini

    Mr. Wijeyasingha where did you live in the past 5 years?
    Are you coming directly from Mars or what?
    The Greek people accepted Creditors condition for five long years. These conditions: “the creditors conditions”, “The austerity”, the conditions dictated by expert produced further deprivation, unemployment, and plunged Greek economy & people into poverty.

    Now they had the courage to say “that’s enough” and commentators like you start insulting them. That’s ridiculous.
    You and the likes will be obscured by history.

  • Mr. Bernard Wijeyasingha

    Sandro
    I was on earth, were you in Uranus? the situation of Greece now is that the people are worse off than ever before. There was an article that Greeks are eating food from trash cans. Greek banks have bellied up and business is fleeing. You consider that a better situation? the stubbornness of Athens is an act of suicide and you accept that verdict? what are you smoking for God’s sake?

  • c1ue

    Sadly, the economic prowess of this writer is clearly deficient.
    It has been documented that the majority of GDP losses due to austerity are because of the breaking of the payments chain from pensioners to stores to suppliers. Loss of GDP makes repayment of debt harder, and ongoing policies which produce negative or low growth makes repayment successively more difficult or impossible.
    The Austrian model, while a favorite of right wingers everywhere, has never in history actually worked for massive debt repayment. It was not how the United States repaid its massive pre-World War II and World War II debt. It was not how Germany repaid its Versailles obligations. It was not how the UK repaid its World War I obligations. The list goes on and on.
    Certainly there are many structural issues in the Greek government and economy which has led to its present predicament, but the Tsipras government is responsible for none of them.
    The most telling item which the writer ignores is the EU/ECB rejection of proposed tax increases on financial institutions and wealthy Greeks. This single fact underscores the true motivation behind austerity: the desire to prevent clawback of ill-gotten gains from financial engineering, tax evasion, and negative sum economic policies.

  • d.g.summers

    “Laws are like sausages, it is best not to see them being made.”
    Otto von Bismarck

    Negotiating with Greeks is like walking past an unflushed toilet.
    Unnamed street cleaner

  • tinhatter

    A better reply would have been ‘I was on Earth, were you UP Uranus’. Some people think the world owes them a living.

  • tinhatter

    And of course the Greeks are totally blameless ? Sorry they joined the Eurozone, essentially agreeing to hand over their economy to foreigners. They accepted loans and lived on the hog. Now, like spoilt children, they refuse to accept the consequences of their actions. Yes, of course Goldman & the troika are blots on humanity, but as the saying goes ‘you can’t con an honest man’

  • Mr. Bernard Wijeyasingha

    tinhatter
    I guess it is hard to admit that one’s vote has just ruined that person. that resounding “NO” vote was a “no” vote against their own well being. It is hard to eat crow and come out sounding like you won.

  • Sumner_Vengeance

    I am constantly amazed not only by the amount of feces that marxists spew, but as well by how much of their feces they insist that we chew.

    Sort of like dogs insisting that we eat their vomit.

  • Sumner_Vengeance

    “It has been documented that the majority of GDP losses due to austerity
    are because of the breaking of the payments chain from pensioners to
    stores to suppliers.”

    You have a source for this?

  • jd

    Passing around drink brewed up by the bankers are you?

  • tttbnr

    Marxists understand how markets work, while capitalists manipulate them through the use of power, whether financial or police.

  • tttbnr

    Greeks are not blameless, nor is Chan Akya for writing a mendacious commentary, but blaming them will not resolve Greece’s problem of debts unable to be paid, which the EZ and free market buffoons refuse to recognize. The majority of Greeks received nothing from the sovereign debts created by the banks and Greek elites, but those debts did generate plenty of shadow banking revenues for financial vultures, who are in actual need of market discipline to stop their living like hogs at other nations’ troughs.

  • Lion Heart

    A BEAUTIFUL analogy:

    “Imagine for a moment that you have a gang of feral youth on your street who have the habit of stealing everything——”

    However this analogy apples to Israel.

    Who has squeezed 100 billion dollars out of Germany by using “gang of feral youth” like David Goladman.

    What did Greece got as war repatriation —-Nothing
    What did those next of kin of those 2 million Gypsies got?—-Nothing.

    Germany should payback to Greece, what it owes.

  • Jams O’Donnell

    Even dogs would turn up their noses at your vomit.

  • Jams O’Donnell

    Exactly right – especially the last paragraph.

  • c1ue

    You can see the details on Argentina’s recovery post-2001 default here:
    http://www.cepr.net/documents/publications/argentina-success-2011-10.pdf
    Summary: 12% of the near doubling of Argentina’s GDP from 2002 to 2011 was due to exports, the rest was due to domestic spending.

  • Sumner_Vengeance

    uh, GREECE

  • Sumner_Vengeance

    That must be why most marxist govts either FAIL or adopt some form of crony capitalism to stay afloat / keep the goodies coming in for the privileged leaders scum at the top who know whats best for everyone else and tell them what they can sell how much they can sel iot for, and eventually, WHAT TO READ AND SAY AND PRODUCE.

    And of course, with almost all citizens fully disarmed in marxist ruled countries, there’s no likelihood of the the govt USING THE POLICE TO THROW PEOPLE IN PRISONS FOR THOUGHT CRIMES or buying some extra rolls of toilet paper and selling one to their neighbor…

    Marxism leads to Communism.
    – VLADIMIR LENIN.

  • Sumner_Vengeance

    Oh look, speaking of failed economies (and fake people), its Ahmed pretending to be marxist euro trash, with his cute little jihadistinian flag.

    What shall I do with it today? Print it and use it for toilet paper or target practice? Or just burn it.

    Hey Ahmed, how many jihadist children have you blown up today and then blamed on those EVIL JOOZ (you know, the ones that provide WATER AND ELECTRICITY AND LET THROUGH HUNDREDS OF TRUCKS PER DAY OF MEDICAL SUPPLIES AND FOOD TO GAZA while you scum try and break the UN AGREED TO NAVAL blockade to import more weapons?

    WHY DON’T YOU TAKE OVER GREECE? Maybe you can dig tunnels to go under their schools like you did in Israel, so you can kidnap little Greek children, rape and murder or hold them for ransom… thats THE “PALESTINIAN” WAY….

  • c1ue

    If you care to read more carefully, what I wrote is that past instances of austerity have shown that GDP losses were due to the payments chain being broken.
    Whether this applies to Greece isn’t documented yet by research, but likely we’ll see some data if the ongoing reduced austerity measures continue, with a lag of at least 6 months to a year

  • tttbnr

    The USSR was a continuation of Csarist authoritarianism, which has more in common with capitalist authoritarianism than Marxism.

  • tttbnr

    Capitalist indoctrination is not reality.

  • Mr. Bernard Wijeyasingha

    Capitalism in practice is the main reason why the United States , with a population of 330 million or 5% of the world’s population, consumes 25% of the world’s energy. If that consumption is slowed or stopped it would devastate world economies.

  • tinhatter

    Yes, the weak and the stupid will always lose more from the elites’ stupidity (or maybe not stupidity).
    Don’t get me wrong, I do not disagree with you but the whole world seems to have joined in this ‘victim’ mentality. Greece is a democracy, their leaders were voted in by a majority of the people.
    Islam (of course) is the biggest ‘victim’ – far easier to blame some else than to admit your founder if he lived today would be in front of The Hague for child abuse and war crimes or in a looney bin listening to ‘voices’.

  • Sandro Valentini

    As I said you’ll be obscured and forgotten by history.
    in the meantime you could stick whatever you want Up Uranus.

  • Sandro Valentini

    I think that the fact that the US spends billions on the military machine that try to controls the economies and resources of many countries if not continents, should be taken into account when it is said that: “with a population of 330 million or 5% of the world’s population, consumes 25% of the world’s energy.”
    Otherwise we’re missing the point here. The one that cannot afford to slow down its consumption is the US and not vice versa. Resources could be easily deployed somewhere else.
    And by the way the dollar it is powerful only because of its military backing, let’s not forget that. Now if you’re saying that world economies would be devastated by a US slowed consumption rate, well that’s your point of view.
    Mine is completely different.

  • Mr. Bernard Wijeyasingha

    Sandro
    you quote part of my comment (US consumes 25% of world energy) and leave out the section that if we slow down our consumption radically that would devastate the economies of the world. Our consumption drives the export economies. It used to be where the US produced and consumed, then “Corporate America” outsourced our production capabilities to mainly China but also to the “Asian Tigers”.

    Now those nations’ exports are dependent on the consumption patterns of the US, Europe, and the Middle East. they make up some of the world’s largest economies that consume. You better pray and hope Americans can afford to consume so much in what is called “the global village:”
    The US dollar is so strong because it is the main “international currency of exchange”. When the Euro came into being it reduced that role. when bilateral trade is done not using the dollar as in Russia,China, Iran, India who have done certain bilateral deals not using the dollar, it reduces the role the US dollar plays. That is one of the main reasons we can print the dollar nonstop 24 hours a day, 7 days a week. If the US dollar becomes irrelevant as the main currency of exchange the US dollar will crash, and our printing presses will stop. that would be ten thousand times worse than the economic collapse of Greece.
    the world wide effect would be devastating.

  • tinhatter

    Nurse, nurse, Mr Valentini has escaped from his padded room and is on the internet again.

  • Sandro Valentini

    Well again different points of view. You think that a dollar collapse will harm more those that have dollars in their portfolio rather then the ones who own it. Do you know what hedging means right?
    I think that the dollar falling will be a catastrophe for the states and less so for anyone else.
    Again your not taking into account the military power that keeps the machine going. No military power, no control over countries. No control over countries, more freedom to act independently. More freedom to act independently… Do you see where I’m going?
    Like Iran had proven, countries could live without the US, is the US that cannot afford to have these examples in the “global village” because that will show to the world that you can get rid of the bully.
    Last but not least. You’re talking about the end of the dollar like the end of history. Similar events have already happened many times over in history, maybe not in such extensive scale; something else will rise and take the place of the dollar: simple as that.
    The Americans though won’t be as powerful.

  • Mr. Bernard Wijeyasingha

    Got your comment. You have reached conclusions from my comment and then addressed those.
    The collapse of the dollar which is by large, the international currency of exchange will devastate world economies. You stated that it “will be the end of history”. Please remove Hyperbole from your conclusions.
    The US military has been drastically cut by the Obama administration. Even though the US is one of the world’s largest arms seller, our military is less than half the size it was before Obama. Then it cannot be the driving force it once was during world war 2
    during that war the term “Rosie the Riveter” was used when American women took the place of American men, in manufacturing military hardware
    One liberty ship per week
    one Tank per hour
    and many more that I cannot remember at the moment.
    the “ford assembly” line method was used to make the US military the greatest and surpassing that of Germany
    At that time the military “machine’ catapulted the US economy. Women dominated the work force probably in the first time in the modern era. while the men were at war. Not anymore. Wars do not drive our economy the way it did in that war.
    Regarding our consumption I believe I have already addressed that.