Archive for the ‘Greece’ Category

Iran deal is done, Bibi unhappy, Greek deal done, Greeks unhappy.

July 14, 2015

Reuters and other anonymous sources are reporting that an Iran deal has been done.

Greece yesterday, Iran today, what’s for tomorrow?

Bibi is neither pleased nor amused. A “pre-emptive” strike by Israel on Iran now becomes that much more difficult. Saudi Arabia will not be too pleased either. If sanctions are  lifted and also on weapons sales by Iran then we can see the pro-Iranian factions across the Middle East getting a boost. Which will probably constrain the advance of ISIS somewhat (and whatever the Saudis might say it is private Saudi money funding the barbarians). The pro-Iranian factions in Syria and Iraq will not only get a boost, they may also be more successful on the ground than the US-led coalition.

However Saudi Arabia will not be too unhappy about the additional downward pressure on oil prices. It will be sometime before Iran can ramp up production and during this time, low-cost Saudi oil will win further market share. Though Saudi Arabia failed to wipe out shale oil from the US, it is still increasing production and contributing further to the current oil glut. Saudi seems to be pursuing a revised strategy of keeping oil prices relatively low for 2 years or more in a war of attrition against the higher-cost oil producers. Market share is perceived as their prime weapon to try and get rid of the higher-cost producers. But I think they have miscalculated even here. A discontinued shale oil well can be restarted with very little investment and at very short notice. Production costs of shale oil have decreased sharply. Shale oil developers will just ramp their production up and down depending upon the prevailing oil price. And the larger shale oil wells can make money even with oil prices down at $40/ barrel.

It isn’t quite time for vacation yet in Europe (apart from Sweden which is closed for July). Some kind of framework resolution for the whole package of the 3rd bailout needs to be passed by the Greek parliament by tomorrow. Some resistance is showing today but the resolution will surely pass. Of course that says nothing about the Greek government’s implementation of all they have signed up for. Their track record of implementing what has been solemnly promised is not good. And if the reports today that the ECB will not be pumping liquidity willy-nilly into the Greek banks are correct, then the banking system will have to start issuing IOU’s to keep functioning while the negotiations are concluded. That will effectively be an alternative currency and it won’t be long before the IOU’s start trading at a different value to par. A currency by another name than “Euro” is still a Grexit for as long as that currency is used.

But an Iran back in the international fold is undoubtedly a good thing.

Varoufakis (backed by Krugman) chose the wrong game

July 13, 2015

Yanis Varoufakis is a Marxist economist and an “expert” on game theory. Paul Krugman is about as close to a Marxist economist as one can get in the US. The only thing that “star” economists get right are back casts where they force their theories to apply to things that have already happened. Krugman is a Nobel prize winner – but in economics that is not something to be very proud of. Krugman has been a vociferous supporter of the anti-austerity camp. He has even criticised those who have argued against debt write-offs. Thomas Piketty is another “star”, French, “socialist” economist who has also been supportive of the anti-austerity brigade.

(In my own view this is not a battle of ideologies since austerity and anti-austerity are not ideologies. If anything it is a battle between profligate public expenditure on the one hand and prudence and good housekeeping on the other.)

In any event, tonight Greece is contemplating the stringent austerity measures they must sign up to by Wednesday along with the loss of fiscal independence required to be able to just enter negotiations on a 3rd bailout of some €85 billion. Debt restructuring is not included in the package though some rescheduling of debt service will be discussed. It is a package is much more stringent than the Greeks rejected in their much-vaunted and self-indulgent referendum. (What referendum if posing the question “Do you want more taxes?”, would not answer “No”. I was surprised that as many as 39% answered “Yes”.) If the negotiations had been completed 3 months ago, Greece would have been able to conclude a much less painful package.

But it all makes sense if seen as a high stakes “game” that Varoufakis convinced Tsipras and his Syriza colleagues to play. With his game theory credentials and the support of empty “heavyweights” such as Krugman and Piketty, Varoufakis probably thought that he could outmaneuver Schauble especially as he was initiating the game. Perhaps he even felt he was defining the game. A threat to leave the Euro was the nuclear weapon in his arsenal. Seen as such a game, the calling of the referendum was probably planned as the decisive, pre-ultimate move. Even his resignation immediately after the referendum was probably a premeditated move for the negotiation they expected to have. But these moves backfired. First, against Greek expectations, the banks were asphyxiated. Varoufakis had probably miscalculated in thinking that the ECB under friendly French influence would not shut off the liquidity tap. Schauble’s decisive counter-move came yesterday when, for the first time, a Grexit, in the form of a 5 year time-out, was openly named as the alternative. Once Schauble had hijacked that as the nuclear weapon, the game was over. Tsipras had no weapons left and no alternative to capitulating completely.

The Greek population are not only paying for the profligacy of the past. They are also now paying for a game started by Varoufakis which went horribly wrong.

This game is over but the match is still going on. Tsipras would do well to ignore Varoufakis (and Krugman and Piketty) for the rest of the match. Marxists and economy just don’t mix. Marxism may be able to hide its face in the blend but the economy is poisoned.

Neither in or out, but a temporary Grexit is now on the table

July 12, 2015

As always in the EU or in the Eurozone countries, differences of opinion end up with wishy-washy compromises which only maximise the level of dissatisfaction. The EU has become expert at choosing the least attractive solutions in its quest for divine consensus.

After 5 years of trying to keep Greece from leaving the Euro, Germany has finally put forward the compromise position of a 5 year time-out from the Euro, a temporary Grexit which, in all likelihood, would become permanent if it is adopted. The time-out would be offered to Greece if they do not manage to pass some emergency resolutions through their parliament by Wednesday. But the matter of greatest significance, which highlights the fundamentally flawed nature of the Euro, is that a Grexit – even just a temporary one – is for the first time formally acknowledge by the Eurozone countries as being on the table.

It will be painful in the short term but the best for Greece is to leave the Euro, stay in the EU and build up a strong New Drachma. I hope they do take a time-out, that their debt is then restructured, that they get help to and do get back on to their feet and eventually that they make the time-out a permanent exit. And that then leads to an orderly dismantling of the Euro – or at least a suspension of the Euro – to be revisited again when political union is achieved – if ever.

A currency union has to be the natural consequence of a political union and cannot be used to coerce politically unequal nations into a phoney political union that their populations do not want.

Greek proposal is for European taxpayers to provide €5,000 handout per person

July 10, 2015

Why did Tsipras bother with the referendum?

The Greek proposal now is for much the same reforms that were rejected by the referendum. Except that now a debt write-off of about €54 billion is also demanded. That is about €5,000 for each of the 11 million Greek population to be funded by the taxpayers of the other European countries. It is not cash in hand of course but whether handout of cash or cancellation of debt, it costs the same.

The proposals are to be approved by the Greek parliament today and even if the hard-left vote against, it should go through with the help of all the centre-right votes. I suppose it will all get approved – with French pressure – on Sunday. But the bottom line is that every Greek citizen will effectively be getting a handout of €5,000 each from other European taxpayers.

It is not debt relief after a natural catastrophe or a war that is being asked for. It is debt relief for mismanagement. It is debt relief for earlier profligacy – for a bloated public sector which awarded itself generous pensions at 55; for years of  tax evasion and corrupt big projects. And it was done during a period when other more prudent European countries were considering raising the retirement age. Some of that profligacy will be corrected but far from all of it. This bailout is unlikely to suddenly bring “good housekeeping” to the Greek house. It will not prevent Greece from being constrained and stifled by the Euro straitjacket. Further bailouts will be needed.

For the Eurozone it will be a patch-up exercise for a fundamentally flawed common currency system. It is fundamentally flawed because it is being seen as a tool to bring about political and fiscal union when it should just be a natural – and inevitable – consequence of political and fiscal union. In the long run the Euro has to be shrunk or dismantled. Debt relief for the Greeks now is a precedent that establishes it will always be on the table for future mismanagement.

Past bad behaviour being rewarded for the sake of a grandiose concept of a Holy European Empire.


French socialists trying to rescue their Greek comrades

July 9, 2015

That Yanis Varoufakis was a marxist economist is no great secret though he likes to call himself a libertarian marxist. (I have no great opinion of the black magic of economists in general and especially since they are all theorists which backcast but can never make a forecast. But a marxist economist pushes the bound of credulity).  His forced resignation from the post as Finance Minister was the token, cosmetic gesture made by Tsipras to the creditors. Syriza is a strange blend of socialism and marxism and nationalism. Among the group of creditors it has become apparent that the French socialists are going out of their way to try and save Tsipras and they are desperately trying to help Tsipras come up with a good “socialist” plan that can pass muster with the other creditors.

Now it seems that French econmists are actuually helping Tsipras draft proposals which must be presented today.


The Greek media have reported that financial experts from France are helping Greece put together its reform plan. It’s a story that has been backed up in the French press too.

But France – which has taken a largely conciliatory tone towards Greece – has denied any of its officials were involved.

AFP quoted one un-named official as saying: “France wants to help things along and very much backs an agreement, but in no way are we helping them draft the proposals.”

That French officials will not be acting in the name of France is obvious. But it is equally obvious that French nationals – acting in an “unofficial” capacity, but with the probable knowledge and blessing of the French government – are helping the Greeks to draft their proposal.

Good luck to them. But the best for all is for Greece to leave the Euro and stay in the EU.

For whom the Euro tolls

July 7, 2015

Without political and fiscal union coming first, currency unions do not work.

In fact currency unions place a rigid constraint on freedom of action in the political and fiscal arenas. History has far more examples of failed currency unions than of any successful ones and – nearly always – the successful ones are because political and fiscal union has come first. The UK, USA, Federal Germany and the USSR are (or were) firstly political and fiscal unions which allowed for a successful common currency. Currency union is not a tool which enables political and fiscal union. It is political and fiscal union which allows currency union.

It is the believers in the Holy European Empire (in Bonn, Paris and Brussels) who think they can use the Euro to force the union.

The failed examples range from the

  1. New England colonies who each printed their own money but which was acceptable at par in all 4 states till other colonies outside the union started printing the money as well. Massachusetts withdrew and introduced a silver standard. (???? – 1750)
  2.  The Latin Monetary Union which was a French inspired ego-project based on a silver/gold standard and joined by Belgium and Switzerland. It was later joined by Italy, Greece and Bulgaria. But it could not cope with fraud with silver content coins as the gold standard was introduced in other countries since it had a fixed exchange rate between gold and silver (15:1). It was formally founded in 1865 and came to an end with WW1 but officially only in 1926.
  3. The Scandinavian Monetary Union started in 1873 but became dormant in 1905 and came to an end officially in 1924. It worked for a while but could not withstand the variation of inflation in the different countries which led to a string of devaluations and dumping gold in the open market and rebuying it at much lower fixed rates from the unofficial Central bank.
  4. The East African shilling bringing Kenya, Uganda and Tanganyika (and later Zanzibar) started in 1922 pegged to Sterling. It survived independence of these British colonies but could not withstand the depreciation of the British Pound when the Sterling Area collapsed in 1972.
  5. The CFA (African Franc) was started in 1945 in the French colonies of West and Central Africa and is still in use. It was pegged to the French Franc and  is now pegged to the Euro. Even if it may have contributed to currency stability it is one of the key reasons why economic planning for the very diverse developing countries of Central and West-Africa has become impossible.

There are many other examples, but the simple conclusion is that without political and fiscal union already existing, a currency union is not a way of imposing such political or fiscal union. If there is diversity among the countries involved and if fiscal and political measures need to be different in different regions, then currency union is far too rigid and can only promote political dissatisfaction and populist revolt.

And so it is with the current Eurozone. There is no political or fiscal union and currency union is being used (by some) as a tool for trying to impose a political union. The countries of the Eurozone are far too diverse politically and fiscally to be forced into a common shape by a common currency. The Eurozone is wishful thinking. When Marxists in Greece want to try their experiments it cannot possibly be reconciled with capitalist regimes elsewhere.

Any country which needs to exercise political and fiscal freedom cannot – actually must not – subject itself to the strait-jacket of a currency union. Greece should never have joined – or been allowed to join – the Eurozone. Cyprus should never have been allowed to join either. Currently, of the Eurozone countries, Finland, Latvia, Lithuania, Malta, Portugal, Slovakia, and Spain would be better off without the political and fiscal constraints that is set by the Euro. Kosovo and Montenegro have adopted the Euro voluntarily but they are not constrained in quite the same way.

As far as Greece is concerned I hope they leave the Euro (and remain in the EU for now) and so kick-start the process of bringing the grandiose, but untimely, Euro experiment to an end.

Cameron is the unlikely winner of the Greek referendum

July 6, 2015

There will be millions of words written about the Greek “No” to the conditions set by its international creditors and what it means. But what strikes me is that the only real winner is David Cameron.

For Greece and the EU it is a lose-lose situation. If the creditors soften their conditions, the Euro and the EU loses. If the creditors stand firm and Greece leaves the Euro, the sanctity of the Euro and membership of the Eurozone is gone forever. My view remains that the best for Greece and the EU is for a return to the drachma, an EU which shrinks its ambitions and a dissolution of the Euro.

If the creditors now soften their conditions and a Grexit from the Eurozone is avoided, it will demonstrate that the IMF, ECB and EU conditions will never be the final word again for any member country. Each will always have the option in any negotiation of calling a “referendum” to reject the terms. Any negotiation by a member country with the EU can use a referendum to finally reject an EU position. Any country can then reserve the right to put any EU Directive to a referendum and EU Directives will become merely guidelines to be accepted or rejected by member countries at will.

If, on the other hand, a Grexit does occur and the fatally flawed Euro experiment begins to come to an end, it will be emphatic evidence also that the entire concept of a new Holy European Empire is something only in the minds of a very few in Bonn and Paris and Brussels, but is not shared – at this time – by the general population (represented by the general Greek public). It is a concept either too far ahead of its time or possibly which will never be real. At any rate, for this time, it would demonstrate that it is fundamentally flawed.

And what strikes me is that this helps David Cameron both within the EU in his quest for renegotiation and even for treaty change. It even helps him domestically. He has had an issue of credibility in that he has called for an In/Out referendum where he will surely have to call for an “In” vote. His problem lies in being able to show that he has won enough during negotiations to justify an “In” recommendation. But now, with the Greek precedent, he can even demand the most drastic changes in Europe without being thrown out of any room. He is likely to get changes which were unthinkable yesterday. He can even go to a referendum ostensibly demanding an “Out” as a negotiating ploy, get an “Out” vote and then return to the negotiating table. He can call a second or even a third referendum (and if a bankrupt Greece can carry out a referendum within a week then surely the UK can manage something similar).

Referenda are now just a step in the EU negotiating process.

A drastic haircut for Greek middle-class as savers are set to lose 30% of their deposits over €8,000

July 4, 2015

The Greek problem is very complicated I am told. It is an ideological battle between right and left, I also read. It is austerity versus profligacy. But I think it has been unnecessarily “complexified”. It is not about which ideological gods are to be worshipped but it is about good house-keeping. It is essentially, basic “home economics” applied to a household of 11 million people. It is about how a deeply indebted household with expensive habits and many non-contributing members is to continue. It is about what lenders are justified in demanding from the household to continue lending. It is about abdication of responsibility by the householder. It is about lending to a prudent householder or to one who will neither clean his house or commit to good house-keeping.

Whichever way it goes at the referendum tomorrow, there is going to be a great deal of pain for the “middle class” who have paid their taxes and have managed to save and who keep their savings in Greek banks. Those who don’t usually pay their taxes (and I have seen one estimate that these are around one third of those who should be paying taxes), keep the “black” economy thriving and they don’t usually bother with banks. The visible rich probably pay a significant amount of the taxes they should but they keep their money mainly outside of Greece (but probably in the Eurozone or in dollars). Since Tsipras came to power they have been quietly getting out of the Greek banks. They are well aware of how all depositors in Cyprus had their savings in Cypriot banks arbitrarily written down over one day while the banks were closed. The very rich of course are well versed in all methods of tax evasion and they are not so stupid as to have kept their money as deposits with the Greek banks.

The total Greek debt is about €328 billion which is about €30,000 per capita. In theory if €30,000 could be confiscated from every Greek citizen, Greece could be debt free. Of course if creditors accept that some level of debt write-down is inevitable – and this seems unavoidable – they will certainly insist that Greece and its banks also accept a “haircut”. The question becomes how much debt write-down is necessary and how much of that will be confiscated by those with substantial deposits in Greek banks. If the IMF analysis is to believed (and they have been wrong many times) then the debt must be reduced by around €60 billion for a growing(?) Greek economy to have a chance of servicing the remaining debt.

Yesterday a report in the Financial Times (since vehemently denied by Syriza) stated that a swingeing 30% of all deposits over €8,000 would be confiscated. As a comparison the Cypriot haircut finally became a dissolution of Laiki Bank and the confiscation (with part conversion to equity) of 47.5% of all deposits above 100,000 euros in the Bank of Cyprus. There are not enough deposits at Greek banks of over €100,000 to milk and hence the figure of €8,000 seems credible.

The critical point is how much debt can 30% of these deposits wipe out. Suppose the lenders agree to write-off (or write down) debts equivalent to about €30 billion. Then Greek savers would need to cough up an equivalent amount if the IMF target of €60 million is to be reached. That is about €3,000 per capita. Greece has an average monthly wage of about €1000 per month (2014). Of course unemployment is high and it is not the average wage earner who exhibited the profligacy or evaded taxes which created the Greek debt mountain. From Syriza’s perspective, confiscating the money of the rich would be best for this purpose. But since that may not be within reach, it is better to soak the middle-class than the bulk of their supporters who are average wage earners or unemployed.

So whichever way it goes in the referendum tomorrow, the middle-class in Greece are going to get badly hit. They are in for a full Brazilian wax job and not just a neat short back-and-sides.


Greece just moved from a “developed” to a “developing” nation

July 1, 2015

It has never happened before – certainly not since the 2nd World War –  that a developed economy defaults on payments to creditors and slides back to be a developing nation. But now Greece joins Argentina, the Ivory Coast, the Dominican Republic, Russia, Ukraine and Ecuador, among other developing countries, as countries which have defaulted on loan repayments to international creditors.

Greece has however defaulted many times before; in 1826, 1843, 1860, 1893, 1932 and now in 2015.


The International Monetary Fund on Tuesday confirmed Greece had not made its 1.5 billion euro ($1.7 billion) loan repayment to the Fund, making it the first advanced economy to ever be in arrears to the Fund.

The missed payment, the largest in the Fund’s history, is equivalent to a default, in that both imply a breach of Athens’ obligations. IMF spokesman Gerry Rice said Greece can now only receive further IMF funding once the arrears are cleared.

The Greek default is not only an indictment of the past profligacy and mismanagement in Greece but also of the EU’s (and the Eurozone’s) recklessly expansionist policies.

It is time, I think, for Greece to return to the Drachma. And then an orderly Grexit – as orderly as may be possible. The Euro is too far ahead of its time. As of now it is a failed experiment and the Eurozone needs to shrink sharply, if not to be entirely dismantled.

If the Deutschmark is not to return then at least a N.Euro and a S.Euro are called for?

A Grexit is the best option as the government hides behind a new referendum

June 28, 2015

It seems to me that modern democracies – and especially those with coalitions produced by proportional representation – produce “followers” rather than leaders. And when “followers” pretend to lead they end up taking the easy, CYA, path through referenda. The Scottish referendum and the upcoming UK referendum on EU membership are illustrations of where supposed “leaders” pass the buck onto a diffuse and unaccountable electorate. The “wrong” choice can always be justified as being “the will of the majority”. All across Europe, countries have “followers” in leadership positions, who inevitably fail to lead. I take vision and the ability to carry people towards that vision as being the hallmarks of leadership. Rather than vision, it is the next election which governs. “Leaders” merely follow the current whims of the crowd and don’t even make the attempt to “carry” the crowd an any difficult path.

But I think the current Greek government’s call for a referendum to vote on the lenders’ conditions for further loans to Greece, while carrying out negotiations with those lenders is an abject abdication of leadership. Suppose, as is most likely, the conditions are rejected. The government may well return to the negotiating table in the hope that this may have strengthened its hand. Though exactly how is difficult to see. It is really only an attempt to mobilise a “sympathy” factor. It is equivalent to sitting in front of the bank manager, without any collateral and without any plans to stop spending on unnecessary things while pointing at a crying child and begging for a sympathy loan.

If the government recommends a rejection and this is confirmed by the referendum,  it would be the start of a Grexit. The government may carry forward a “begging” from the lenders but it will only be postponing the inevitable. If the people accept the lenders’ terms, the government ought to resign but will not since they can always point to the referendum for their abandonment of their “principles”. But it will also make it impossible for anyone to negotiate with the Greek government, since no “decision” by them will carry any credibility without being backed up by a referendum.

I expect we will see a run on the banks on Monday – if the banks are open. I also expect that the government will scrape up the relatively modest €1.6 billion needed for the repayment due on Tuesday. Then the result of the referendum  on Sunday the 5th will be the card in the hole to continue negotiations.

But I hope a default takes place and that the Greeks reject the lenders’ conditions and a Grexit does occur. Then a debt restructuring can take place. Writing off debt without first going bankrupt is not healthy. In the long run it will be better for Greece to return to the drachma. It will also be better for both the EU and the Eurozone. Both need to shrink. In corporate terms I would say that EU Inc. has expanded too far, much too fast. Some divestment is desperately needed. It would be better for the EU to focus on the common market and free labour movement provisions and to allow political union to happen whenever, and only when, it is ripe – or maybe not to happen at all. Trying to force the political union is counter-productive. The European parliament can be dismantled completely without losing anything. The Brussels bureaucracy could, and should, be drastically trimmed to be an accounting agency and nothing else. The common currency is of little value with the disparity in economic disciplines across the Eurozone. Dealing with multiple currencies but where each currency is representative of its underlying economy is not as difficult as having the fundamental mis-match we now have between the “average” value of the Euro and the strength of each of the underlying economies.

Greece needs to get out of the Euro strait-jacket it is in while remaining within the European trade zone.

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