Cochrane and Kashyap on Greek Debt (and Europe)

Chicago finance professors John Cochrane and Anil Kashyap give their views here.

91 replies on “Cochrane and Kashyap on Greek Debt (and Europe)”

“Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system.”

I recall reading that some senior US army officer in WW2 won fame of a sort by his proposed solution to the problem of VD among the troops: continence. These guys seem just as unworldly.

Mohamed El Erian :

“even if Greece can deliver, European creditors fundamentally disagree among themselves as to how best to support the country — other than to push the IMF to lend more. Some, led by Germany, want fairer burden-sharing with the private sector, rather than to continue to fund both the needs of the Greek economy and full repayments to private lenders that are now exiting the country. But the ECB strongly opposes this, especially now that its balance sheet is contaminated by large holdings of Greek bonds.

Responding properly to all this is an engineering nightmare and a political headache. Critically, it now requires giving up on at least one, and more likely at least two, of the three principles that have underpinned the coalition’s approach to Greece: avoiding a debt restructuring, a currency devaluation and a change in the fiscal set up of the eurozone.”

“Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system.”

It is the same tune as ever. 3 years on and no change. Presumably the procrastination period hasn’t healed the banks.

Greek cds now trading “upfront” which is jargon for sellers effectively requiring an installment of the fee early. Can be to make dealers books easier to keep flat, but also can be reluctance to rely on creditworthiness of buyer.

“So what to do? Prepare for the worst. Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system. Sovereign debt and sovereign exposure must face large capital buffers. Sovereign debt must be marked to market. Banks must run serious stress tests to find implicit sovereign exposure. Banks with inadequate capital must raise it, find buyers, or reorganize. If that means bailouts of “systemically important” banks, then governments must do so, face their taxpayers, and make their regulators explain how they let this happen. ”
I really can’t see this as a solution.

The authors underestimate the size of bank debt, its systemic importance to a system that has had limited sovereign issue (pension funds and insurance reserves), the damage that will (not might and maybe even already has) be caused to bank debt as a no-risk instrument.

They don’t account for the recapitalisation of the ESCB that will be required as the knock-on effects bust the NCBs of Greece, Ireland, Portugal, perhaps Belgium and perhaps with knock-on effects in Spain and Italy, without even getting to Germany, Austria or France.

Their solution is comprehensive for only the bank debt – pushing the losses onto public debt. It is simply papering over one crack by pulling the wallpaper over, exposing a much larger crack in the sovereigns. It is a rather bizarre solution, since it is sovereign debt that they are fingering as providing the losses… another barrowload of devaluing government bonds pumped into banks that are unable to fund themselves with devaluing bank bonds? Because the banks are insolvent based on the writedowns of their devaluing sovereigns and bank bonds? It would be comical if it was in the Sun…

I don’t see an alternative to large-scale liquidations, of sovereigns as well as banks. The fat tail has been enlargened so much as to risk that. As Mr. El Erian points out, we’ve gone from a situation where a an early debt restructuring might have sufficed, to one where more than that is required. Prevaricate longer and all three will be not just required but inevitable.

@ Grumpy

With the ECB holding ever increasing volumes of Greek debt and presumably having seniority in the event of everything falling apart the private holders would be left as the most exposed haircut wise. How are the CDS priced nowadays ? Would it be the same as the risk of a stampede at a holy site in India ?

cds pricing is a guessing game. If you buy it you don’t even know if you are going to be leaned on to “volunteer” which means – will it or won’t it be useful?

Some people are using it for MTM hedging but it may have little enforceable value to them.

Looks like ECB get seniority by not volunteering.

So Ms. Whitney was correct 18 months ago when she said she would not touch European banks as they were in worse shape than their American counterparts the FDIC at least put all the following into the “failed banks” category .. whereas all we have been given by the ECB is pretend and extend and don’t burn senior bondholders or the game will be up. It is up!

I’ve been looking around a bit.

In August 2010 the ECB released a statement after its first review mission, which included:

“The contraction in the economy is in line with May programme projections: GDP is expected to decline by 4 percent in 2010 and some 2½ percent in 2011”

Reuters reported in June, 2011.

“ATHENS, June 9 (Reuters) – Greece’s economy shrank far more than expected in annual terms at the start of 2011, signalling a second wave of austerity measures demanded by the EU and IMF will pile even more pain on a fractious society.

Athens plan for avoiding a debt default and tackling its budget crisis depends on squeezing revenue out of the economy, but sharp downward revisions to first quarter data suggested the mountain the government must climb is even higher than thought.

Gross domestic product tumbled 5.5 percent in the first three months of this year, the official numbers showed, far more than a earlier of flash estimate of 4.8 percent.”

So, austerity, growth figures turn out ‘worse than expected’. Solution: more austerity. Is that the plan?


Not sure – but I don’t think Rory McIlroy will be too bothered now -12 after 16 holes on Day 2 – a lead of 9 shots on the chasing field !

“Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system.”

Are they talking about loans or bank administrators, or both?

If the whole system is in trouble as a result of the wisdom of our ECB overlords in not doing the right thing by the bank bondholders in the first place shouldn’t the government just hold on and wait and see how things pan out ? Does Anglo have to be burnt today ?

Has this article really been written by economists? The short-term issue in Greece is not the debt, but the deficit. Not a word about that in this article! Incredible!

This second Greek crisis has been caused by the fact that Greece is not delivering on deficit reduction and other commitments to the troika, such as privatisations. This is infuriating Germany and other Northern countries, rightly so in my opinion.

However, the reaction of Germany has been plain stupid in my opinion. Without consulting anyone, they launch a plan to forcibly lenghthen bond maturities by 7 years, which would make it possible to share the burden of a debt restructuring between public and private debt holders later on. This is not a stupid idea an sich. The problem is that this would trigger a formal default.

I have looked at the financial statements of a number of large European banks. I doubt very much that forcing them to take losses on their Greek bonds would be a big issue (with perhaps one or two exceptions that can be handled easily)

The problem is the Greek banks, which would become instantly insolvent. It should be obvious to everyone that the combination of a formal default with an acute bank crisis (with zero sovereign backing) is an excellent recipe to completely demolish the Greek economy.

The ECB is refusing any formal default unless EU governments come up with a solution for the Greek banks. Personnally, I fully agree with the ECB. Clearly so far, the EU governments have not come up with that solution. As a result, the ECB has won the argument … at least for the time being.

BTW, the ECB is using a smart trick by arguing that it would have to stop the €80bn of lending to Greek banks because it could not use Greek bonds as collateral anymore. Correct. However, I believe that the ECB would not stop the Greek Central Bank to use ELA facilities to take over this lending.

Has this article really been written by economists?

Sort of. “Chicago finance professors John Cochrane and Anil Kashyap….”

@ All

The German press are not being kind to Merkel and her inability to get ahead of events. Der Spiegel, in its English language net edition, has a good summary.,1518,769069,00.html

Incognito above has identified some of the core issues.

The only piece of sense in the two professors’ presentation was the following sentence.

“Thus, the only way to get banks to “voluntarily” roll over the debt is by letting them carry the debt at artificial “hold to maturity” valuations, which leaves the danger to the financial system”.

How likely is that!

Two weeks have been wasted – and the crisis allowed to get worse – on internal German political wrangling. No wonder buisnessme across Europe are becoming worried by the level of incapacity being demonstrated at political level (to which Ireland is making her own unique contribution).

And that assessment leaves the contribution at supposed expert level out of the equation.

There are reports that Schauble’s 7-year extension plan was taken directly from a Deutsche Bank document “A proposal for Greek liability management exercise – burden sharing without haircuts”, with the German TV station ARD having a documentary on this. I haven’t been able to find much in the way of English language commentary on this however, so a bit more evidence is needed before concluding that this was in fact the case.

Inherent to the debt extension plan would have been credit enhancements, in order to induce creditors to “voluntarily” swap. These could have taken the form of collateralization of the new bonds with the proceeds of Greek privatizations, or guarantees by the EFSF. If Schauble’s plan really was written by Josef Ackermann, then perhaps it was not the taxpayer-friendly proposal portrayed, but rather another scheme for unsecured private debt to be exchanged for officially guaranteed debt/secured debt. There would have been a headline €30bn PSI involvement figure but behind that would have been costs distributed in some manner between Greek (via privatization) and EU-wide taxpayer (via EFSF). At least this would be consistent with Merkel’s claim today that they were always seeking a “voluntary” scheme. The real goal was to avoid a hard default, where Greek debt would need to be haircut by 50% or so to get the debt/GDP ratio to a sustainable level. In that case private creditors, whether banks, or pension or insurance funds, would have to take real losses.

It seems that even this Deutsche bank-sponsored scheme was seen as too radical by the ECB/France, and the risk-averse Merkel agreed with them. It remains to be seen what “credit enhancements” will be given to banks that rollover their maturing Greek debt at below market rates, which seems to be the plan now. The Greek banks can presumably be simply told what to do, and rollover what they own themselves, but as far as I understand it this won’t be enough to meet the headline €30bn figure. I cannot see a French, German or other bank voluntarily rollover debt at below market rates without a quid pro quo, either visible or behind the scenes. What will this be?

@Bryan G

The ratings agencies are inclined to regard a decrease in NPV as a default.

If collateralisation is used as an inducement this would enhance market value through reduced default risk, but is it not the case that it would still reduce HTM value? If so then what is the conversation with the ratings agencies?

What a tangled web.

Policy makers seem to have lost the plot. Extend and pretend is a suitable strategy for a V dip in the markets or GDP.

Croke Park for bondholders.

They should be able to work out why that might not be appropriate.

Of course, there is a way out of this. But the politicians do not seem willing to go down that route for the moment.

Basically, the way out is to treat the Greek banks differently than the other private bondholders. A few possibilities:
– The EU governments buy all the Greek bonds on the balance sheet of the Greek banks at a good price.
– Greece creates a separate class of bonds for the Greek banks. The Greek banks exchange all their existing bonds into that new class of bonds. Greece then involves all the other bonds in some form of restructuring, but not the new class of bonds.
– Greeces restructures all the bonds, and the EU recapitalizes the Greek banks.
– Etc etc etc

In addition, I believe that it would be necessary for the EU to assume the deposit guarantee on Greek bank deposits. (in my opinion, the deposit guarantee should anyway become an EU/EZ matter)

When Lenihan nationalised the gambling debts of the nouveau rich he basically established a constant decline of Irish GDP for at least a decade until Ireland moved from one of the highest per capita GDP countries in the EU to one of the lowest. There is nothing any government can do until we get one who has the courage to break the bond.


From the Fitch report posted yesterday, it seems that with the 7-year debt exchange approach, both the issuer (i.e. Greece) and the bonds themselves would be in default, due to the decline in NPV. With the rollover approach the issuer will go into default, but the bonds themselves will not.

However it must be remembered that all the talk about the ECB not being able to accept collateral at a certain level is bogus. The ECB set their own rules. The modification of the rules to accept low-quality Irish and Greek debt did not specify a floor, and it is hard to see why the ECB would cede control of what can and cannot be used as ECB collateral to a US-based ratings agency. If they choose not to accept as collateral instruments rated at a certain level, it will be because they choose not to, not because they cannot.

It seems the key argument is that any further ratings decline is likely to increase the run on Greek banks, with a subsequent need for more ECB bank funding, and we all know what their position on that is. The Greek banks are able to absorb the consequences of the 7-year extension plan NPV writedown – it is the sovereign that is the basket case rather than the banks. However, when push comes to shove, the contagion argument on bank funding wins every time.

@ Bryan G

I brought this interesting Deutsche Bank paper to attention on 6 June on another thread. For the latest, including the TV report cf.

An element of dirty work at the crossroads is clearly involved, not in the manner in which the TV station covered the issue – although it is as simplistic as anything one would see on RTE or hear on the PK show – but in the reaction of the various political actors, including nominal allies in government.

Overall, the story does not add up to very much. How could the issue of involving private investors be addressed without involving them in the discussions? But it is definitely very damaging to Schaeuble.


Unfortunately neither my long-forgotten schoolboy German or my Google translate plugin are up to the task of understanding this, though the auto-translated title of

“Field man puppet: Wolfgang Schauble makes what Deutsche Bank suggests”

seems to confirm the basic idea (as well as teach us that the English for Acker is Field). Does the article support the view that Schauble’s proposals were essentially Deutsche Bank ones, or is this being denied:

“Traitorous worked the Rhetorik, which the speaker of the Treasury in its further remarks used: „With all decisiveness, expressly and loud neck “he knows the reproach back”

Europe is indeed the source of the rot since the beginning but the WSJ is of course ignoring the venetian banks withen its host.
The only hope against these banks has always been puritanical elements withen US society.

This partial independence has always centred withen the US treasury which until recently has kept a cultural distance from the darkness.
When the FED asked to become part of the BIS structure in the 50s the treasuary politely refused – asking only that it keep relations with the BIS.

I believe then the Banks infiltrated to a large degree the LBJ adminstration engaging America in a pointless sustained external war to force bankrupcey on the States.
It subsequently defaulted in 71 – but not before scrapping all of its more noble adventures to pay bank debts.
The Nixon & Ford adminstration of course cemented the BIS infiltrators withen its structure causing a industrial stagnation under the petrodollar system.
After many decades of sustained effort the Clinton administration castrated the US treasury and subsequently the FED joined the board of the BIS.
After that they accelerated the derivative time bomb to astronomical numbers killing the last vestiges of nations and perhaps forever destroying all hope of progress and advancement for human kind.
The Pox has once again mutated to its most virulent form.
It seems humanity is doomed.

@paul quigley
Well, speaking of capital requirements, when looking at the presentations of large European banks, I notice that most are trying to contract their balance sheets to meet the tighter capital requirements. Not only the banks in the periphery, which often indeed need to because of excessive reliance on wholesale funding, but also those in the core.

I am starting to wonder whether all the instability that we are witnessing in the European bond markets is not to some extent linked to this trend.

@Jules: “decline of Irish GDP for at least a decade until Ireland moved from one of the highest per capita GDP countries in the EU to one of the lowest.”

Spot on! This was the substance of a contribution (I cannot rem the actual site where I encountered it) back in 2005. I was intrigued by the assertion, so I followed it up. Sure enough, the contributor had his facts right!

The politicians are in a complete tizzy as they attempt to resolve the debt predicament. Spinning like dolls on the end of a rope. The outcome may please them, but not the ordinary folk.

Brian Snr.

But Spain, Portugal and Italy are also experiencing slow growth, high unemployment, and have unpopular governments with limited ability or desire to implement reforms. The banks in each of these countries are chock full of their government’s debt.

As Incognito suggests, it’s odd that two academics could produce such a fact-less op-ed article.

The banks in Spain, Portugal and Italy are not ‘chock full of their government’s debt’ – – the figures for 2010 were €200bn, €13.7bn and €145bn respectively.

The earnings of most of Europe’s big banks are at risk from restructuring rather than capitalsiations.

Italy’s UniCredit had a sovereign exposure of 2.8% of 2010 total book value while Spain’s Banco Santander was at 11.8%. Spain’s second biggest bank BBVA was at 3.7% – – 43% of BS profit in Q1 was from Latin America.

How realistic is it to include Italy when the private sector has the highest savings rate in Europe and half the sovereign debt is financed locally?

The main risk from Greek debt is the exposure of its banking system and a related collapse of its economy; the direct exposure of German and French banks is relatively low at €34bn and €55bn (2 Greek banks are majority owned by French banks) respectively. There are other distributed exposures to insurance companies etc and the ECB.

A Greek default would unlikely bring down a big European finance firm.

An editorial in Friday’s FT titled ‘The evaporating reform of Greece,’ says “The international financial rescue of Greece in May 2010 was, first and foremost, an emergency operation to avert a sovereign debt default, save Europe’s banks and prevent the collapse of the euro. But the crisis also represented a once-in-a-generation opportunity for Greek politicians, business leaders, trade unionists and the general public to join together in cleaning the putrid Augean stables of the modern Greek state…Thirteen months on..myopic politicians, in government and opposition, trade accusations over trivialities and pay lip service to the cause of reform. The public, suffering its third successive year of economic recession, is by turns angry, desperate and drained of hope.”

Greece had a debt to GDP ratio of 25% in 1981 when it joined the then EEC. Turkey’s was 42% in 2010.

I made similar arguments to the FT’s in respect of Ireland in the article in the Dublin Review of Books – – only to have them dismissed by UCD’s Whelan as ‘nonsense.’

I also argued that the socialisation of bank debt had been pioneered by Ireland when as Commissioner Almunia confirmed this week, there was no EU policy on protecting senior bondholders. It’s a pertinent issue as Anglo was nationalised just 15 weeks after the issue of the bank guarantee.

On reform of Europe’s governance system, it’s reported that it’s the directly elected European Parliament, that is pushing for a system with credible sanctions against the resistance of member governments.

Dr. Stephen Roach of Yale and Morgan Stanley, wrote this week of zombie consumers and the gridlock on fiscal reform in Washington DC.

The chattering class may not view reform as important but in the real world of jobs and business at a time of uncertainty, agreement on long-term reforms must surely have some positive current impact on consumers and business investment.

@ Brian G

Google translatehas a difficult time with German. (There is Bing version which does a better job).

The article essentially confirms the accuracy of the story or, at least, political players – of the minor order – do not call it into question. The press spokesman for the fiaince ministry is also feeble in dealing with it.

The TV programme is rather tendentious in tone but bears out the accuracy of your own analysis, Ackerman being seen as looking after the interests of the financial sector and leaving the taxpayer with the bill. It also points up the fact that German banks have already largely pulled their irons out of the fire.

What I would dispute in the TV coverarge is the simplistic implication that the German taxpayer is being put on the hook for all of Greek debt. The countries of the euro area, the member countries of the IMF and the EU as a whole, are stepping into the breach. That much is undeniable. But they are doing it not because they have been outfoxed by the banks but in the system in which we live of fiat currencies and fractional banking – as I believe it is called – this is what sovereign states have to do.

For base political advantage, this message, and not the message of lazy, feckless “peripherals”, is only now being conveyed in Germany. However, as Michael Hennigan points out above, this does not absolve in any way Greece, or for that matter Ireland, from getting her house in order (and paying back the money borrowed within the limits of what is posible, the current interets rates being set, if I am not mistaken, at levels which Ireland would have paid prior to joining the euro).

I wonder what our creditors make of the announcement by the government ruling out any increase in income tax against the above background.

@ Brian G

By the way, on the anouncement ruling out income tax increases, one must assume that it based on the knowledge rather than the assumption that Ireland is “on track” to emerge from her economic difficulties, a view which both the EZ and the IMF appear to share, a situation which would not be impacted greatly by a reduction in interest rates.

Can the number crunchers confirm this?

@ Michael Hennigan

‘The main risk from Greek debt is the exposure of its banking system and a related collapse of its economy; the direct exposure of German and French banks is relatively low at €34bn and €55bn (2 Greek banks are majority owned by French banks) respectively. There are other distributed exposures to insurance companies etc and the ECB.
A Greek default would be unlikely to bring down a big European finance firm’

Those exposure figures are reassuring to a degree, but who knows what’s sitting out there in the world of derivatives and CDSs, Contagion travels by a variety of channels, including those unrecognised in advance, so, like the invasion of Afghanistan, the outcome is actually unknowable. As Colm McCarthy pointed out on another thread, we haven’t had a European sovereign default since 1952.

Some folk have a lot of money riding on a Greek default. One of the judgements they are making is that our political and institutional strucutres are vulnerable. That reform process, which you examined in your excellent DB paper, is stuck in the sand.

I would have seen Enda Kenny’s statement as simply a reiteration of the austerian view that the adjustment process will focus primarily on cutting governement spending.

@ Paul Quigley

What the Taoiseach said was textually as follows (IT).

“But as head of Government, I can say this in respect of the programme for government and this is very clear: there will not be any income tax increases in the budget.”

Mr Kenny said the commitment not to raise income tax was fundamental to the programme. It was also important for people to be able to plan their lives on the basis of the commitments.

“For that reason, that element of the programme for government is one that we will adhere to very strictly and very clearly.”

As far as I can gather, the leader of the other party in the coalition did not deem it necessary to intervene.

This leaves open the question of the extent of the (i) “austerian” measures to which you refer (ii) elements of possible increases in taxation, other than income tax (iii) tax buoyancy.

Questions to whet the appetite of any number cruncher.

“so, like the invasion of Afghanistan, the outcome is actually unknowable.”

The Americans are now talking to the Taliban

The thing about irrational positions such as the ECB on the bondholders and the Yanks in the Hindu Kush is that the numbers eventually force a climbdown anyway. The GNP of Afghanistan is around USD 10bn and last year the Yanks spent USD 110bn in Afghan/Pak. This bailout has failed numerous times over 10 years. How big will the iterations of the Greek bailout get relative to GDP before the ECB rings the Taliban ?

Number crunchers are good at assessing risks. As Keynes knew so well, uncertainty is essentially unquantifiable. It turns out that the Afghan war is also about the future of Pakistan, regional Sunni/Shia rivalries, the disposal of Gulf oil wealth and God knows what else.

People who knew the systemic realities didn’t get consulted of course, because if they had to be acknowledged, such initiatives would be recognised for the (profit seeking) adventures that they are. That 110bn went somewhere.

For those interested:

The Euro is also an adventure, with considerable vested interests at work. The unknown unknowns are on the way to becoming known unknowns, which I suppose is progress. We learn by doing. Roubini isn’t impressed by the ‘Vienna initiative’ talk, so we’ll see how long it lasts.


‘In the end, democratic nations are not willing to relinquish their political planning authority to an emerging financial oligarchy.

No doubt the post-Soviet countries are watching, along with Latin American, African and other sovereign debtors whose growth has been stunted by predatory austerity programs imposed by IMF, World Bank and EU neoliberals in recent decades. We should all hope that the post-Bretton Woods era is over. But it won’t be until the Greek population follows that of Iceland in saying no – and Ireland finally wakes up.

Financial Times columnist Martin Wolf writes that the eurozone “has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. … either default and partial dissolution or open-ended official support.”[8] But ECB intransigence leaves little alternative to breakup. Europe’s payments-surplus nations are waging financial war against the deficit countries. Without a common union based on mutual support within a mixed economy – one capable of checking financial aggression – the European Central Bank replaced the military high command. Its bold gamble is whether the Greeks will be as stupid as the Irish, not as smart as the Icelanders.’

As stupid as the Irish. Quite!

Anyone any figures on the flow of euro deposits out of Greece? Should be interesting.

The Greek government have fluffed the opportunity for reform, but what establishment wants to cut its own throat.

The Irish shouldn’t try to seize the moral high ground on reform however.

@ Grumpy

Did you see this from Daniel Gros ?

“How should one assess the chances of Greece avoiding an Argentine scenario today?A quick look at the fundamentals (Greece today versus Argentina before the default) is not encouraging:

Debt level (% of GDP): GR: 150% v. ARG: 50 %

Fiscal deficit (% of GDP): GR: 12% v. ARG: 5 %

Current account deficit (% of GDP): GR: 10% v. ARG: 2 %

Growth (real GDP): GR: -3% v. ARG: -2 %

Deposit flight (% change in bank deposits): GR: -10% v. ARG: -7 %

On these five fundamental indicators of an impending crisis it is thus five to nil for Argentina.”

Is Mr. Gros not saying that there are plenty of Greek assets, overseas money, islands, pocket-lint and stuff so there is no problem?

Mind you, I don’t disagree totally with his conclusion:
“As in Argentina in 2001 the population of Greece seems determined today to push the country towards the worst of all options: a disorderly default without having implemented first the structural reforms which would allow the country to emerge leaner and stronger from this “catharsis”. There is very little Europe can do to avoid this outcome.”

I would quibble a little with it, though. PASOK was elected with a majority on an austerity platform. The public-private split in Greece makes Ireland look like a family spat over a ditch boundary. The protests appear to be largely from public sector workers. Private sector workers appear to be, er, ‘retaining’ tax on the excuse that it should be spent better (that, though, is often an excuse used for tax evasion).

So I don’t think there is no constituency for reform or necessarily a full constituency for default. Unfortunately, though, there isn’t enough for reform and there is enough for default – a situation likely to lead to very messy outcomes.

@ All

The Seuddeutsche Zeitung carries an extensive article cum interview with Juncker in today’s edition. The following extract has made numerous German politicians – and notably Westerwelle of the FDP – choke on their porridge.

“We are playing with fire” says Juncker. In the worst case, the rating agencies could claim the existence of a “credit event” with extreme consequences for the monetary union. “The default could infect Portugal and Ireland and then, because of their high indebtedness, also Belgium and Italy but beforehand Spain”. Juncker goes further. And that is not all. As the Greek banks would be most impacted by a restructuring, they would have to receive an additional financial packet. “As long as we, because of German domestic political considerations, seek to involve private investors, will everything become even more costly”.

If this does not convince the markets – and Roubini – that PSI is like the Cheshire Cat, nothing will.

Someone should tell Daniel Gros that Greece is not in South America.


The image of German politicians choking on their porridge would make a good political cartoon (are there any economic cartoonists?).

On the subject of ratings agencies and Italy, I see that Moody’s warned last night it may cut Italy’s Aa2 credit rating. I guess it won’t be the only downgrade if Greece goes mammary glands up.

Thanks. I ask because an acquaintance of mine, a Greek immunologist, opened five banks accounts outside Greece to secure his savings… eh hem

This is a game of chicken – and the banksters are better at it.

What I think they know, deep down, is that if we do everything they want us to do we don’t need them any more.
The deterrents to defaulting are that the banksters won’t lend us any money in the future and that they could impound state assets.
Well if we cut our deficit to zero we don’t need to borrow and if we have privatized state assets then there’s nothing to impound.

People will say that we will be poorer but we have to be – no country can afford to use these markets any more.

And another thing – only entities that raise their own taxes should be able to issue currency. Therefore Europe has a choice – introduce federal taxes or ditch the Euro.


On the recent pronouncements on income tax I think Enda Kenny is starting to play the “Brian Cowen” role in government, and is in real danger of a rapid loss of credibility

The recently completed revised MOU published just a few weeks ago contains the following target for budget 2012

Revenue measures to yield EUR1,500m in a full year will be introduced, including:
– A lowering of personal income tax bands and credits.

Compare with the recent quote:

“But as head of Government, I can say this in respect of the programme for government and this is very clear: there will not be any income tax increases in the budget”

And just to be clear the programme for government commitment is not just limited to income tax rate, but says the government will

Maintain the current rates of income tax together with bands and credits.

So an obvious and complete contradiction is ignored. This achieves nothing other than to insult the audience, in this case both the Irish electorate and the EU masters.

Also let’s look at what the recent SPU document forecast on amounts to be raised from “taxes on income, wealth etc.” from 2011 to 2015 (converted to €bn)

19.5 -> 22.0 -> 23.9 -> 25.8 -> 27.6

So there’s a 40% increase in this category of taxes over 5 years; now the expectation is that some of this will be due to growth, however growth predictions for the same period are only 17%.

So “it’s important that people have some planning to be able to put into their lives.” Fair enough – but should Irish people plan according to what all the official documentation submitted to the EU says, or plan according to what the Taoiseach says? Both cannot simultaneously be true.

I comment on this blog now and again and boy, have alot of people got stockholm syndrome. GET OUT SIDETHE BOX, STOP READING THE IRISH TIMES. LISTEN TO THE ALTERNATIVE CHANNELS, RT, TODAYTV. Its ironic it,s Russian and Iranian but they actually give a different prespective from the usual rubbish on RTE. Read The Engame by John Mauldrin. WE ARE GOING TO DEFAULT. Just read the book, alot of the source comes from the BIS.

@ Bryan G
Maybe it’s a bit jesuitical but you can lower income tax bands and credits without actually increasing the tax rate. So he might just be playing word games.
IMF review in July could be interesting and there’s another one in September. Plenty of room to row back anyway


But I pointed out that Kenny did not really leave himself this wiggle room – he reaffirmed the programme for government which explicitly mentions that existing bands and credits will be maintained, and he did not restrict his statement to income tax ‘rate’. In contrast Gilmore did leave himself this wiggle room – he said changes to social welfare rates are off the table. The MOU requires social welfare expenditure cuts, but this can be achieved with changes to eligibility/means testing etc. Trying to argue that an increase in income tax due to a change in bands and credits is not an “income tax increase” is one that even the Jesuits might try and run away from.

The odd question is why Kenny said anything at all about a budget that is still months away and with all the focus on Greece. He will have to row back on his position, so he has just handed everybody a stick with which to beat him, for no good reason.

@ Brian G

Could the really awful truth be that the present government, and especially its leader, has no idea what it is doing?

I came across the attached in today’s Indo, the author not being identified on the net version.

What is interesting, because it is a common phenomenon, is the fact that he or she is all at sea as far as international developments are concerned but is probably entirely correct with regard to the domestic aspects.

The really valued talent of the governing elites in Ireland – and especially politicians and the media – is that of the capacity to “wing it” i.e to never actually grasp and enunciate the facts.

As to the revival of the burn the bondholders issue, it points up the Augustinian contradiction in the position of the EU. As it constitutes a point on which Ireland has to concede it might, just might, prove useful.

@seafóid. hogan

“Fiscal deficit (% of GDP): GR: 12% v. ARG: 5 %”

Which way round does that score though?


Seanie Fitz was winging it too, along with a lot more like him, but they got found out. Autumn 2010 brought a harvest of overdue revelations about the state of our banks. The summer will be a hot one in the markets, and this year’s harvest will test the competence and coherence of our government.
As Warren Buffet says:
‘It’s only when the tide goes out that you learn who’s been swimming naked.”

@ Brian G
In many ways the IMF is a politician’s dream. “I didn’t want to raise the rates but the IMF made me do it”.

I think the Irish government is caught in a spat between the Americans/IMF and the EU. They get a little emboldened at times – thinking that they are a bit more than pawns in a game that actually threatens to bankrupt the IMF.

The govt should just forget about the cute hoorism. It needs to cut the deficit to zero. Then it can do whatever it wants. Shouldn’t be a stooge played by the IMF against the EU. Just cut public sector wages and social welfare by 40% and default. Get out of this diabolical charade.

@David Burke

No one, as far as I am aware among the Independents or ‘the Left’ – daylight atheists, etc. – has argued for default at home, for some form of mortgage repudiation.

The Irish psyche is unable to develop strategies that do anything but follow the most coercive conventional lines of thinking.

As I have said several times in this blog, default begins at home – and when SMEs are having their business credit cards cancelled with five days notice for minimal overruns, something is seriously out of kilter with the official government and CB blather about recovery.

Mortgages need to be cut by 40% too. And all mortgage books bought by a state owned bank

Once we have the deficit cut to zero we can do whatever we want.

@ paul quigley & DOCM

Juncker “As long as we, because of German domestic political considerations, seek to involve private investors.”

Private investors buy sovereign/bank Greek debt – presumably after reading a prospectus, looking at the data, putting a wet finger in the air, etc. They take the profit as it is paid off. But suddenly, when the bank/sovereign can’t/won’t pay, the whole thing is nothing to do with them, and now only an insane hot-head would ask them to havything to do with solving the debt crisis they are a party to.

The ‘questioning’ of ‘private sector involvement’ is all over EU/ECB communications now, and it looks like a classic piece of debate framing – like ‘share the pain’ – which sounds overtly reasonable and thoughtful but is actually there to stake a position.

Here’s an, admittedly old, communication from those red flag flying barricade stormers of the IMF.

“Involvement of the private sector in the resolution of financial crises is appropriate in order to have the burden of crisis resolution shared equitably with the official sector, strengthen market discipline, and, in the process, increase the efficiency of international capital markets and the ability of emerging market borrowers to protect themselves against volatility and contagion. An additional goal is avoiding moral hazard—the encouraging of imprudent or unsustainable behavior by creditors or debtors that can increase the potential magnitude and frequency of future crises.”


“Once we have the deficit cut to zero we can do whatever we want.”

Not really – even if the primary deficit is cut to zero, the country will still need to borrow on the markets to pay back the interest on the national debt, and to redeem this debt as it becomes due. In 2015, for example, interest payments will be in the €11-12bn range, and from memory there are principal repayments due of roughly €20bn per annum from 2012 out for a decade. So even with a zero primary deficit there is a funding need of over €30bn per annum, and even with some restructuring this is still going to be a very big number. Of course with a zero deficit market funding should be much easier to obtain, but dependence on the market will remain.

It is the handling of upcoming bond redemptions that is causing much of the turmoil in Greece. Over the next 3 years Greece has an expected cumulative deficit of about €30bn, but has bond redemptions in that period of about €100bn. Greece has an overall debt burden of about €350bn, so you can see that each year there are redemptions due of about 10% of this. (Ireland will have an overall debt load of €210 – 220bn with about 10% due for redemption each year). It is the handling of this €100bn in Greece that is causing the biggest problem – they were trying for a (40/30/30) split between EU funding/privatization receipts/”voluntary” rollover but you can see how smoothly that is going. Now the “rollover” portion just time-shifts the redemptions a few years forward, in effect doubling the redemptions due in 2015-2017, say. The guiding rule seems to be that when faced with an insolvency problem, pretend it is a liquidity problem and try to solve that, and they are not even doing that very well.

@ Bryan G
What happens if we just don’t pay those bond redemptions?
What realistically can they do?
If they refuse to lend us more money – good – because with a zero deficit we don’t need it anyway. And if they go after state assets we could protect those by privatizing them (which is going to happen anyway)

Then you would be out of the Euro Zone,maybe out of the other European Institutions,without banks ,probably even without a currency.
Those are rather theoritical considerations .
“Just cut public sector wages and social welfare by 40%” Good luck with that!


Not even Argentina went for a complete default, but if Ireland did so the economy would collapse. For a start if the IMF and EU don’t get their money back I think you would find that FDI would stop completely, Irish companies would find they never won any major bids outside the country, incoming business travel, conferences, joint ventures etc. would stop, tourism would drop, and lots of companies would stop selling products here since they think they won’t get paid. Ireland would become a pariah state, since there would be huge political pressure in the US and the EU not to do business with a country that failed to pay back official loans – i.e. failed to pay back their taxpayers.

There would be no gunboats on the Liffey, but there’s no need for that anymore. I have seen absolutely no evidence that Irish people could deal with the huge drop in living standards involved. It is a world away from burning senior bondholders, since not only is this sovereign debt being defaulted on, but an increasing proportion is sovereign debt owed to official/public creditors, who can directly or indirectly influence commercial activity in their countries. And this is all before issues related to the fact that Ireland doesn’t have its own currency are taken into account – i.e. Ireland would be kicked out of the Eurozone.

@ Gavin Kostick

In my view, it is the timing of the remarks by Juncker, in a paper which is the sounding board of the most conservative elements in German society, that is of significance. Indeed, I mis-translated one phrase. He said that Belgium and Italy could be impacted before Spain. And he is quoted with slightly less incendiary – for a German audience that is – remarks in other Continental papers this morning. There has to be a method in his madness and the only one that I can see is to clearly establish – especially in German public opinion – that PSI is a chimera. The outcome will be reflected in the wording of the ESM in terms of the extent to which it is prescriptive or optional.

The decisive voice in allowing Greece to join the euro in the first place was that of Germany and German industry – especially its military industrial complex – has doen very well out of the Greek spending splurge (with more than a hint of irregular parctices along the way). It is also a fact that Germany was the strongest opponent of strengthening the investigative powers of Eurostat which would have revealed the state of the stables befor they became Augean.

The bill has now come due. It is easily manageable in financial terms but very difficult to sell domestically in Germany. Indeed, Merkel is now back-tracking from what she said publicly in the joint press conference with Sarkozy, the spinners maintaining that there is no difference of opinion between her and Schaeuble. But one way or the other, the markets have given their verdict and either (i) Greece defaults or (ii) the country is kept afloat by the rest of the EZ.


Thanks for fascinating insights into German dynamics and to all for another good thread.

Fair enough

i) Greece defaults. Systemic consequences unkonwn but probably very ugly, with widespread collateral damage to the credit system, including the political credit of the EC leadership.

ii) Greece is offereed the status of protected zone, under the long term administratiion of some sort of ‘troika’. Such a step is, as you say, economically affordable for Europe, but, with Greek employment continuing to tank, internal Greek political problems must worsen.

When Greek yields were at the level Ireland’s are at now, the view was taken that Greece was a case apart. No offence to to our Greek friends, but ‘basket case’ was the term commonly used.

Given the consequences of jumping overboard, as set out succinctly by Bryan G above, flat growth, shrinking cash reserves, and major bond redemption in Jan 2104, what are our own chances of evading administration ?

Ok – thanks for that. I realize this might be continuing an absurd argument but I think it’s interesting to really think about the aftermath of default.
FDI seems to be a major consideration. If we placated the IMF by offering repayment over an extended period that might reduce the political fallout. We could also cut corporation tax to zero to attract a continued presence.

ECB cuts liquidity to the banks so we end up with no money in the ATMs. But we can revert to a Sterling pegged Punt. Maybe we need to start to consider the practicalities of printing that currency

There is a real chance of default. Maybe we should prepare for it now

@ DOCM and paul quigley

“The outcome will be reflected in the wording of the ESM in terms of the extent to which it is prescriptive or optional.”

I agree that the ESM is where this is all heading. If the outcome of the ESM is that the private sector can never lose and the tax-payer must always cough up, then we’re into proper revolutionary territory.

The ESCB certainly think there should be burden-sharing:

I’ll reiterate that I don’t like the acronym PSI as it paints the bondholders as bystanders not instigators. The discussion is ‘how should private sector involvement be managed’, not ‘should the private sector be involved’ – they already are.

“Given the consequences of jumping overboard, as set out succinctly by Bryan G above, flat growth, shrinking cash reserves, and major bond redemption in Jan 2104, what are our own chances of evading administration ?”

I’ve been thinking about that, but don’t have a cogent answer right now. I do hope though, that the DoF and CB are role playing a wide variety of possibilities and have learned from the last round of negotiations.

Brian G
“Not even Argentina went for a complete default, but if Ireland did so the economy would collapse. For a start if the IMF and EU don’t get their money back I think you would find that FDI would stop completely, Irish companies would find they never won any major bids outside the country, incoming business travel, conferences, joint ventures etc. would stop, tourism would drop, and lots of companies would stop selling products here since they think they won’t get paid. Ireland would become a pariah state, since there would be huge political pressure in the US and the EU not to do business with a country that failed to pay back official loans – i.e. failed to pay back their taxpayers.

right….but as nobody is suggesting that, whats your point? are you doing a james carvill on it?
What people are suggesting is some action on bank bonds – some say go for the unguaranteed seniors, others for that plus some change on the guaranteed ones. That wont cause the dead to rise will it?

@ paul quigley

Given the consequences of jumping overboard, as set out succinctly by Bryan G above, flat growth, shrinking cash reserves, and major bond redemption in Jan 2104, what are our own chances of evading administration ?

Maybe we’ll find that President Bachmann has Irish roots.

@ Eureka

Bermuda already has zero corporate taxes; maybe Pakistan should try it to attract FDI?

Krugman is shrill:

I think there’s a good case to be made that at this point demands for even more austerity are counterproductive, even in terms of creditors’ interests: the Greek economy is suffering long-term damage, the Greek political scene is being radicalized, and the chances of Greece just telling its creditors to take a hike while it devalues the new drachma are rising.

What we are seeing in the EU is a kind of cold war. Practically everyone loses in wars, but that doesn’t stop them from breaking out. What we need if we are to understand such events is a hybrid subject, a cross between International Relations Theory and International Economics. We could call it International Political Economy or something like that.

Mr. Juncker should be aware that his remarks have an influence on markets. He seems fond of statesmanlike pontification. He should also be aware that it is only statesmanlike if you can do something about it. He has neither the muscle nor the agreement to do anything about the current situation. Therefore he should shut up.

Or perhaps he is telling lies again.

Indeed, I think Mr. Gros’ last sentence is in error – it is 5-0 for Greek default, based on the position of Argentina. Which, as others have pointed out, is not a comparison that’s all it’s cracked up to be.

@Kevin Donoghue
I think Mr. Krugman is looking from the wrong angle. What if the purpose of the hard line is to force Greece to choose to leave? For it to be ‘not a eurozone default’? In which case, Herr Schauble’s attempt at a write-down solution is a last ditch attempt to keep Greece in the eurozone. Without it, Greece is in an impossible position.

The question becomes then, why would the ECB support this? Rotten-limb surgery?

I agree with you, it is well into the territory of politics, never mind political economy.

@Gavin Kostick

I agree that the ESM is where this is all heading. If the outcome of the ESM is that the private sector can never lose and the tax-payer must always cough up, then we’re into proper revolutionary territory.

Never suggest the need for revolution under your own name, loose finger tips sink ships and all that.

For me the whole situation only makes sense if I put France and ECB on the side of the fight that sees the European FIRE sector as of more importance to the EU economy than all the other sectors combined, and Germany on the side that sees only the creditor nations FIRE sectors as having this level of political precedence.

This would make the current political struggle about which nations future generations have to suffer the most to protect the interests of the current generation of European financial capitalists. The ECB and France have a more universalist idea of serfdom than Germany does, this gels nicely with interests of the European monied classes and EU institutions and so for the moment the ECB has the upper hand.

Ireland has unfortunately made itself irrelevant to this struggle by becoming utterly dependent on the ECB so our plan remains the same as it was under the Fianna Fail government: Wait for the next crisis of capitalism and hope to escape in the confusion.

@ Gavin Kostick

“The outcome will be reflected in the wording of the ESM in terms of the extent to which it is prescriptive or optional.”

What I was referring to is the likely enabling language in the ESM treaty and not to any actual event.

Germany has been in a state of denial since the very beginning of this crisis by refusing to face up to the fact that the maintenance of the solvency of the EZ banks cannot be left to individual countries. Fuel has been added to the fire by the pursuit of goals which may make sense in terms of populist rhetoric but are contradictory in international political and economic terms, notably the idea of saying to private investors that we will not hang you now but intend to do so in 2013. This unrealistic goal has been stuck to with great tenacity and is doing more damage by the day.

It is clear also that all the trains cannot arrive in the European Council station on Thursday without the risk of a major political catastrophe. There will be a minimum agreement today on Greece and the Hellenic train will be shunted into a siding until July (as against September, another totally unrealistic German demand).

Efforts can then concentrate on (i) finalising the text of the ESM (ii) upgrading the terms of the EFSF (with some hope that the nuisance of Ireland’s special pleadings can be disposed of) and (iii) agreeing the strengthening “six-pack” of proposals on the Stability and Growth Pact.

I posted this link to a recent House of Lords Report (HOLR) which could be subtitled “All you ever wanted to know about the euro crisis but were afraid to ask”.

I would direct attention to Appendix 6 on the relative size of the various EZ economies. The spectacle of waiting for several elephants to trip over several mice is extraordinary in every respect, not least the fact that the biggest elephant has allowed such a spectacle to be put on stage in the firts place with various celebrity economists shouting from the body of the hall “look out, he’s behind you”.

Unlike many here, I believe that history will regard this episode in the Greek crisis with a completely different eye.

Over the last few weeks, the coordination between France and Germany has been absolutely perfect in their bad cop / good cop routine. As usual, Germany took the role of the bad cop, while France played the good cop.

As a result of the seamless routine between France and Germany, the suspect, Greece, is now scared shitless and seems willing to amend its ways.

Who is next?

Nice to see Chigago understands the concept that higher yield means higher risk – something that escapes most here.

Here is an interesting bit from the FT re Greece

“Most analysts and many European officials agree the main reason Greece has fallen behind with its reform programme is a lack of political will. Mr Papandreou’s government dutifully drafted framework laws in line with reform benchmarks set under the current bail-out programme but left gaps to be filled in by ministerial decrees. Months later, many such decrees are languishing in ministers’ in-trays, making the legislation unworkable.

Following cuts last year in civil servants’ salaries, some ministers quietly handed out additional allowances to their staff without informing the finance ministry, says Miranda Xafa, a former Greek representative to the IMF. “Effectively the [previous] ministers sabotaged the programme, believing they could fool the troika,” she says. It helped that the establishment of a central payments agency for public sector workers, another troika requirement, has been delayed.”

@ hoganmahew

” He should also be aware that it is only statesmanlike if you can do something about it.”

EU communication with the markets has been dreadful throughout the whole crisis. How many times have they been forced into a deal that “brings relief to the markets” that breaks down a couple of months later where the whole cycle starts all over again?

@ Philip II
Bryan G was only replying to my probably ridiculous suggestion regarding absolute default.
The ramifications are not as bad as I had thought to be honest:
1: We will have to leave the Euro – the ECB will stop liquidity to Irish banks if we default on any of our debt (sovereign or bank – so why not just go the whole hog/!)
2: The FDI sector would leave – where would they go? The world is full of unstable places at the moment. An English speaking, skilled and socially stable society will continue to be attractive (and add to this a 0% tax rate). Anyway the FDI could move if the next American administration cuts down on tax loopholes anyway – so you know…..

So as the saying goes you might as well get hung for a sheep as a lamb. If we’re going to default let’s do it big!

@ All

Some very interesting ideas floating around in the ether, one being an outline suggestion from Schaeuble for a “compromise” with the ECB involving the issuance of EFSF bonds, to be lodged with Greek banks, and acceptable, of course, as collateral by the ECB; or something on these lines. This would be linked to a “carrot and stick”, to take the phrase used by Schaeuble, approach to Greece including, according to the Belgian finance minister, an advance of only half the immediately required €12 billion. There would be agreement to a doubling of the EFSF capital.

This may not be the right version as Schaeuble himself said it was a work in progress but what bank could be said to be coerced into buying EFSF bonds?

Excellent timing on the announcement that EU finance ministers have decided to hang on to that €12bn for now. Here’s a gun to your head.

Had they said that on Friday, Athens would probably be in flames right now with the people having the weekend to think about it and spare time on their hands.

I suspect that PM George Papandreou may take a walk this week. Will the whole of Greece do the same vis-a-vis the Euro in the not too distant future? I would say the chances of that happening have just moved up a notch.

/above system failure @ Greece will lead to major changes on the existing political system.So long no political party has the will to take the responsibility and lead the country out of the darkness.Rumors currently are that a new political party lead by well known economic analyst that insist upon we are going the wrong way and claim exit from euro would be the correct way to deal with the crisis.The specific movement although is not advertised yet is serious enough for the “desperate” people to follow.And they are the majority now.


You said: “Rumors currently are that a new political party lead by well known economic analyst that insist upon we are going the wrong way and claim exit from euro would be the correct way to deal with the crisis.”

From what I hear, more credible rumours are that some very heavy people are leaning on Antonis Samaras (leader of the conservative New Democracy party in Greece) big time in respect of next weeks vote on the new austerity measures being accepted. It’s an interesting situation as he has already publicly stated he won’t back the measures. What to do eh?

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