Jeff Sachs: Greece Can Be Saved

Jeff Sachs shows how a Greek default can be avoided through a different European approach to funding a troubled sovereign in this FT article.

14 replies on “Jeff Sachs: Greece Can Be Saved”

There be CDS dragons……
What currency is this ?
Sweet Jesus .. I mean Bono sorry.

How could a economic system so fragile be a offspring of a organic structure ?

Very few are asking the most fundamental of questions – WHY ?

The cure proposed by Mr Sachs is aspirational. Nobody will lend at the rates proposed and the German taxpayer is not going to subsidize Greece for 20 years.
The French solution is a great deal for French banks. Take out half your money and get double the interest rate on the remainder. But the effect on the Greek Bonds not included in the timeframe (2011-2014) could be a problem if the markets decide that this deal further devalues longer dated Greek bonds.

It only requires a solution if there’s a problem, and for many there is no problem

And that’s where we’re at – alot of money being made behind the scenes.
Sad to see poor Vincent Browne chairing board meetings for St Columbanus and entertaining the nation with a but of crusty baiting. But there is real momentum behind the enrichment of the few on the misery of the masses.
Unfortunately these things tend to end quite badly. The rich form camps and fight among themselves usually killing millions in the process.

While the article suggests a way that Greece can repay its debts, the title of the article is still putting the emphasis too much on outsiders helping Greece. Greece pays high interest rates not just because of past borrowing, but also because of a lack of confidence in Greece’s willingness and ability to reform its own taxation and spending systems.

In the meantime there’s still a chicken and egg problem. If Greece could get a long term guarantee of cheap funding it could reform and repay its debts, but there’ll be no long term cheap funding until there’s confidence that Greece will reform, and Greece needs money now. Not later, now.

In that context Greece, the EU, the IMF, etc., must either take a stepwise approach towards funding and reform, or prepare a best-attempt at orderly restructuring, or experience a disorderly default sometime soon.

Mr. Sach’s article helps to show that the attempt at funding and reform is worth making but that specific path to salvation is highly unlikely to be the path Greece follows.

Of course Greece can do much better and maybe prosper; the stunning comeback of its neighbour Turkey shows what’s possible.

However, the author of ‘shock therapy’ should curb the enthusiasm a little. He says the ‘stalwart Greek people deserve our gratitude for this week’s vote’ but a society afflicted with endemic corruption and cronyism will take sometime to adjust.

As for ‘Greece has vast solar and wind power to export to energy-hungry northern Europe. Greece offers a superb transport hub for Europe-Asia trade…,’ limitations of geography would surely impede advances in both these areas.

Rotterdam, Antwerp and Hamburg have no reason to fear losing shipping traffic.

As for guarantees that could cost ‘nothing,’ it would be naive to even expect the most brave and visionary political leader of a key Eurozone country to support such a move without evidence of significant progress on reform; ditto for other peripheral basket cases.

Apart from armchair delusionists and the self-interested – – both groups of significance – – Irish people could tell him that even the reality of a failed system isn’t enough to promote significant change; external pressure with the risk of consequences is a necessary catalyst.


And that’s where we’re at – alot of money being made behind the scenes.

JTO again:

There is some truth in this. But, what you need to realise is that they are principally making (and losing) money out of each other. They are gamblers betting on alternative outcomes. One group will win. One group will lose.

Cutting through all the technical jargon about bonds, cds, yields, spreads, etc etc, which hardly anyone understands (I certainly don’t), what it boils down to is this. In relation to the Irish economy (but, it applies to other economies as well), some people, like myself, have bet on its success, while others, like the Saint Columbanus gang, have bet on its failure. Of course, when the term ‘invest’ is used, rather than ‘bet’, it sounds a lot more grand and noble, but ‘betting’ is what it actually is. Yesterday’s census figures are a great boost for those few, like myself, who have bet on the Irish economy’s success.

There is a lot to reflect on in this article, as Martin Wolf pointed out in a blogged comment.

Martin Wolf, FT chief economics columnist | June 30 4:58pm | Permalink
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This is a thought-provoking piece. One issue which occurs to me is that such a low-interest guarantee would surely also need to be provided to other European sovereigns. It remains unclear how either the IMF or the EU would be able to persuade other countries — for instance Italy, or Spain — to begin lending to Greeks at lower interest rates than they face themselves.

In essence, Jeff is arguing for a fiscal union, with a common (low) interest rate on eurozone government bonds. If that were possible, the eurozone would be a federation already, and there would never have been such a crisis, in the first place. It is logically sensible, but it also seems politically impossible — MARTIN. ”

As the EU is not about to become a federation overnight, there is little choice but to continue with the policy of muddling through in the hope that Greece will bring its contribution to the party. The same holds true for Ireland as Michael Hennigan points out above.

Sachs also deals with what strikes the non-economist as the central conundrum of the situation in which the peripheral countries find themselves.

“The IMF-EU estimates are based on the idea that Greece [Ireland/Portugal] will have to pay high market-based interest rates that include a significant premium for the risk of default. The obvious problem facing Greece is a potentially self-fulfilling prophecy of default. High interest rates will lead to an intolerable debt-service burden and the inevitability of default. The prospect of default, in turn, will lead inexorably to high interest rates. The better policy is to get Greece’s interest rates sharply lower, consistent with an alternative scenario in which Greece is in fact able to manage its debts because debt servicing is moderate, gradual and backed by renewed economic growth”.

He also hands out some well-deserved brickbats to colleagues who add to rather help resolve this conundrum.

“Many of my colleagues in academia have blithely called upon Greece to default, and thereby force an involuntary restructuring of its debts. I find such advice to be naive. Nobody can guarantee a managed default in today’s global financial system. Bank runs, a contagion to other countries, the triggering of credit default swaps, legal actions by vulture funds that buy up cheap Greek bonds and then sue for full repayments, and heated political recriminations within Europe, are but some of the consequences that could quickly follow a default. An unravelling of the monetary union could not be excluded”.

and, with regard to the hubris involved in presuming to get ahead of events:

“Many of those who argue for the inevitability of default claim that Greece can never repay its mountain of debt. They may eventually prove to be correct, but it is still far too early to say, or to act on that hunch”.

@Michael Hennigan

To be fair to Jeff (Sachs), apart from vast solar and wind power for export to energy-hungry northern Europe and being a superb transport hub for Europe-Asia Trade, he does suggest that Greece, in return for being granted German-level borrowing rates, “remains one of the world’s glorious destinations for tourism,….and ruminations on the human condition.”

An argument clincher, surely? Fuel for Minister Noonan next time he’s sitting beside Sarkozy at dinner!

“But, what you need to realise is that they are principally making (and losing) money out of each other. ”

Wish it were true! The get bailed out if they lose

Essentially the bet is on how much money you can be extracted from a nation in the form of bond repayments? It’s a function of economic growth and efficiency at taxing. It’s an ok thing to bet on but there comes a point when it just gets out of hand.
You have the rating agencies who are in the pockets of bondtraders, the ECB who is also in the pockets of the bondmarkets and the EU which is full of idiots really. The game is easy to fix and is full of cheats. And the losers keep on going to the players to get top ups when they lose. And the other thing is that it doesn’t use real money. It generates the money first and then forces the citizens to create the value for it.

So it’s a daft game really. It has taken unregulated banking to its absurd and ridiculous extreme. And what’s worse is that the participants are forced to play for the gamblers simply by being citizens of democratic states.

Now, don’t get me wrong – I don’t have a big socialist head on me thinking that we should all be living in an egalitarian Nirvana. I just know that you can mess with people so much before things get difficult. Once you prevent them from hoping (not necessarily achieving) and once you give them nothing to lose you’re looking at serious problems.

Bottom line the game is too expensive and dangerous for the world to run. Take the bankers up to Shelbourne Park – much less harm done…..on second thoughts though wouldn’t be fair on the dogs…..

@ All

An interesting paper in the context of the discussion on this thread. The author’s grasp of the economics of the situation – insofar as I can judge – far surpasses his grasp of how the EU actually functions. He also seems unaware of the fact that in various surveys, and I stand to be corrected on this, the institutions of the EU come out better in the popularity stakes in European public opinion than national institutions or politicians. This is attributable in no small measure to the unique solution found by the EU to Rodrik’s dilemma: there is no necessary contradiction between the practice of democracy at a European and a national level. Time will show whther this is the case.

Where is the evidence that a Greek default of 50% would lead to another Lehmann type situation? This is all a massive spin by the Financial Industry well sold to captured-politicos and imposed on subservient serfs; as with all dictatorships, irrational fear is injected into the system and peddled incessantly by the captured politicos and the subservient media.

This is a battle between Financial System, much of which has gone Rogue and detached from humanity, and democratic citizen-serfs. Thus far, the Rogue element is winning – and has captured the EZ.

A glorious destination for tourism?? Tourism is a low-value-added industry which employs low-skilled labour. It is a nice-to-have addition to a healthy economy but hardly a motor for wealth creation. And then comes the solar power potential?!!? The folly of wind has already created a wealth of misallocated investments across Europe and huge headache for transmission network operators. And now the idea to transport sun-generated electricity across Europe?! Dear Geoffrey Sachs, take out your bloody calculator before you reach for the keyboard.

@David O’Donnell…

“This is all a massive spin by the Financial Industry well sold to captured-politicos and imposed on subservient serfs; as with all dictatorships, irrational fear is injected into the system and peddled incessantly by the captured politicos and the subservient media.

Curses! Rumbled!

But we do know where you live though…

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