McCarthy and Mody on what the Greek fiasco tells us about the ECB and IMF

Here, and here.

Three questions arise. Why would any non-European country be willing to accept another European IMF head? Would it not be better for the Europeans themselves if a non-European IMF head provided us with an “adult in the room” at times of crisis? And why would any European be happy living in a monetary union in which a politicized central bank cannot be relied upon to act as a lender of last resort, and in which their guns could be turned on any (sufficiently small) member state in a time of crisis?

65 replies on “McCarthy and Mody on what the Greek fiasco tells us about the ECB and IMF”

Much of the assets of the Greek banks are obligations of the Greek state. The Greek state has embarked on a course of non payment, which ultimately will make the banks insolvent. Is it a good idea to provide ELA to insolvent banks? In the case of Anglo Irish Bank , Irish taxpayers ended up on the hook to repay the ELA provided to that institution. In the case of Greece, any ideas on who pays if banks ultimately fail ?

By any objective measure Greek banks are now clearly insolvent. At what point wil they be recapped, by whom and should ELA be extended to them at all. Will deposit bail in be neccessary?

I note the following response to Mody’s piece.

“What a half-baked piece of drivel. Forget about debt sustainability. Its never been about that. Everyone has known that without structural reform Greece could not have FISCAL sustainability, which has to come before any thought of a creditor haircut. You cannot reward bad policy or bad behaviour and expect change; instead you simply are reinforcing the bad behaviour. There are NO suitable or applicable modern comparisons to Greece. The country is a unique brew of the worst economic and political tribalism / clientelism / regulatory paralysis / corruption / bribery / tax cheating / etc.

Clearly Greece should never have been accepted into the EZ. But having done so the EU and IMF have made a valiant effort to offer Greece a chance at staying. Progress was being made until December and could have progressed into area such as debt reduction, etc. until the crass, selfish politics of SYRIZA and their narcicistic leaders deceived their country and destroyed years of progress in 5 months.

They say a people get the government they deserve. I don’t believe anyone deserves this group of Losers.

Hello Drachma. Welcome Greece, the next banana republic of the 21st century.”

There is no point in my trying to improve on that.

Despite the huge number of news outlets covering Greece, a huge amount of commentary from academics and journalists since 2010, and both public and private published reports/ briefings, it can be difficult for an outsider to get a handle on this crisis.

I don’t know much about Greece as I haven’t lived there and I guess that would be the situation with many others commenting on the crisis presenting the common theme that the troika officials have made a dog’s dinner of the situation and now big and small countries in the Euro Area are ganging up on Greece to impose more austerity.

Some say there should not have been any cuts in public spending but we hear little on an alternative.

In the two pieces featured here, there is little or no focus on the key issue of growth. Prof Mody makes a blistering attack on his former colleagues at the IMF — “disingenuous” he terms them or in the lingua franca “liars” — and he says “It would be foolish to expect a miraculous source of external growth to lift Greece or Europe.”

In recent years Chinese firms invested over €5bn in Portugal and just over €400m in Greece. The latter has one of the worst inward investment records in Europe and in February the new government put the privatisation program on hold.

Yanis Varoufakis, the Greek finance minister, said in relation to privatisations: “It’s not very clever to sell off the family jewels in the middle of deflationary crisis . . . It is wiser to develop state property and increase its value using smart financial resources to strengthen our economy.”

That maybe true but with a choice of gaining billions in revenues and squeezing citizens’ income in the short-term, the former maybe the prudent choice.

Cosco, a Chinese state shipping company which operates a profitable container terminal at Piraeus, is interested in acquiring the remaining 67% stake in the company and Reuters reported in May that Greece will finalise “immediately” a €1.2bn deal with German company Fraport to run regional airports and reopen bidding for a majority stake in Piraeus port.

As for Colm’s argument, over €100bn in deposit outflows had occurred between 2010 and absent capital controls the fear that the referendum would result in an exit from the euro would surely have triggered large outflows in the past week and maybe subsequent weeks.

There was no obligation on the ECB to close down the Greek financial system on Sunday last: it was free to announce continuing liquidity support and to end the deposit run. The governing council chose not to do so and cannot now complain if it is seen to have yielded to creditor pressure.

Absent controls, EU officials could be blamed for a bank run by saying an Oxi vote would mean a euro exit — however, if I was living in Greece, I would not rely on ECB ELA in this situation. I would have taken the money out.

Colm also writes:

This was the same Euro-summit which, during the acute phase of the 2012 sovereign debt crisis, produced the ‘game-changer’ commitment about re-capitalising Irish banks. We know how that played out.

The problem with this argument is that there was no ‘game-changer’ commitment.

Kenny tied two separate parts of the June 29, 2012 summit communiqué together to make his claim of a “seismic shift” on Irish bank-related debt.
Kenny has not named one leader at the summit who had made what he claimed was a specific commitment.

Finally, the Greek crisis has been a challenge from the start and policy has had to be made on the hoof. However, let’s have detailed alternative proposals on how Greece, effectively a kleptocracy, should have/should be reformed.

Long-term, Greece needs debt relief but it also needs competent governance for the next 20 years and outsiders cannot magic that up.

@ The Second,

Well said that person who wrote that comment.

I think the entire disaster is tragic…. it should never have gotten this bad. The Greeks should have attempted reform when they got into the Euro strait jacket. If they were unable to reform… the problem should have been publicly flagged up at ECB / Council of Ministers level. A problem shared is a problem halved.

Yet it was pushed under the carpet, elephant in the room ignored, then Goldman Sachs employed to plaster over the elephant… then credit crisis and boom.

I cannot comprehend.. how Yanis Varoufakis… who has Doctorate degrees by the hundred, honorary Doctorates, written several books, affiliated with so many 3rd Level institutions and held lectures etc etc… I just cannot comprehend how he (along with Tsipras & Syriza) could be so reckless in the risks he is taking.

It defies logic.

Have a read on wikipedia about the Greek civil war after WWII. Appalling atrocities were carried out by both sides. This referendum is akin to dividing the country again.

And of course… it is vulnerable innocent people who are going to get hurt the most.

The main question is what will the ECB governing council do tomorrow, irrespective of the outcome of the referendum. What it decides will, effectively, decide whether Greek banks can continue to function in some fashion. They may open on Tuesday but certainly only for limited operations and capital controls will remain indefinitely. (The administration of the last mentioned will be a major headache, especially for industry which has ground to a halt).

The idea that the Governing Council of the ECB could sanction open-ended ELA for banks that depend for their solvency on the solvency of the national government is far-fetched. Tsipras/Varoufakis are trying to pin the responsibility for THEIR decision to close THEIR banks on the ECB when, in reality, it was the major bet that they made that the other countries would not risk the evident political consequences and the spigot of central bank funding could remain open. They lost!

That’s politics! The idea that the ECB exists in some pristine ivory tower free from such is total nonsense. It is not true of any central bank. As to comparisons with national central banks whose countries are not participating in a monetary union, these are equally specious.

A lot of the commentary is based around the idea that the euro was a major error of historical proportions and the discussion, notably in the Anglo-Saxon media from countries with no real skin in the game, takes its cue from there. Like the Irish travel guidance “if I were you, I would not start from here”, it is of zero help in actually deciding the path ahead.

Tuff times in Greece

“”The best assets of the State have been sold off in such large parcels that Irish people could not compete, and these best assets have almost all been handed to foreign hedge funds. In turn, these funds have already sold on some of the properties and have made millions in profit.” The Midfielder

Oops – did I say Greece? Deutscher-EZ-Strategy is simply wrong; badly wrong.

If one accepts that introducing the euro was a catastrophic error, one of the next questions that is inevitably of interest is how it might practicably be dismantled, or at least shaved down to an optimum currency area. Starting with Greece looks like a very good idea because the Greek economy is being crucified by price rigidities that could be sorted out by introducing an independent currency followed by a good dose of inflation.

Amen to that. Bring on Grexit pls as a start to reducing euro to optimum size where it survives. There are at least 5 countries that should contemplate exit. The worst thing to do would be a renegotiation. The Greeks have made their choice…no

Would the IMF policies have been different if Stanley Fischer was the managing director? Just asking.

Frank Galton

Would IMF policy have been different if Olivier Blanchard was the current managing director?

Already during the bankruptcy of BES in Portugal the ECB/ESCB completely rejected their duties regarding financial stability (TFEU 127). The financial stability had to be paid by Portuguese government, despite the fact that the new framework was already in place.

That means, Eurozone is an area without efficient deposit insurance.

OXI, OXI, OXI [Currently 60%, with over 10% of vote counted]

Hymn to Liberty: [Greek National Anthem, Kipling translation]

“We knew thee of old,
O, divinely restored,
By the lights of thine eyes,
And the light of thy Sword.
From the graves of our slain,
Shall thy valour prevail,
As we greet thee again,
Hail, Liberty! Hail![5]

So it seems that the Greeks have called it as a “No”, by 61% currently. Tells you how this proud people will not accept debt slavery, which is what has been proposed by the creditors. Simple as that.

In the end, the creditors’ position has been fundamentally wrong, in the extreme. Capitalism has been thwarted to the benefit of the strong and the rich, to its breaking point. While many on the right have gleefully been looking for blood, they will now find out that this is a two sided story…..

Mark-to-market will also be interesting to watch in the coming weeks and months. For all the BS moralizing from the right (and I am on the right generally), the hard facts will now have to be dealt with. If the right does not adjust (properly), the markets will move to wipe out large parts of their wealth. Ideology be damned…..Also, if they do not get this back on some sustainable course, watch established political heads being taken in Europe on a progressive basis.

Off topic, but why is Alan Ahearne’s topic now shut down? This seems to happen with all his topics.

Can’t say I’m surprised that a homegrown pro-EU economist apparently Finds free and open discussion . . . undesirable.

Question for those cheering the outcome of the referendum.

What do the Greeks do now?

Their economy is at a standstill. Their banks and stock exchange are closed. They have been obliged by the folly of their new government to introduce capital controls.

Who could expect an uninformed electorate to vote in favour of more “austerity”?

They are now dependent on the kindness of strangers; with a vengeance.

Schaeuble, the hate figure, has said that “they will not be left in the lurch” during their “temporary absence” from the euro. This is, effectively, already the case. A euro tied up in Greece is not the same as a euro in free circulation across the EA and world-wide.

@Paul W

The hard facts are that the Greek govt must reopen the banking system this week, one way or the other, in order to prevent total economy collapse and a humanitarian crisis.

Whether the banks re-open with Euro or Drachma will depend on the ECB. If ELA is not increased and the banks are not normalised immediately, then the Greek govt will be forced to immediately introduce Drachma (accompanied by a hard default).
The days of the ECB shutting down countries are now over.


ECB is certainly in illegality territory, as they were with Ireland’s bailout. As you advised for Ireland, Greece should now take the required legal action for an injunction against the ECB action. Complete breach of treaty. Actually closing the Greek banks this last week has been criminal….right in the middle of their 2015 peak tourism season. Criminal, and aimed at regime change. Very right wing…..but completely and very visibly undemocratic……something everyone should be concerned about.

However, the Greeks have borne the brunt far harsher than the Irish…4X the Irish adjustment. @Tull….you certainly need to think about that a little more than you do.

Reaction here in the US is “incredulous”, but people here also do not understand why no debt forgiveness from the creditors……But no point in repeating the many arguments.

In my view, this has never been “left versus right” at its core. That is merely a symptom. This has always been (again…yawn) about debtor versus creditor. The rest has been noise.

Still in my mind are those many posts here a few years ago in the six-pack and related context where the likes of John McHale generally moralized about Ireland being the best debtor student in class……ah! Let’s the Greeks some credit…although a majority of their people clearly feel that they have absolutely nothing to lose. That Ireland has participated in their getting to this point is simply shameful….shameful. Don’t even attempt to dilute that.


You really have some nerve. You write: “Their banks and stock exchange are closed.” Well who closed them? The ECB, which is now a rogue, outlaw bank, closed them. You want to point fingers for this small blow against the financial anti-democratic paradise you and your line thought you’d set up? Start by blaming your own hubris(to use a nice old Greek word) and lack of respect for the rule of law and the will of the demos (and there’s another).

Maybe your technocratic and unelected sages can elect themselves another people on whom to impose their will.

@ Ernie

Syriza invited the unfortunate Greek electorate to participate in the actual inter-governmental negotiations. They absconded from their responsibilities as elected representatives.

To quote Abraham Lincoln; “Elections belong to the people. It’s their decision. If they decide to turn their back on the fire and burn their behinds, then they will just have to sit on their blisters.”

What are your suggestions as to their next steps?

“The days of the ECB shutting down countries are now over.”
I think that is true. In a normal situation, creditors would have taken their medicine long ago. Clever Germans /N Europeans incl French have now socialized their losses to everyone else in the EZ, blaming the Greeks (and others) moralistically. BS. They (the creditors) have laid the foundations for huge, progressive social unrest in the EZ and EU, although it will not be immediately apparent…no big bang detonation I think.
But let’s be clear…the costs of no agreement, no compromise, no debt forgiveness to the Greeks in particular will shape the continent for decades to come, negatively. The “social cancer” that has been created will take down some faster than others of course, but will be very difficult to control let alone eradicate.
What everyone in the last few years has miscalculated (including me) is that this is happening over time, historically. Slow but sure.
And yes, it is coming Ireland’s way too.

First, short term effect – lack of, big reduction in investment. Big pull back again, potentially for a number of more years. Big corporates, etc will move to the fences to wait out the turmoil.

-1 on that last post. It’s not the Greeks next steps alone that you should be concerned about. If the creditors mis-step here, watch your own burnt arse! (progressively over time).

Encouraging to see Italy talking about need to get back round the negotiating table…interesting that given Renzi suggested this was a vote on staying in the euro….and tssipras is the one accused of telling porkies during the run up.

Anyway not a time for triumphalism for tssipras and vaurofakis, even if it is for every European that still believes it the deal we were sold under Maastricht.

Merkels legacy as a leader is on the line over the next few dAys… Can she rise to the task.

Whatever happens it is wonderful to see the politics of fear finally coming up short…it achieved much in this island….Lisbon 2, fiscal treaty.

Time to either fix this joke of euro project or dump it….!

Amazing result of referendum in Greece. Brave people who have not forgotten their brave ancestors and heroic resistance in WW 2. They do not sell themselves cheap. Lots of broken plates in Athens tonight !

Frances Coppola on the situation facing EA leaders.

Damned if they do and damned if they don’t! Putting the Greek banking Humpty Dumpty back on the wall will be a laborious process. Tusk’s view that exit from the euro was not the issue seems fairly certain to be proven correct. The fact that the Greek programme was off target does not get over the central political problem i.e. assistance in return for conditionality, the nature of which is decided, by definition, by the creditors.


If anyone can explain to me how the actions of the Troika have improved matters in Greece, I am all ears.

Burn the Greeks (unfortunately I presume, but increasingly from you and others like Tull) is beginning to sound more Fascist than Capitalist. A fine line……but are you sure you can see the tree from the woods on that? That’sa serious question BTW.

This is peak Syrizia & it is all downhill from here as they fail to satisfy expectations. ATM limits reduced and depositor bail ins looming. Threats of payment in IOUs unless ECB gets some guarantee from EU over ELA collateral?

Unless there is a programme agreed between creditors and defaulters, it looks like Grexit which is supposed to be the one thing that 75% of the Greeks do not want.

“If anyone can explain to me how the actions of Syriza since it came to power may have improved the economic prospects of Greece, and its unfortunate people, I am all ears.”

No you’re not.

In any case it would be premature. This time next week will tell us more in that regard.

Legalism is hardly a defense…..simplistic at best, misinformed also perhaps, but then “burn the Greeks” repeated and repeated begins to sound “dark”. Look fwd to your response.

Well what can I say….but that was a Hat Trick!

Im glad it’s a landslide result, a 49 -51% split would have been disasterious.

There is just one small problem….money!

So will the discussions recommence on Monday, and Greek banks open on Tuesday?

If Syriza pull this off, then it will only encourage Spain, Italy Portugal to follow the Syriza tactic.


Someday you should let us know who you are – why so shy?

Yes or No this last few weeks has been dispiriting, a disaster for the European project. It is nuts to exult in the prospective economic demise of Greece, or in teaching some transitory bunch of Greek politicians a lesson.

The result is clear and in time it may become more clear that for Greece and the euro system, it would be best for both to part ways.

Paul W writes “people here (US) also do not understand why no debt forgiveness from the creditors” while last week the White House announced that bankrupt Puerto Rico with $73bn in public debt and a population of 3.5m will not get a bailout!

As for “ECB is certainly in illegality territory, as they were with Ireland’s bailout…” the Maastricht Treaty says “neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body”. It also refers to “undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks”.

Greece should be helped but it will take two to tango and a relationship of permanent antagonism would likely prompt the other democracies to call time on the relationship.

It’s decisions made by the Greeks that will determine its future prosperity but to improve on dismal exporting and inward investment records will take a very long time.

The resignation of Varoufakis is regrettable from the point of view of European solidarity. Varoufakis was pro Europe and looked for resolution within the euro.
The field is now cleared for Greece to go it alone, with a hard default. Greece needs banks open, and should and will open them, one way or another, this week.


Exhult? Where did that idea come from? My view is that I have the best interests of the Greek people at heart. My experience of any direct dealings with them have been warm and very congenial. My view of their politicians, and the error they have just made in allowing themselves to be persuaded that they can have their cake and eat it, is another matter.

I am still waiting for the arguments that demonstrate that the advent of Syriza has been anything other than a disaster for them.


Never thought I’d be getting lectures on democracy from a Eurocrat. But, then, hubris seems to be obligatory among that crowd, right down to the lowest publicist flunky.

I also note that you think it untoward (or maybe just unfashionable among the unelected hubris set) that Syriza chose to consult the people so as to secure a more solid mandate on questions that, for many Greeks, are literally matters of life and death.

What I would suggest is that Germany, specifically Angela Merkel, pay less attention to her own domestic political prospects and more to basic morality and basic economics of a sort that Germany, more than most other countries, ought to be in a position to recognise. In this I follow every point made by Thomas Piketty in this interview with Die Zeit: Europe needs a debt conference of the sort Germany benefitted from (with Greece a signatory!) in 1953, not only for Greece but for all of the peripheral countries.

The alternative is the destruction of Europe for a third time, though somewhat less dramatically, at the hands of Germans and their short memories and perennial tendency to blame others.

So what next, now that Mr Varoufakis has resigned? Posted on his blog & twitter this a.m.:

Minister No More!

Posted on July 6, 2015 by yanisv

The referendum of 5th July will stay in history as a unique moment when a small European nation rose up against debt-bondage.

Like all struggles for democratic rights, so too this historic rejection of the Eurogroup’s 25th June ultimatum comes with a large price tag attached. It is, therefore, essential that the great capital bestowed upon our government by the splendid NO vote be invested immediately into a YES to a proper resolution – to an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms.

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.

And I shall wear the creditors’ loathing with pride.

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government.

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

Vaurofakis resigns.

The Eurogroup needed their sacrificial lamb – Tsipras and Vaurofakis haven’t put a foot wrong yet and have given it to them….

It is the clearest sign yet an acceptable deal will be done…the ego’s of Eurogroup are willing to cede – particularly after the IMF broke ranks during the week – provided they can save some face and get a head. Small price to pay for Greece if it comes off….if a deal is landed with debt relief they will be building statues to Vaurofakis.

Michael Hewson, chief market analyst at CMC Markets UK, said:

“The ball now lies firmly in the ECB’s court as the prospect of Greek banks running out of money in the coming hours is likely to increase, with the prospect that the ECB will cut off Greek banks in the process causing a collapse of the Greek banking system, and in the process highlighting the significant structural flaws of the euro.

In a proper monetary union it would be inconceivable for the US to cut off Florida or for the UK government to cut off Scotland from their lender of last resort, but if the ECB ends ELA then that is precisely what will happen to Greece, either later today, or later this week”


Ciaran O Hagan of Societe Generale has his finger on the political pulse (and not for the first time). H/t the FT.

“Such a move [[to stop ELA] is not for a couple of days yet … if at all. A Eurogroup [finance ministers] meeting has been called for Tuesday to prepare for a heads of state summit that evening. So any action is not until Wednesday at the earliest, and quite possibly none if countries looking to avoid a crisis have their way.

France however is pushing hard for the euro area to accommodate Greece (with the Socialist grouping in the EU parliament echoing such sympathies). So far France and Germany have managed to maintain a coordinated line, and the impression of some unity. We will particularly watch to see if they can keep up this front: any disunity would prove very destabilising, going way beyond the Greek issue and raising existential questions.”


So a significant majority of the 62.5% of Greek citizens who voted said no to
(1) any external attempts to compel them to repair their failed state, and
(2) the current debt repayment schedule being imposed by the creditors
and said yes to
(1) continued membership of the Euro Area and the continuation of the current failed system of domestic governance with some modifications to protect or advance the special interest groups to which Syriza panders, and
(2) more money from all other members of the Euro Area without any effective conditionality.

No amount of the usual Eurofudge would allow the other members of the Euro Area to accede to these desires. However, the rest of the EU and its institutions will have to establish and deliver a major economic and humanitarian support package as a matter of urgency – irrespective of the high-level political stalemate. And the EU’s Grand Panjandrums will have to come up with some variation of the package it applied to Cyprus and apply it to Greece.


Oh dear lord….i agree!

If this were a football match Greece have come from 3-0 down to make 3-2….but they have the momentum and the Eurogroup defence is in disarray. There are 10 mins left.

Istanbul 2005.

‘The fact that the Greek programme was off target does not get over the central political problem i.e. assistance in return for conditionality, the nature of which is decided, by definition, by the creditors’

The point that Coppola is making is that the 2012 programme was a fantasy. IMF staffers are pointing to a reality which is doubtless highly uncomfortable for their own Board.

Sectoral balances matter. The Greek state cannot run a surplus unless their businesses and households take on more debt, or they have much stronger exports. These are not realistic prospects, therefore the project, as designed, could never fly.

‘Pacta servanda sunt’, or the law of contract , enforceable by courts, is basic to our constitutional order, but insolvencies happen to states as well as businesses and individuals. Absent debt restructuring, value cannot be preserved, and the longer that takes, the more value is destroyed.

There are sound macro-economic reasons to restructure Greek debt. There are also security reasons why it is not in the interests of any European nation to let the Greek state go to the wall. We have failed states in Ukraine and Syria, and refugees galore from Africa and beyond.

As Ernie notes, Germanys’ debts were forgiven after WW11 because the failure to do so after WW1 led to inflation, mass unemployment and political disaster. The interests of creditors were subordinated to the general interest. The grip of financial sector ‘players’ on the political system will have to be broken once more.

Veronica’s comments (neighbouring thread) on the radical nature of Syriza are astute as usual, but the ‘European Social Democratic Left’ has drifted steadily into the camp of the ‘haves’ and the older, more secure members of the workforce. Meanwhile wages and job security are steadily declining for the rising generation, even in the ‘secure’ nations. That’s the gap which Syriza, Podemos and others, are going through.

Varoufakis may have moved out of, or been shoved out of, his post, but he still has his motorbike, as well as a not inconsiderable capacity for economic theory. Probably going to go global.

Is anybody looking long term here – without Greece and the possibility that some of our other southern European neighbors get similarly cut-off the value of the euro will soar not crash. That will kill off Irelands recent growth spurt, increase the yield on bonds and we will be left with a large overvalued euro debt were we are expected to transfer a large amount of our production surplus cash to pay for German and French bank mistakes almost a decade ago while the HSE and education is run down. Meanwhile deeply regressive taxes on the little people such as VAT, property and water taxes and excise duty will grow.

A currency union without a central bank as a lender of last resort is not a currency union it is an Economic bully camp. If the ECB can cut off critical liquidity to Greek banks in their hour of need this puts a lie to Draghis “We will do what it takes”. The extra 10 bn euro or so that the greek banks need in liquidity to stop vital supplies running out, small businesses closing and hospitals running out of critical supplies should be given to them immediately whatever the outcome of the negotiations. Otherwise, even putting the moral outrage of human suffering to one side, the debt will become even more unmanageable and the coming 20-30% crash in GDP, caused by the ECB will put debt to GDP ratios up to 200%+, making any debt payments null and void. The 10 bn is nothing to 0.5 trillion in quantative easing that Draghi plans to underwrite all the investments of Europe’s uber-rich (unless of course in the unlikely event they still hold greek paper!)

This does not look good for our great European leaders, a few years ago they transferred nearly all the private Greek debt from their banks to the European taxpayers. Now worried about contagion and the worry that the European electorate might wake up and start electing governments that represent their interests rather than a bunch of neoliberal fanatics they are now about to ensure that all that debt is written off because they are worried about “moral-hazard”. The only real moral hazard is if you can do something about someones suffering and choose not to because of your own Economic beliefs. During the Irish famine laissez-faire economics ensured that mortality and suffering was much greater than it could have been. We have seen similar historical applications of Economic water boarding with Communism. This is neo-cons moment do we want millions of people to suffer to prove a point and subject the west to another decade of austerity, falling median wages, declining public services and another huge increase in the power, wealth and income of the 1%.

Without doubt the Greeks have a lot of cleaning up to in their taxation and legal systems but is impossible for them to even start this with a civil-service worried about their next pay check. They need space and help from Europe.

Now might be a good time for the Irish government to re-introduce the punt. We could put it as the same value as the euro initially and could then devalue if god-forbid Germany gets it way and kicks Greece out of the Euro and the UK leave the EU, which they will probably do when the stories of Greek malnutrition and people being turned away for hospitals start to fill our Sunday papers. Without Greece the Euro, what is it good for, absolutely nothing!

@Paul Hunt

Do you honestly think a Europe built on German attempts to “compel” (“force” would be more accurate) other sovereign nations to remake themselves in the image of Germany is desirable? Never mind that such a thing is in no way universalisable (to use the Kantian term that Germans should be familiar with): every European state cannot be an export powerhouse and Germany’s status as an export powerhouse is largely grounded in other European states playing the complementary role. When it all goes pear-shaped, however, Germany is insistent that only the latter shoulder the burden.

If you had a failing regional bank in the U.S, the Feds would ensure it was either re-capped or sold to another entity. Somewhere in that process, liabilities above the cap could be bailed in, assets & equity written down.
I am not sure the Fed would be as lenient as the ECB.
The cost of recapping Greek banks hardly features in the current back & forth.

Our last great hope in this unholy mess is the French.

They understand a lot about protest, social democracy and diplomacy – they get a lot wrong but they understand these things. If France can talk Germany down off its self righteous ledge (1953 for Gods sake!) then a positive resolution could be possible. Hollande may well seek to grasp his place in history here and become the restorer of order to Europe.

Well worth a read:

“Greece’s debt is 180% of GDP, which seems to make it insolvent without large primary surpluses. This column argues that since restructuring lowered the interest burden to just 2% of GDP, Greece is solvent – or would be with nominal GDP growth of just 2%….

This misdiagnosis by the ECB now has dramatic effects on the Greek banking system, and thus on the Greek economy as a whole. The ECB takes the view that the Greek banks which hold Greek sovereign debt are now becoming insolvent themselves, and therefore cannot profit from lender of last resort activities.

“Since the (restructured) Greek government debt is most likely sustainable, the Greek banks should be allowed to use their Greek government bonds as collateral to obtain additional liquidity support.

By refusing this, the ECB has caused an unnecessary banking crisis.

This crisis will deepen the recession, increase unemployment and dramatically deteriorate the Greek government budget, transforming a liquidity crisis into a renewed solvency crisis. In doing so the ECB helps keeping Greece in a bad equilibrium. This may force Greece out of the Eurozone. The ECB would bear a huge responsibility for this outcome.

….Accepting that the (restructured) Greek debt is sustainable opens the door to both a softening of the austerity programme and to liquidity support of the Greek banking sector. This solution assumes that creditors accept reality. They must acknowledge that their claims on the Greek government have a significantly lower value than their face value. They should make clear to their citizens that the losses were incurred in the past. Admission of this reality must be the first step to solve the problem of the Greek debt.

I am aware that this solution creates political problems.

First, politicians prefer to live in a fictional world allowing them to pretend no losses have been made so that they can hide the truth to their own taxpayers.
The solution proposed here demands that these governments come out with the truth.

Second, in order for this solution to be applied the insatiable desire of some creditor countries to punish the Greek for their misbehaviour must be overcome.

This moral hazard idea looms large over the negotiations. Given that the Greek population has suffered so much and has paid a very high price for past mistakes, it is time to repress these desires to go on punishing a whole nation.”

It looks like the creditors are intent on continuing the economic blockade of Greece (by shutting down the banking system).

Greece should go to Drachma immediately, with a hard default.
In reality, it should have done so the moment the ECB limited ELA to banks.

A foreign controlled central bank that speaks about, attempts to, or initiates the closure of the banks and economic system of any country, should be met with an immediate response.
You are no longer our central bank. Go now.

On a aside point…. I think it is unfair to refer to Greece as a failed state. It still has many things which are working, and at the moment it has not descended into anarchy.

There have been millions upon millions of European tourists who have visited Greece and have had a very enjoyable time.

It would be more correct to state that Greece is a economically / financially unsustainable country for various reasons.

It is also very disappointing that given the devaluation of the euro since June 2014…and even longer term…. that it has not aided and assisted in getting Greece back on it’s feet.

Maybe it is because they don’t export much to non euro areas.

@ PQ

The nub of the matter is contained in the paper by De Grauw linked to above.

“Today Greece has no access to the capital markets except if it is willing to pay prohibitive interest rates that would call into question its solvency. As a result, it cannot rollover its debt despite the fact that the debt is sustainable.”

And, of course, the proviso of a minimum 2% nominal growth rate.

What decides the credit rating of a country is the willingness of markets to buy their debt, not the opinions, however well-founded, as in this case, of economists.

The evidence of the tentative Greek recovery being snuffed out by the arrival of Syriza is overwhelming. Alan Ahearne is correct in his analysis.The implications for European taxpayers, and Irish taxpayers in particular, are beginning IMHO to sink home; even in a country such as Ireland with many symptoms of the Greek economic policy malaise, if not as serious.

@ Joesph Ryan,

I think Tsipras would hold a referendum on going back to the Drachma first.

Some commentators on Bloomberg have said there would be mass unrest in Greece if the Drachma is introduced. Think about it…. the 60 euro withdrawal limit would correspond to 60 Drachmas / day… but the Drachma would freefall a certain amount.. perhaps -40%… to 36 euro / day withdrawal limit.

Given the unpredictable behaviour of Syriza…. anything could happen next. A lot has happened in the last 5 months… and it would appear there is a lot more to come.


You are misrepresenting the fundamental proposition of the De Grauwe paper.

“What decides the credit rating of a country is the willingness of markets to buy their debt, not the opinions, however well-founded, as in this case, of economists.”

The ECB is not the “market” it is the lender of last resort and is not anchored to the fears and sentiments of the market. The diagnosis the ECB should be confining itself to is as De Grrauwe analysis….but the ECB is not an independent central bank – it is a political hub that exerts power through its printing machines.

@ Nocense

FYI this link to the Council on Foreign Relations.

As in the case of the banking system, the only thing worse than having bankers assessing business risks would be to have politicians doing so, and the only thing worse than having private agencies rating sovereign risk – free of charge, by the way – would be to have the sovereigns rating themselves. They would all be AAA.

“Some commentators on Bloomberg have said there would be mass unrest in Greece if the Drachma is introduced.”

Really? Now why am I not surprised with that from Bloomberg, whose reading of the situation has been somewhat off, to say the least.

With a hard default, I have seen economists argue that the drachma would not fall much at all. Why would it?

Greek Debt/GDP would be down to about 40% after recap of banks, compensation (in Drachma) to Greek holders of domestic bonds, a Keynesian stimulation fund, and provision to run a deficit for two years.

The ECB, this evening, has now tightened the noose, and is determined to cause a humanitarian crisis in Greece, so that Greece will come to heel.

The Greek government would be foolish to give to ECB tactics, which as Varoufakis has said, some might call terrorism.

In order to protect its citizens, Greece must go to drachma immediately.


Plenty of good analysis in Yannis Palaiologos’s book, and he is no friend of Syriza.

The problems of the Greek state and economy long antedate Tsipras and Co. The tendencies is from which they spring may have contributed in part to the debacle, but the real damage was done by other parties. And with the willing collusion of external business and political interests. The same sort of folk who are now holding their noses.

Alan Ahearne’s narrative is incompatible with the figure presented in Coppola’s IMF paper. There can be no Greek recovery under the present debt burden, but the issue goes well beyond Greece, so what happens there may well be a foretaste of things to come.

Europe now on the point of tearing Greece, and itself, apart.

“Germany’s Gabriel said the Greeks had simply rejected the single currency rules, while Matteo Renzi, the Italian prime minister, delivered a cri de coeur lamenting the desperate situation the eurozone and the EU now found themselves in.

“Two political building sites need our work urgently, in European capitals and in Brussels,” he said. “If we stand still, prisoners of rules, regulations, and bureaucracy, Europe is over. Reconstructing a different Europe will not be easy … The first one is Greece, a country in very difficult social and economic conditions. Meetings tomorrow will have to indicate a conclusive solution to this emergency.”

Definitely senior hurling now.

@ Joesph Ryan,

When Greece joined the Euro…. the rate was 340.75 Drachmae to the Euro.

We might see a return to that rate soon enough!

I can’t help thinking about how “disruptors” are understood now to bring creative and competitive advantage to the marketplace. How disrupted is the EU now, ha! Everybody moans, but nobody wants to dig deep and propose the kind of win-win solutions REAL leaders are supposed to provide. It’s no wonder Europe has so few tech startups, or giants. Embrace your disruptors, uncomfortable as they are. An example, I have never seen as much intelligent, well reasoned and impassioned dialogue, worldwide, on any other issue. Greece, people! Land of Homer, idylls, myth, legend…. We can’t even make a sentence without using words rooted in Greek. Then we go to Greece’s beauty, its sun, sea, fine fresh foods. People care about Greece, home of democracy, philosophy, medicine… So where’s the brainstorming for win-win solutions?

Perhaps, who knows, it all ends where it begins, with a banking shutdown that asphyxiates Greece completely, allows its people to just die in the streets, and then the vultures come, scooping up islands for a song. One can only hope that ancient furies would forever beleaguer those vultures and that there will never be peace for the people who profit from Greece’s murder — be they Greek or otherwise!

Cri de coeur indeed, and yet everyone just thinks of themselves, not wanting to be disrupted!! But here’s a tip — when disruption occurs, that’s the time of greatest possibility. It’s when the glue causing people to be stuck lets loose and they can take a new tack, choose a new way. Where are the proposed win-win solutions? Europe is dead if it can’t respond to the most creative moment of disruption that any of us will ever see in our lifetimes with something brilliant. Just wait until your souls also die from insulating yourself from, or feeling smug and superior in the face of, Greek starvation. Europe’s fate will surely be to sink into irrelevance, mired in its own stuckness. The clock is ticking.

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