Greece is the word one more time and it should default and devalue without delay

Yesterday in a move which woke me from a seasonal slumber Greek financial markets lurched downwards. The initial trigger for this was the failure of the current leadership to win sufficient parliamentary votes in the Presidential elections meaning that an election was required under Greek political rules and will now take place on the 25th of January. This poses more than a few questions especially for a bailout process which ahem, in the Euro area has developed a habit of avoiding the democratic process via for example the appointment of a technocrat in Italy. Even worse than this for the Eurocrats is the fact that SYRIZA is ahead in the polls currently and its criticisms of the bailout and austerity are vocal. It’s views are shown below.

The impact of the austerity on the Greek economy and Greek society has been devastating. The austerity measures included cutting wages and pensions, reducing the cost of public utilities through privatisation, imposing extensive labour reforms and making cuts to health and welfare services. These led to an unprecedented unemployment rate of almost 30% (among young people it is more than 60%!), widespread poverty with a 98% increase in poverty rate, over-indebtedness of households, closures of many small shops and businesses and an economic recession which has exceeded 20% of GDP in the past five years. The government debt has further increased……   Young people are leaving the country thus reducing the potential for future economic growth.

That is a list which is hard to argue with although the unemployment rate has improved in 2014.

What is the state of play in the Greek economy?

The official view has been one summed up by the use of the word Grecovery. However the last six years or so are best summed up by this from Talking Heads.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

No doubt some will be considering that these two lines of the lyrics from that song apply to the bailout process.

They can tell you what to do
But they’ll make a fool of you

If we switch to looking at the actual economic output or GDP numbers then we see that the Greek economy peaked in the third quarter of 2007 with an output of 65.2 billion Euros (reference 2010). Back then economic growth was recorded as being at an annual rate of 4.5%. However matters deteriorated so quickly that an annual growth rate of -10.4% was recorded at the beginning of 2011. In spite of the recorded improvement in 2014 the third quarter saw economic output of 49.8 billion Euros or 23.7%. Each time I calculate that number it has a shock impact. Who thought that what was considered to be a first world country could see such a decline? Also proponents of the Euro in Greece with any heart should find their breakfast porridge tasting like gruel. The boasts of the decade of the noughties have turned to what looks like dust to me.

What about wages?

Here is a similar story which provides plenty of food for thought for proponents of Grecovery. Here is the latest data.

The seasonally adjusted Index of Wages of the 3rd quarter 2014 recorded an increase of 2.1% compared with the corresponding Index of the 3rd quarter 2013, while a decrease of 2.2% had been recorded when comparing the corresponding quarterly Index of 2013 with that of 2012.

So 2014 has again been a better year but any improvement needs to be looked at in the light of the previous decline. On a seasonally adjusted bases wages are 14.2% lower than they were in 2008.

Real wages have fallen more heavily in spite of the fact that the Euro area measure of consumer inflation or HICP has seen negative annual numbers since the beginning of 2013. The reason for this is that the initial impact of austerity was to boost consumer inflation in Greece as indirect taxes such a Value Added Tax (VAT is a sales tax) were raised as part of the austerity measures. The plan was to reduce the fiscal deficit via raising revenues which often backfired as the economy then contracted. However I note that compared to the annual average for 2008 prices in November 2014 in Greece were some 7% higher. This means that real wages have fallen by around 21% in the Greek crisis as the credit crunch impact fed into the Euro area crisis.

What about employment?

So has the substantial cut in the price of labour or wages seen a boost to employment? Again we need some perspective as initially the 2014 numbers do show this.

The number of employed persons increased by 1.4% compared with the previous quarter,and by 1.5% compared with the 3rd Quarter of 2013.

Even that does seem a bit measly doesn’t it when we consider the falls in real wages? Well if we now take an overall perspective we see that a calamity has taken place here.

The improved numbers for the third quarter of 2014 show that some 3,586,900 Greeks are employed whereas the same quarter of 2008 saw some 4,639,600 employed. So rather than a lost decade we have lost a million workers in round numbers. And of course those that remain are paid on average considerably lower wages. Put like that it is perhaps a surprise that the Greek economy has not contracted further.

Greek national debt

This has become an awkward area as three-quarters of it is now to official sources such as the Euro area support mechanisms and the International Monetary Fund. So we need to take care with the impact of numbers such as government bond yields as they apply to a relatively small proportion of the debt. Be that as it may the Greek ten-year bond yield is now 9.47% compared to below 6% in the  autumn of this year. If Greece was like the other peripheral Euro area countries that bond yield would be 5% or lower now. Although on the other side of the coin Greece officially has only two months of the bailout to go and that assumes a new elected government does not make such a move unilateral.


I am one of those who have consistently argued that Greece should default and devalue along the lines of the sort of programme that the IMF used to apply before it switched from plans based on economics to ones based on (French) politics. Back on the 10th of December 2012 I suggested this.

As you can see my fears of a 1930s type economic depression in Greece have come ever more true as 2012 has progressed. The worst part of this is that there is an exit door. It would not be what economists call a “free lunch” as there are dangers such as the risk of inflation from the currency devaluation but rather than the hopeless future that Greece now faces it does offer hope. Rather than being a bankocracy Greece would have the opportunity to regain control over her own destiny.

In essence what Greece has to do is explained well by these lines from the song Hotel California.

Last thing I remember,

I was Running for the door

I had to find the passage back

To the place I was before

Back then there were plenty of critics of such a strategy who argued that inflation would be the problem. Were the Greek situation not so grim I would have a smile at a group which mostly seems to argue these days that we will never have inflation again. Oh well!

The upcoming public holidays would give a chance to make the necessary preparations….


24 thoughts on “Greece is the word one more time and it should default and devalue without delay

  1. Agreed about the default/devaluation but don’t you think the Troika will instantly withdraw banking liquidity support and crash the whole Greek system as a warning to others who may have similar plans in the offing (and I’m looking at you Italy!).

  2. Shaun, I spoke to Greek friends yesterday after the results came in from the presidential vote. They tell me that the EU and various Eurocrats are frequently on TV with dire warnings of the future for Greece if they do not elect a government who continues with the current arrangements and austerity. They have clearly stated that they want a New Democracy win or at least a coalition to continue the bail out programme. This is blatant interference in another countries political affairs but it doesn’t surprise me as I saw the same thing happen in Ireland a couple of years ago when they wanted a yes vote. It worked in Ireland and by all accounts it is beginning to work in Greece. Nothing must interfere with the EU/Euro jugganaut! To hell with democracy and the suffering of the Greek people. You are absolutely right when you say default and start again. What a pity they hadn’t done this last time.

    • Hi Pavlaki

      The fear card has been played time and time again by the Euro area authorities. Of course reality has turned out to be even worse than the fears they have manipulated. The Chief Economist of the ECB has been playing that card according to Bloomberg.

      “The rise of political parties opposed to structural adjustments is a “warning signal,” Praet said. “Populists in some countries promise fast and simple solutions but their proposals would be a complete disaster.””

      Worse than the disaster you helped design Herr Praet?

  3. Hi Shaun,
    I listened to pundits on R4 this morning whilst commuting. They suggested that Greeks are now in a primary balance situation due to the massive cuts aforementioned. Of all the European countries they have indeed responded properly following great duress. Who are we to rob them of independence now? I agree that a default is best, they can run the country without support now that the Germans have shown them how to balance € in € out. All that holds them back is ironically the payments back to cover the debt made for them by the Giant Squid (GS).

    Let them show us all the way…

    Paul C.

    • Hi Paul C

      The latest numbers do indeed record a primary surplus as Capital Greece highlights below.

      “The Greek government on Tuesday announced a primary budget surplus of 3.566 billion euros in the January-November period, up from a primary surplus of 2.778 billion euros in the same period in 2013 and a 2015 budget target for a primary surplus of 2.875 billion euros.”

      The catch is that Greece settled a lot more arrears in 2013 (5 billion Euros) than it has so far this (1.01 billion Euros). I do hope that it is not seeing more arrears build up…

  4. Hi Shaun,

    As a addition to your Hotel California reference let me add another Genesis snippet:

    Genesis ~ The Chamber of 32 Doors.
    I’d give you all of my dreams, if you’d help me,
    Find a door
    That doesn’t lead me back again
    -take me away.

    I would add that the lyric also includes the following:

    The rich man stands in front of me,
    The poor man behind my back.
    They believe they can control the game,
    but the juggler holds another pack.

    I need someone to believe in, someone to trust.

    Who should the Greek people believe in and trust at this time? As Paul C. notes above, the last time they placed their trust in Blankfein and his boys and it didn’t work out too well. Not for the Greeks, that is … I see that Lloyd is doing just fine!

    • Hi Jim M

      Thanks for the Genesis reference and link I will have to look that song up. As to the Vampire Squid doesn’t everybody else lose whenever it gets involved with matters? The Greek people should place their trust in themselves in my opinion.

  5. Hi Shaun, When you first suggested Greece’s default and devaluation back in 2010 I think it was,I agreed and carried on agreeing until the beginning of this year. I now feel they are in too deep and are too weak to recover from such a move. They have now lost a lot of physical and human capital and the Troika will make them pay even more dearly than they have already, if they do as suggested. Only this time they don’t have the capacity to overcome such malicious moves via new agreements with other emerging economies which was the way forward for them that I envisaged in a default.

    My mother had to go into hospital in early December and I counted 75% of the health care assistants aged under 25, speaking English with a foreign accent and their name badges looked Greek, whilst the same applied to 20% of the nurses. If this is replicated throughout the NHS/rest of the British economy then Greece’s loss appears to be the NHS/Uk’s gain (downward pressure on wages??) but these young people are no longer in Greece to help it out of the apocalypse that the Troika would do it’s best to engulf the Greek economy with in the event of default and re-adoption of the drachma. That’s before we get into the inflationary effects on the Greek people, with pharmaceutical companies etc refusing to supply goods due to fear of non payment or payment in a volatile currency.

    As an aside it seems the UK public sector has undergone a Greek type experience as the standard grades (excluding the Governor of the BOE and MPC members etc) have experienced wage rises totalling 4% since 2008 whilst RPI has romped ahead by about 21% compounded. Just something to think about……

    • Hi Noo2

      We have indeed had a considerable proportion of our workers in the UK suffering from real wage falls but the UK has managed employment gains in response which is the opposite of Greece.

      As to Greece there have been a long list of excuses as reasons not to default all along. If you look behind them they mostly operate to suit the banking class.

      My best wishes to your mother.

      • Thanks for the good wishes to my mother Shaun. The thing is time has moved on and whereas until a year ago Greece could have survived and eventually (5 years) prospered if it defaulted and left the EZ it is now unfortunately too weak to withstand the severe retribution taken against it by the Troika if it defaulted etc.

  6. Good stuff Shaun, This clearly shows the risks of running up debts in a foreign currency. The Euro is a “foreign” currency for every country that has adopted it. I doubt TPTB in Brussels and Frankfurt will let anybody off the hook. Greece may exit, default and revert to the Drachma but I can’t see the Euro-denominated IOUs just being torn up. Or am I missing something?

    Best wishes for the New Year – Eric.

    • Hi Eric and Happy New Year to you as well.

      In theory Greece is indeed tied into the Euro denominated IOUs. But exactly how would they enforce it? There have been economic forces pushed into Ukraine for example but not Euro area military ones.Would they be able to enforce issues on Greece right now with Putin hovering in the direction of the Balkans?

  7. Hi Shaun,

    Long time no see, right? 🙂

    My best wishes to Shaun and the other readers for a great 2015!

    A couple of thoughts:

    Defaulting and devaluing is indeed the sane route, however the endeavor is so complicated (politically and financially speaking) that I suspect nobody in Greece would dare touch the subject with a 10-feet pole.

    Tsipras has promised the Universe to the electorate over the years, however he has scaled back his rhetoric in the past few months and is now talking about “Coordinated moves to be made in accordance with our EU partners” and so on and so forth.

    Samaras and his New Democracy party are once again banging the drums of doom and have steered just shy of proclaiming Godzilla will attack the Alimos Marina in Attica in case SYRIZA comes to power.

    While there are some other developments in play (It’s rumored that Papandreou, the by now infamous PM of Greece in the 2009-2012 period, is preparing to launch a new party in about 2-3 days, which will naturally chip away at SYRIZA’s and ND’s and PASOK’s percentages because his surname alone carries resonance with a great deal of retirees and associated “dedicated voters” – Also, the performance of the 2014 new party River will have to be measured in the first national elections it will take part in), the general consensus I am getting is this:

    The majority of people who appear sympathetic towards SYRIZA do not believe in the least that they will keep the promises made. However, even if things remain largely unchanged, they feel that changing the direction of politics by appointing a party that has never officially governed or participated in government, may be beneficial in a way.

    Personally, I will not vote for them, however I believe that someone will need to explain to the Troika and what have you that they are in no real position of demanding excessive primary surplus numbers (The 2016 target frightens me as it’s supposed to be over 10 billion Euros which must all go to debt repayment) from an economy which is mired in depression / recession and has been politically ruled under “programs” and Troika assumptions which were never validated.

    For instance, no program or MoU ever implied it would be successful with a grand total of 20%+ loss in GDP output and extremely low inflation or deflation, but these did come to pass, often in the worst possible manner and numbers were usually chilling (still are, if we consider unemployment figures for one).

    As such, someone (Tsipras? Perhaps) will have to renegotiate drastically the primary surplus numbers for the time period spanning up to 2022, and the ruling New Democracy’s approach of “Oh, Greece’s debt is absolutely sustainable, carry on merrily old chaps” which is laughable will have to be changed most definitely.

    Hope you were not tired 🙂

    Have a great evening!


    John aka Ioannis

    • Hi Ioannis and welcome back, how is business?

      Thanks for the political insights. The concept of rebels being tamed is pretty much straight out of the pages of the later Dune novels! I wish Greece well and hope that whatever party wins the election it presses for change and amkes it a Happy New Year for the majority not the minority.

  8. Hi Shaun,

    Wishing you and all your readers, a happy, healthy and prosperous 2015.

    I think the main lesson we can learn from the 2010 and onwards Greek situation is that self-flagellation has nothing to commend it! Iceland showed the way of taking the banks economic mismanagement on the chin by letting them go bankrupt with the moral hazard placed where it should belongs, on the management, bondholders, shareholders, large and corporate savers! Hong Kong let two banks go bankrupt in the 1960’s and the banks, realizing from that point, that there will never be any bailouts, so they have acted prudently and responsibly since then with bank deposit insurance very popular with their savers protect themselves from losses and rates being a barometer of a perceived bank’s health. Greece should have done the same, defaulted and left the Euro, I think we would now be talking about a rapidly recovering rather than a Zombie Greece. The EU / Eurozone policies seem to have only achieved one notable thing to date, where one size doesn’t fit all, pretty universal economic stagnation, which may well continue for the rest of the decade!

    I was reading in a German newspaper the other day of German alarm over the possibility of SYRIZA gaining power and defaulting on loans made to them and that the German taxpayers would suffer! Now who would have guessed that the 2010 Greek bailout of German and French bank liabilities, could lead to Eurozone taxpayers, especially the German and French ones, paying the bill for the socialization of banks debts to taxpayer ones? Will the same happen if / when Russia defaults in the last quarter of 2015, where they are currently burning $10bn of their reserves a week and now only have about $390bn of them, with the biggest liabilities to Austrian, Italian and French banks with Russian bond holdings? It is no surprise that the Austrian President saying the other day that further sanctions were in nobody’s interest and would be counter-productive (not to Ukrainians they wouldn’t)! What he really means is that if Russia defaults, the Austrian banking system will be in the proverbial deep brown stuff! It is interesting that the named biggest banks of Russian bonds are the same ones that have appeared on here before, for problems with foreign denominated loans in Eastern Europe, which must raise serious questions about the quality of the bank’s risk calculations and quality of their managements.

    • Excellent comment & point on possible Russian default.

      Iceland is much less corrupt than Greece, which probably helped the Icelandic recovery. New Democracy and Pasok should have been electoral history, if reports of their leaders thievery are credible. Greek default or not, these untouchable kleptocrats will continue to live extremely well whilst the 99% of Greeks suffer.

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