Greece needs to grasp the nettle of default and devaluation now

Today begins with hopes of a new path for Greece where the people have been under the shackles of a Euro area imposed austerity programme which collapsed the Greek economy. It was not supposed to be that way as the future was bright according to the official forecasts and their apologists.

put the debt-to-GDP ratio on a declining path from 2013.


but from 2012 onward, confidence effects, regained market access, and comprehensive structural reforms are expected to lead to a growth recovery. Unemployment is projected to peak at nearly 15 percent by 2012.


As you can see that was a complete hoax call and a much worse one than the one troubling Prime Minister Cameron. Even at the end of 2012 rather than the promised “growth recovery” the Greek economy was instead shrinking at an annual rate of 5.7% on it way to losing around a quarter of its output overall. Even worse the unemployment rate which was supposed to peak at 15% climbed and climbed and as of the latest monthly numbers was still at an appalling 25.8% in October 2014. It is hard to imagine a worse failure especially as the apologists for this economic destruction regularly rubbished alternatives with the claim that they would lead to an economic Armageddon.

I consistently argued that there is another and better way I subject I returned to on the 30 th of December.

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.


So far the only rescue has been for the French and German banks which overextended and overexposed themselves in Greece. In return their taxpayers find themselves exposed to a threat of default by Greece via the various off-balance sheet mechanisms (EFSF and ESM) which have been used as bank errors were socialised.

A Fiscal Problem

The claim has been that the Greek public finances have been reformed but as we stand issues remain as the quote from Kathimerini below illustrates.

According to officials from the General Accounting Office, the lag in tax revenues compared to the targets set for January is greater than 1 billion euros. When this is added to 2014’s 1.3-billion-euro tax revenue shortfall, the fiscal gap in revenues amounts to 2.3 billion euros.


Added to this is the enormous debt burden which is Greece is now carrying. As of the end of the third quarter of 2014 it amounted to some 315.5 billion Euros or some 176% of Greece’s GDP (Gross Domestic Product). Here we see complete failure as the default/haircut of 2012 was supposed to reduce this ratio to 120% whereas it was saying “I’ll be back” just like the Terminator.

The interest payments have been cut and cut by the creditors who are now mostly taxpayers of other countries as organisations they support own around 4/5 ths of Greece’s national debt now. So interest payments have been contained for now but the capital issue or how this will ever be repaid was kicked into an undefined future. So the banking sector was bailed out but mostly Euro area and some of the rest of the world taxpayers (via the IMF) got what is called in rugby a “hospital pass” of the accumulated debt and losses.

Enter Syriza

Up until now the Greek political class has in essence supinely adopted whatever policies it has been told to implement by the Troika (European Commission, ECB and IMF) except for one major omission. This comes under the category of reform which of course would include removing themselves! Also if Greece had managed to tax its oligarchs the problem would have been reduced considerably in scale. So those presenting the solution were always part of the problem which is why that I hope that the new government that has just been formed by Syriza turns out to be a new boom clearing out the political and economic dust and cobwebs.

It is one of the tenets of this blog that I do not do politics and thus I will steer clear of the political debate. However I welcome this which is an excerpt from a Bloomberg interview with the newly appointed finance minister Yanis Varoufakis.

“extend and pretend was applied to a whole nation (Greece)”


To end this vicious cycle…….which is beating into a pulp a proud nation in the south-east of Europe.


According to Channel 4 in the UK he has presented himself as an economic reformer.

‘We are going to destroy the Greek oligarchy system’


Let us hope that there is genuine economic reform in Greece starting today as there is no time to lose. As Tears for Fears put it.

You can change


Let us also hope that this from The Last Resort by the Eagles will stop being prescient.

Some rich men came and raped the land,
Nobody caught ’em


Market Response

Initially the Euro fell on the foreign exchanges to an eleven year low but a bit like the Duke of York (ahem) it marched back up the hill to where is began! So it is now just above 1.12 versus the US Dollar. The Greek equity market  has dropped 2% but things seems calm although some care is needed as of course the ECB with its planned QE (Quantitative Easing) program which begins in March is sitting there as a back-stop. Although of course the QE program did in a way start very early in Greece as so much of its debt is in official hands.

There may have been action elsewhere however as rumours have been circulating that the Swiss National Bank has been capping the Swiss Franc against the Euro again. Well I guess it has intervened at almost every level on the way up! Whatever the exact cause the two currencies have returned to parity,for now at least.


The Greek election has ramifications for several other Euro area countries as for the first time a government has been elected on what we might call an anti-Troika vote. Should it hold its nerve and prove to be stable then it will be hard for the Euro area establishment to copy what it did to Ireland and play Gerry Rafferty from its loudspeakers.

Get it right next time


They of course will be hoping that the words from Hotel California remain true for the Euro.

“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! ”


My advice is that of course Greece could and should leave the Euro and default. There are of course dangers in such a course but they are dwarfed by the economic and human catastrophe that has already taken place. I think that it is much more likely that Greece will reform itself and throw of the shackles of its establishment that is like an anchor on a ship in such a scenario. Actually you do not have to take my word for it you can instead read the words of the “on track” high priestess Christine Lagarde of the IMF.

‘Reforms Are Still Needed In Greece’ (Le Monde)


With apologies to the Bee Gees perhaps this can come true.

I saw my problems and I’ll see the light
We got a lovin’ thing, we gotta feed it right
There ain’t no danger we can go too far
We start believin’ now that we can be who we are – greece is the word


22 thoughts on “Greece needs to grasp the nettle of default and devaluation now

  1. Hello Shaun, momentous result.

    Whilst I absolutely agree that Greece should default and leave the Euro, Tsipras has mellowed his stance to one of re-negotiation.
    Since Greece has definitely played her part in keeping the Euro down, (probably at least the same as €1.2trn of QE) he may have a reasonably strong hand, but the Greeks are not looking for piecemeal changes, I wouldn’t have thought, and Troika may have one eye on Italy when renegotiating.

    Was the QE announced in advance of the Greek election solely for the purpose of shoring up exposed banks in other €-zone countries?

    • Hi therrawbuzzin

      To answer your question possibly indirectly but not directly. The bailout effort which most benefits the banks is the third attempt at buying covered bonds which began last October. I agree that Syriza have moved towards renegotiation but there is much that might happen and I hope for a good result for Greece.

  2. Shaun, Syriza brings so much hope to The Greeks but I do wonder if they will deliver. Leaving the Euro would be the best option but I doubt it will happen as most Greeks are too afraid of the consequences and the coalition partner would not accept it. I also think that the Troika (with one eye on Podemos in Spain) will want to be seen to be tough. The Euro project can ignore the Greeks but Spain would be a different issue entirely. Syriza will get concessions from the Troika but not a write down of debt although it may be kicked so far into the future and with such low interest that it becomes irrelevant. I wonder if Tsipras will blink first and accept this as a compromise. We will see.

    • Hi Pavlaki

      I remember writing that the eventual term of the official debt to Greece would be infinite as there are no real mechanisms that allow repayment and as you say that may happen this time around. I hope that Tsipras holds his nerve and proves to be a good poker player.

      As to the Euro area it is in fact relatively small fry and cheap to offer a deal but as you say the catch is that Portugal,Spain and Italy will be watching.

  3. Hi Shaun
    I am again reminded of Soap

    Can the euro banksters allow the first card in the deck fall over.

    Will the new government have the kahunas to default.

    Will .there be more radical govrnments elected who still do nothing

    Confused? You will be

    As you’re on musical overload today how about George Benson

    To understand the reasons

    That we carry on thisway

    Wer’e lost in a masquarade


  4. Its too little too late.

    Too little – Tsipras has already weakened his stance and he has no mandate to take Greece out of the Eurozone. In the end he will do as he is told or the Troika will destroy him and his party by removing his ability to meet even his smallest of promises. The Troika still hold the purse strings and there’s nothing the new Greek government can do about it.

    Too late – even in the most unlikely scenario where Greece has to be kicked out of the Eurozone, the debts have long ago been moved away from the banks and onto the Eurozone taxpayer, so it no longer even matters if Greece cant or wont pay. Sure it will be portrayed as a disaster for the Eurozone and Greece but ask yourself, will Goldman Sachs and the others really care about it? Not in the slightest.

  5. Hi Shaun
    Apparently over 75% of Greeks want to keep the Euro , they ( probably correctly) think that leaving the EZ will equate to leaving the EU and they are frightened about this prospect ( Turkey never being far from their thoughts). I don’t know if Iceland really is ‘different’ or whether its just another myth, but changing a political party ‘hue’ in government doesn’t make any difference unless you completely throw of the real constraints of power held by the financial masters. In the case of Greece these are many steps removed, through the opaque labyrinth in Brussels and Frankfurt.
    I agree with Pav, EZ/ECB can’t be seen to write off the debt, Germany won’t let them, but there is nothing a good hozing down by a bout of QE ( mark1 or 2 or 3 …..) cant do to those pesky numbers. Its la la land, dont you know, the ECB will monetise it sometime in the long distant future.
    We all end up by paying for it with our devalued fiats , but its not much extra compared to the rest of the burden we are already going to pay for. And anyway we are only plebs, paying debt is our role in life, isn’t it?

    • Hi JW

      Our role is to be good little debt serfs? All very medieval and put like that it sounds/reads like a world the Harkonnens from Dune would like. Oh and the very concept of paying debts off is apparently so old fashioned much better if we remain downtrodden.

      As to Euro exit leading to EU exit the European establishment have pushed this line very successfully 😦 . I am far from sure about that as after all they do not want an example of exit in their brave new federal world/universe do they?

    • Hi Chris and thanks for the condolences

      As to the UK we were on the EFSM (M=Mechanism) hook as it was a European Union vehicle of which we are a shareholder as described below by HM Parliament.

      ” Based on its 2011 Budget share, the UK would contribute 12.5% to these costs if they arose.”

      “The maximum liability the UK can incur through the EFSM is thus equal to 12.5% of €60bn, or €7.5bn (£6.6bn).16 For this to occur, the EFSM ceiling of €60bn would have to be reached,and all borrowing countries would have to default on 100% of their loans”

      The EFSM was to Ireland and Portugal rather than Greece and last time I checked totalled some 48.5 billion Euros.We also loaned Ireland some £3.2 billion directly.

  6. Shaun,

    Greece can separately choose Default and/or currency redenomination. Their linkage is heralded by the cassandras who keep calling “default and devaluation” an impending catastrophe. That linkage is propaganda, not fact.

    I am not aware of any treaty laws that allow the ECB to eject Greece from the single currency. I note that Kosovo uses the euro without being “in the Eurozone”. I also note that the Greek PM has a veto….

    Therefore Greece could default and keep the euro. In practice this means a balanced budget excluding loan payments, at least until such time as a sensible haircut is negotiated.

    • Agree with what you say and even if they left the Euro, why do they have to leave the EU? We are in the EU but not the Euro. I have read various arguments why they would have to leave but none that could not be negotiated around.

      • Have previously commented on Greece “being forced to leave the EU”. Shaun’s “no profanity” policy restricts my description of that statement. So I’ll describe it as nonsense, deliberately deceitful propaganda and as a load of manure ….

  7. Shaun,
    Definitely topic of the day but I guess the media expects action but under the spotlight I suspect we shall see weeks of faux-boxing as the socialists brought into “professional government” and stay inside the Euro whilst continuing to posture change. Surely the Oligarchs will continue to “influence” real world decisions.and a watered down conclusion will prevail. The QE was brought to the table (as your other bloggers suggest) to bribe the rest of the states and tempt the Greeks that a wodge of dosh will fix everything.

    Paul -)

    • Hi Paul

      You are right that so far the political establishments have been simultaneously weak and taking care of themselves. So any change offers hope although I expect the opportunity to be brief. Fingers crossed…

  8. “Pouring Water On A Drowning Man”

    You push me when I’m falling
    And then you put me down
    I guess I missed my calling
    I should have been a clown
    How much more
    How much more can I stand
    You’re pouring water
    On a drowning man

    You put me on the right track
    And then you put me down
    You stab me in the back
    Everytime I turn around

    Criticize my lovin’
    When I’m doing the very best I can
    You’re pouring water
    On a drowning man
    You’re pouring water
    On a drowning man
    You treat me like
    The fool that I am
    You bet that I like everything you do
    Put salt in my wounds
    It’s sad but it’s true

    You warm me with your kisses
    Then you leave me in the cold
    How can I know your wishes
    When I’ve never been told
    Won’t you please forgive me
    Just try and understand
    You’re pouring water
    On a drowning man

    You’re pouring water
    On a drowning man
    You treat me like
    The fool that I am
    You bet that I like everything you do
    Put salt in my wounds
    It’s sad but it’s true

    You warm me with your kisses
    Then you leave me in the cold
    How can I know your wishes
    When I’ve never been told
    Won’t you please forgive me
    Just try and understand
    You’re pouring water
    On a poor drowning man

    I got tears in my eyes
    Oh, I’m a drowning man
    I got tears in my eyes
    You’re pouring water
    On a drowing man
    You’re pouring water
    On a poor drowning man


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