A New Hope For Greece And Its Economy

For the second time in a couple of months voters in an election have delivered a result which has surprised the “experts” and pollsters. In the UK we saw the opinion polls misfire badly but yesterday’s events in Greece saw them in even more disarray. The referendum which was supposed to be neck and neck turned out to be as shown below. From the BBC.

The final result in the referendum, published by the interior ministry, was 61.3% “No”, against 38.7% who voted “Yes”.

Accordingly we are left again wondering as to the value and worth of opinion polls as rather than a close result we saw a decisive one.

Some care is also needed in considering what was decided as it was presented by both Euro area politicians and some sections of the media as a vote on the Euro. This was deliberately misleading as Prime Minister Tsipras was very clear on this point in his statement on the first of the month..

Sunday’s referendum is not about whether our country will stay in the Eurozone.

The vote was about a specific bailout package and the extra austerity measures it will pile onto an already struggling Greek economy. As time progresses the No vote does make it more likely that Greece will leave the Euro but as of this morning it is still there and has no immediate plans to leave. Frankly I consider that to be a shame as I have argued for several years now that Greece would be better off if it left the Euro. As to those on the other side of the argument they have created an economic collapse in Greece which some five years later shows virtually no sign of ending.

Finance Minister Varoufakis Resigns

An extra factor has been thrown into what was already a complicated mixture by the fact that the Greek Finance Minister Yanis Varoufakis has resigned this morning at what you might easily think was his moment of triumph! Here is his announcement.

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.

He had a chequered tenure but he was willing to stand up to the bullying and intimidatory tactics of the Euro area establishment and their media acolytes for which he deserves credit. Actually it looks to be the type of resignation where someone is given a push.

The issue of democracy

Perhaps the concept of democracy is not as dead as I have thought! Let us hope so. Although the Euro area tried its best to dampen such thoughts.

President Juncker is consulting tonight and tomorrow with the democratically elected leaders of the other 18 Eurozone members.

However as we recall the role of the European Central Bank (ECB) in all of this and let’s face it there have been periods where it has driven events this bit sounds profoundly undemocratic.

as well as with the Heads of the EU institutions.

Also as the other four European Union Presidents join him voters may wonder as to when they had the chance to vote for any of them?

What next for the ECB?

The next step in the Greek saga involves the ECB deciding what to do about its support for the Greek banking sector. This is crucial because its decision to freeze the level of help called Emergency Liquidity Assistance or ELA at 88.6 billion Euros led to the Greek banks closing their doors and restricting ATM withdrawals to 60 Euros per day for Greek residents. We know that in spite of such measures to restrict the size of deposit flight the theme has continued. From Reuters.

Greece’s central bank will file a request on Sunday that the European Central Bank raise the amount of emergency funding (ELA) for Greek banks, the country’s government spokesman said on Sunday.

Not for the first time in this saga the unelected ECB finds itself centre stage in the crisis which torpedoes somewhat the argument of President Juncker discussed above. However unless it wants to drive Greece out of the Euro which would be awkward to say the least for an organisation which considers it “irrevocable” it cannot cut ELA today. Should it raise it then that would be perceived as a victory for the Greeks against it and some sort of reward. Therefore logic points at an unchanged level for today.

Default Risk

This has risen considerably after the referendum result as frankly all roads lead to it now. Should Greece leave the Euro it is logical for a default to also occur and should it stay there will have to be what is euphemistically called a “debt restructuring”. Whilst some care is needed as these days that market is very illiquid Greek bonds have reflected this by plummeting in price.

For those of you who prefer such matters in chart form here it is from Sober Look.

The moves when the referendum was announced and following the referendum result could hardly be more clear. However these days most Greek bonds are in official hands and they seem to be not only lagging events but also in some alternate universe far,far away.

ECB’s Noyer Says Cannot Restructure Greek Debt To Eurosystem (h/t @livesquawk)

As the International Monetary Fund considers itself to be not only a preferred creditor but the preferred creditor we now have both the main institutions dismissing what is obvious to everyone else. Or to be more specific both seem to want the other to take the pain! The body which is most devoid of reality on that front is the ECB because even if the IMF wrote off all of its debt it would barely scratch the surface of what is required.

The Debt Sustainability Analysis of the IMF told a very different story.

Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable.

It also confirmed one of the running themes of this blog which is that along the lines of to infinity and beyond the Greek debt is on it way to becoming perpetual debt.

the maturities of existing European loans will need to be extended significantly

Deadline Day

We have had a lot of d-days, final countdowns and even h-hours in the Greek crisis but I think that we finally have a day which will result in a clear change and that it July 20th. Why? It is when Greece has to pay some 3.5 billion Euros to the ECB because one of its sovereign bonds matures. As it does not have the resources to pay this then as David Bowie put it we will have to see.


In the meantime Greece has been making some payments since its default to the IMF. It made a payment on a Samurai bond (Japanese yen denominated) last week and plans to pay the coupon on its July 2018 bond today.

The Greek Economy

Contrary to the claims of the Euro area establishment and the institutions this remains in quite a mess. Their version of events that Greece was just about to turn a corner conveniently ignores the evidence of the collapse in previous years. RBS have captured the dire state of affairs in the chart below.

Yes that is 1985 and it provides quite a counterpoint to Euro area apologists as Greece has indeed retraced to then. They of course forecast exactly the reverse which is why Greece joined.


I think that there are several hopeful factors in what has taken place in Greece over the weekend. Firstly an attempt by the Euro area establishment to bully and intimidate Greek voters has failed. By the way when did media organisations like the Economist and the Financial Times turn into such establishment lackeys? Secondly even such an establishment is likely to balk at actively pushing Greece out of the Euro it has told everyone is “irrevocable” so there is a good chance it will sweeten its offer. Thirdly Greece continues to edge nearer to a Euro exit and whilst it would have been much better if it had done so several years ago it remains the best out of an admittedly poor set of choices.

As to the two bargaining groups of the Greek government and the institutions then I feel that both sides now want this to be over but here is the catch. They both want to be able to blame the other or as Lily Allen put it.

It’s not me it’s you
Always has been you
All the lies and stupid things you say and do
It’s you
It’s not me it’s you
All the lies and pain you put me through
I know that it’s not me it’s you
It’s not me it’s you, you

Unfortunately the Greek people are also singing along to Stealers Wheel.

Cause I don’t think that I can take anymore
Clowns to the left of me, Jokers to the right,
Here I am, stuck in the middle with you.


41 thoughts on “A New Hope For Greece And Its Economy

  1. Hi Shaun,

    Another excellent analysis.

    Where the Euro is an irrevocable political project, politics will win for now, but long term if it is not turned from a half to a full currency area with the ECB the lender of last resort, common tax, spending, financial and enforcement systems, along with capital transfers from surplus nations ie. Germany it will inevitably fail. I’m not sure that national parliaments are ready for this or that they ever will be, as a single currency implies the formation of the EUSSR, with national parliaments being reduced to limited power centres like US state administrations.

    In the meantime there are questions like:

    1. Will Greece stay in the EU and Eurozone?

    2. Will a new fundged bailout for Greece be put together that is acceptable for all parties?

    3. How will Greece be forced to carry out the reform they have promised in return for EU and IMF taxpayer’s money and that they have failed to carry out?

    4. How will a Greek debt haircut be carried out and on whom?

    5. What lessons are the EU going to learn on the Eurozone failings and what reforms are going to be made?

    6. When is the EU going to learn the summits are not a substitute for action and reform to make their currency union a viable proposition?

    My money is on that in 6 months time after more summits, spin, subterfuge and can kicking, they will be no nearer to answering any of these question and solving the Eurozone problems. All we will have if well fed, pampered, paid summit attendees with lots of air miles!

    • Portugal, Ireland, Italy, Spain and France (to a growing extent) look on, but (I pray) this has wider repercussions for the evil that is deceitfully called austerity, and which is actually unnecessary neo-liberal attack on social provision to redistribute wealth upwards, everywhere.
      The rags you mention support neo-liberalism and realise the ramifications of a Greek OXI vote.
      Remember, independent does not mean impartial.

      • Please show me a European country with a surplus. I see big deficits. I see dishonest Eurocrats preaching austerity but excluding their own huge salaries from cuts. Deficit austerity is an oxymoron, a fraud

        I see Ponzi pension schemes where the baby boomer generation is taking out more than they contributed and leaving younger generations with mountains of debt. Student debt. National Debt. Pension Debt. Exclusion from defined benefit schemes. Selling off state assets to obscure spending. Excessive house prices are another means of transferring wealth to elder generations.

        Debt is harmful. Paying debt interest reduces the funds available for schools, hospitals and welfare. Not to mention principle repayments. Excess debt can drastically crash a country’s economy – severely hurting the lower 95%. There are plenty of examples over the last 50 years, including Argentina, Zimbabwe and the 1997 Bulgarian crisis that I’ve personally observed. I’m told the 1970s Sterling crisis was tough.

        And it’s all down to the voters, the voters need to eject the greedy and elect relatively honest politicians. And here’s hoping that Syriza bring a new broom of honest, cost effective administration to Greece.

        • You’re wrong about deficit austerity being a fraud.
          You lose sight of the fact that governments raise their spending money in two ways; borrowing AND TAXATION.
          Deficit austerity is the refusal by neo-liberal governments to progressively tax the wealthy, to add to their recent 5% cut.
          We in Britain have just seen another tax cut for inherited wealth, worth £140,000 NET!

        • 95% taxes did not fix the 1970s sterling crisis. 95% taxes did create a brain drain. 95% taxes inspired the Beatles song taxman and their move to the USA – providing proof of the Laffer curve.
          1970s Britain faced a damaging brain drain where many of the brightest and most productive emigrated.

          BTW, the Troika have been asking Greece to collect taxes. If this worked the crisis would be well over and the Troika gone home …. QED

        • Expat.
          1) “The Beatles” did not move to US.
          Paul McCartney’s home was a farm in Scotland and George Harrison lived in Berkshire.
          Ringo moved to the US because he was held in higher esteem, and Lennon moved to NY because he wanted (relative) anonymity.
          Curve? Yer havin’ a Laffer.
          I’ve stated before that the Laffer Curve is meaningless, and only trotted out by those against progressive taxation.
          Presumably, your argument would be that tax cuts for the wealthy are required to keep them here?
          “The 63-year-old denied reports he had left Britain to become a tax exile, saying he was too wealthy to allow tax considerations to dictate where he should live.”

          The idea that we should tax the rich only what they are willing to pay is perverse.

    • I may be wrong, but wasn’t it Gorbachev who asked “Why would anyone want to create a Soviet Union of Europe?”

    • Yes Shaun, I was wondering the same thing that Chris says, also does the ECB realise the damage it’s doing to itself in refusing ELA to a member country, undermining confidence in it’s capability/will to act as lender of last resort?

    • Hi Chris and Noo2

      It is an interesting question. The ELA rules were pretty much non-existent when first applied to Ireland and have been added to considerably since then. Today’s additions are below.

      “Emergency liquidity assistance maintained at 26 June 2015 level”

      But more crucially to your question.

      “The financial situation of the Hellenic Republic has an impact on Greek banks since the collateral they use in ELA relies to a significant extent on government-linked assets.

      In this context, the Governing Council decided today to adjust the haircuts on collateral accepted by the Bank of Greece for ELA.”


      So it would appear that the ECB is protecting itself by stating that it is “forced” to adjust the collateral meaning little or no extra ELA will be allowed under its rules.

      Putting it another way the ELA rules have this bit.

      “However, Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB) assigns the Governing Council of the ECB responsibility for restricting ELA operations if it considers that these operations interfere with the objectives and tasks of the Eurosystem”

      Oh and apologies I forgot to add as I know the FT is running with the legal issue. So far how many appeals to the Euro rules have been upheld?

      • “However, Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB) assigns the Governing Council of the ECB responsibility for restricting ELA operations if it considers that these operations interfere with the objectives and tasks of the Eurosystem” – so that could mean that as the current objectives and tasks of the Euro system are the eviction of Greece then the ELA will be restricted in compliance with aforesaid objectives and tasks! Priceless!!

  2. There will be more arguments about the debts from the past but it is, and has been, abundantly clear that the Greeks cannot (even with the easiest of easy terms) ever clear the present day debt. So it will have to be absorbed by those that can. Some of the EZ have the capacity to do that over a reasonable time frame; nasty but necessary. This concept comes with a moral hazard writ large; no southern EU country will be able to resist asking for the same treatment. And who could blame them. But Greece must be seen as a huge, one-off EU-level mistake. Joining the EZ was not an instant route to prosperity, as many Greeks seem to think. It was, quite simply, a huge disaster that requires a huge solution, and not after another five years!

    But the real problem is: What now? Greece wants more money for day to day running. I suggest that would be a mistake. They also want more regional development funds. But where did they fritter those received up to now? Where is the sign of ‘development’?

    Notwithstanding the synthetic ‘dignity’ issues, I would not give them anything more than historical debt relief until they have demonstrated that they will undertake serious and urgent reforms and they have agreed to detailed monitoring. Each tranche of new money should be overseen by a neutral and non-corrupt third party that has to sign off before the Greeks get the cash. Sorry Greeks, the holiday is over. You now and for evermore have to pay all your taxes, retire when the Germans do, receive pensions in line with the country’s tax base and use the RDF money for its intended purpose. And your civil service should be half its present size. All this will be hard, but it has to be done.

    Especially I would stop handing out ‘ELA’s’. That has been done against the collateral of Greek banking assets. It will be a miracle if such assets have a real value even remotely close to their book value. More ELA’s = lots more cash straight down the pan. And we know whose cash it is.

    Taking a broad view, the underlying problem is that the Brussels crew have forgotten that they don’t yet have a federal structure. And to judge by the response in Greece, they may never have. You can’t adopt federalist processes without a federation! Forcing the structure via the ERM/EZ was an error of the biggest kind. The key players in Brussels have only a limited time to save their project, and it may already be too late. The culture gap may be too big to bridge.

    Otherwise we know what will happen.

    • The question that really should be asked is, “Which, so-called “professional” lenders allowed Greece to run up such debt?
      It must have been obvious, even prior to 2008, what Greece’s economy was like, and its capacity to repay.
      Once again the taxpayer is on the hook to the tune of €1/2trn, because of the fecklessness of these “world-beaters” who require top dollar in pay, and more in bonus, or they’ll go elsewhere.
      If only.

    • “retire when the Germans do”
      So if the Germans brought in a law setting retirement age at 80, the rest of the EZ should follow?

  3. Hello Shaun ,

    As pointed out by previous posts , the Euro and the United States of Europe are a political project so some kinda fudge and lots of humbug is on the cards !

    the crucial point is , will the ECB support the Euro project as it was supposed to?

    lender of last resort?

    if not then the pundits will have the real issue of Euro support to waffle on about

    if you cant support the Greek banks , then what is the ECB for ? and the other weaker members are looking !

    Until the IMF is paid off at the end of August this little show still has some running to do 🙂


    Ps : I thought the main contributors to the EU project was Germany , the UK and Finland ?
    The Euro I’m not so sure about.

    PPs: when it comes down to it , its the money we contribute the other EU countries want , not because they like us ( trade will not stop over night unlike some idiots in MSM keep ssaying – we support the EU there as well ! )

    • Hi Forbin

      Back in 2012 Mario Draghi stepped up to the Euro rescue plate with his “whatever it takes” speech. But this time around with regards to Greece he has merely emphasised what has already been done by the ECB (SMP,ELA etc.).

      As to supporting the weaker banks well according to the stress tests they were fine! Oh hang on……There can’t be many things even in these times more discredited than the Euro area stress tests.

      So it is down to political wrangling with each side trying to make the other look like the guilty party. A long hot summer perhaps?

      Meanwhile the China crisis seems to have given commodity prices a pasting today with Brent Crude Oil down 6%.

  4. Shaun, I read that the German Vice Chancellor has said that a debt haircut or debt forgiveness is impossible as it would blow the Eurozone apart. If Greece is granted such a favour then other countries would want it. The German press is also adamant that Germany is not going to support other countries! They still don’t get what monetary union is all about do they? One thing that will have to happen is that the stronger countries will have to support the weaker. In the two monetary unions that spring to mind, the USA and UK that’s exactly what happens. Wealthy States subsidise poorer States and in the UK England supports Scotland and the rich South East supports poorer regions. The problem with the Eurozone, as we all know, is that they put monetary union before political union and now find it isn’t working. Unfortunately the richer countries are not prepared to take the next step and so we have a situation where the Eurozone tries to be ‘only a bit pregnant’. Where are the men or women of conviction that will take this mess by the scruff of the neck and sort it out? I’m afraid I can’t see them and so the farce will rumble on.

    • Merkel’s power base is German domestic politics and after the East / West Mark currency union at the wrong rate it would be domestic political suicide for Merkel to provide any capital transfers.

      The only winner I can see is Herbert Stein’s law, where economic reality will alway win over politics, but it is going to be messy and deflating for all the eurozone members where growth, at best, will be slooooooooooooow compared to the rest of the world.

      Looking on the bright side, once Greece is finally sorted out after 5 years and counting, there will only be Portugal, Spain, Italy, Ireland and France to go!

    • Pavlaki.
      The Germans want only the benefits of currency union, namely a lower exchange rate than a Deutschmark would have, without either the responsibility of trade reciprocity or financial transfer.
      The Germans are as much a problem here as the Greeks.

      • It’s only the wealthiest 0.1% of Germans who benefit from a weaker currency. The vast majority would benefit from cheaper food and fuel.

        • Not if their exports are uncompetitive and their jobs rendered insecure.
          Add the equivalent of €20k to the price of a BMW/Merc and see how popular they are then.

    • “Where are the men or women of conviction that will take this mess by the scruff of the neck and sort it out? I’m afraid I can’t see them and so the farce will rumble on.”

      Exactly, that would require leadership being demonstrated by leaders and I don’t see any anywhere, either in the EZ or indeed the UK.

    • Bulgaria has pegged it’s currency to DEM since 1997, and with very good results. Living standards have improved and debt has remained very low, because voters felt the consequences of the Bulgarian communist party’s excessive borrowing and resultant hyper-inflation. Currency union gets blamed for much, whilst excessive gets ignored.

      I cannot see the EU successfully re-distributing wealth across the 28 nations. Would Greeks accept cuts to raise Romanian pensions ? Would French accept cuts to raise Bulgarian teachers wages ?

      • I take it you mean the deutsche mark? If so what have you been using as a benchmark peg since 2002?

      • Thanks Expat. I think Bulgaria has been very very lucky not to have had problems pegging it’s currency to another country/economic area as that country/economic area will set it’s rates, thereby trying to manipulate it’s exchange rate to take account of the circumstances it faces.

        A country that pegs it’s currency to another’s had better make damn sure that it’s economy, state of development, potential growth and demographics are very similar to that of the country/economic area it has aligned itself with otherwise it will end in tears.

        I know very little about Bulgaria and must assume that it is very similar to Germany and the EZ, although, given the diversity of the EZ I wonder….

        • Politically Bulgaria is closer to Greece. But voters learnt the consequences of a debt crisis, so they do eject politicians who borrow. Borisov (our centre right govt) are back and really doing good infrastructure (roads & Sofia underground) after a spell in opposition due to an energy costs crisis – a large part of public opinion blames Russian manipulation of energy prices for the crisis ( though that is political and opinion based)

          The opposition coalition of Ethnic Turks, neo-nazis and communists was short lived, but still tried to wreck the economy with borrowing. Notably little infrastructure was built, no welfare increases were paid and no extra money found for schools or hospitals. But I believe the politicians concerned did well themselves…

          Hospitals & schools are badly underfunded, and have old workforces – and will face even greater staff shortages in the near future. Private options are much more affordable than the UK.

          But my observation is that the currency peg isn’t a problem.

        • “in the UK England supports Scotland ”
          That was a lie put forward by Britain’s own corrupt centralists.
          More public money IS spent in Scotland, but we contribute more taxes than the average, more than enough to cover the difference.
          Scotland subsidises England in many areas, including defence spending.

  5. In 2010, Merkel acted to argue down a Greek referendum. I bet she regrets that now. Der Spiegel writes that Merkel shied away from telling the Greeks that they were broke and preferred to hide behind IMF Technocrat reports to dodge blame.

    The facts are simple, Greece has been living beyond it’s means on borrowed money. Spending must be reduced, whether it defaults or not. Reduced spending is inevitable regardless of whether Greece retains the Euro or re-adopts the Drachma. Painful reforms can no longer be put off. But at least Greece can start putting things in order with hope for a decent future.

    Blame should be attached to the politicians who borrowed & spent irresponsibly. Blame should be attached to the lenders who lent irresponsibly. But the guilty parties have got off the hook, and it’s international taxpayers who hold the liabilities via the Troika institutions. It’s the Greek pensioners who are penniless whilst former senior politicians are reported to be indecently wealthy.

    The ECB & EU are presently immune from voter dissatisfaction or accountability, but I’d bet that AfD will be taking votes from Angela’s CDU. The only (admittedly very thin) chance for pragmatic EU reform will come with political support from Germany. Here’s hoping for some democratic restructuring of the EU.

    • Hi ExpatInBG

      You are right to remind us of the technocratic era when an ECB Vice-Governor and ex-Bank of Greece Governor Lucas Papademos was sent in to run things and become Prime Minister. However the technocratic era was a failure or in official-speak “on track”.

      I doubt if they will give that another go but you never know as crazier things have come to pass in the Euro area crisis! Who would have thought that elected politicians would switch debts from banks to those who elected them?

    • Spending MUST NOT BE REDUCED IN GREECE; Greece needs public programmes more than ever.
      What MUST happen is that the corruption stemming from the parties which the EU preferred (ND & PASOK) must be ended, and that every penny invested in Greece should be used to improve infrastructure and manufacturing/service economy efficiency, so that Greeks have the opportunity to EARN their way to prosperity.
      TAXES need to be pursued enthusiastically, with no oligarchs excepted.
      Greeks in general are very hard-working.

  6. Hi Shaun, this seems to be a turning point. Unfortunately, the tutrning pointcoulfd go on for months or even years which wil be no good for any one, butit’s bound to be slow going as the Greeks, Trika nad the World are in uncharted territory now. Each side wil be terrified of setting new precedents which adversely affect it in the future.

    I think the Greeks are incredibly stromg now, EU finance ministers are saying Greece will have to leave the EU and the Euro but there is no constitutional method of removing a member country. Another part of Article 1 of the EU Protocol states “no Euro group decision is valid if it does bear the signature of ALL member states”.

    The EU ministers don’t seem to realise they can’t do anythingto Greece like ejecting it from the EZ or Euro without Greece’s agreement!!

    Thus, Greece holds the power now. It can dowhatit likes and remein in the EZ undermining confidence in the EZ and there aint a thing any one can do about it – except the Greeks if they agree with the EU ministers that they should leave the EZ, which, if I were them after the intimidation and bully boy tactics employed by the EZ said departure would come at a very very high price.

    • Ooops, of course I meant “no Euro group decision is valid if it DOES NOT bear the signature of ALL member states”.

      • Hi Noo2

        You make a good point but I wonder if instead the Euro area establishment will use the ECB as its control valve if I may put it like that. It only needs a 2/3rds majority on it Governing Council for major decisions and like it has done tonight with the collateral rules can send warning shots as well as acting.

        So it could crash the Greek banking sector although of course that is exactly the opposite of what a central bank is supposed to do. What a mess!

  7. Hi Shaun,
    I think we can be very confident that there won’t be any more referenda until the “right” result is achieved. I’m happy that reports of the death of democracy have been exaggerated.

    • Hi Eric

      As Expat pointed out above the Euro area moved to crush the referenda of Papandreou but of course the technocratic puppets did not really work either. So I guess Tsipras bounced them a bit with this move. Whilst they tried to figure out what to do next he acted.

      So far though we seem to have returned to the same confusion! Let’s see if tomorrow brings us some new events.

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