Robert's Stochastic thoughts: The Greek Crisis and Referendum

Sunday, June 28, 2015

The Greek Crisis and Referendum

Greek Prime Minister Alexis Tsipras called for a referendum in which Greeks could vote to accept or reject the demands for further austerity made by Greece's creditors **. This seems to me to guarantee Greek default and imply that no agreement on debt rescheduling will be reached. I have no expertise at all -- I am writing as a newspaper reader. I will assume that the reader knows about as much as I do. update 2: Francesco Saraceno wrote this post but much better here. update 4: Wait a minute, in one Alco poll a 57% of Greek respondents say they would vote yes in the referendum accepting the Troika's proposal. In a Kapa poll 47% say they would vote yes 33% say they would vote no. Given these polls it seems very possible that the proposal (which was rejected by Tsipras) would be approved by referendum. This can only happen if Greece is given a bit of relief to delay default from the currently scheduled June 30 until after the July 5 referendum. It seems to me that a refusal to make a one week loan would make it clear that a blocking coalition of Non Greeks is determined to cause Grexit. Such a refusal would prevent Greece from accepting the current proposal from the troika. I am totally surprised. I think I have to write a whole new post. end update. I think this Washington Post article by Griff Witte is a very good explanation of the current situation

Both sides say that an agreement is now extremely unlikely.

“The negotiations are clearly ended, if I understand Mr. Tsipras correctly,” said German Finance Minister Wolfgang Schäuble as the continent’s top finance officials gathered for their fifth emergency meeting in the past two weeks. “We have no grounds for further discussions.”

The first question is whether either is bluffing. Until Tsipras called for a referendum, I had guessed that there would be an agreement which would prevent default/kick the can down the road. I now guess that there won't be an agreement.

I don't see how a Tsipras government could survive if he were to try to accept the creditors' demands and calls off the referendum. Calling a referendum as a bluff would be a crazy bluff, but the key point is that he is just Prime Minister and doesn't have the authority to fold*. At the same time, calling a referendum violates the norms of international negotiations which require that the general public is kept out of it except, perhaps, for approving the final agreement (with minor amendments and a second vote scheduled if they vote the wrong way the first time). If the European Finance ministers/Troika grant concessions in exchange for cancellation of the referendum, they will have to do something similar in all future negotations. This might be in the interest of the European Union, but it would be too humiliating and infuriating.

Greece doesn't have the cash to meet a payment to the IMF required on Tuesday June 30th. The referendum is scheduled for July 5th (so Greeks won't have a chance to declare independence from the Unitet States of Europe on the 4th of July). This is really at least as soon as it can practically be managed. Some concession must be made to prevent default.

I think this is acceptable to Greece's negotiating partners (very especially including Shäuble). Last week Greece made major concessions and the creditor replied with extreme demands that the primary surplus be increased by spending cuts not tax increases. This sure seems to indicate a desire to get to no.

So what happens next ? A key issue and key cost of default for Greece is that the European Central Bank (ECB) has been loaning and loaning to Greek banks as Greeks take out their Euros while they can. It is entirely possible that Greek banks won't be able to open Monday. A default (scheduled for Tuesday) would almost certainly cause the ECB to cease to help Greek banks. It seems likely that Greece faces at least a banking holiday. This would cause great suffering directly and further decline of production.

I think at that point, Greece is much better off reintroducing the Drachma and declaring that references to the Euros in contracts are to be replaced with references to (some initial exchange rate) drachmas. The cost to Greece of Grexit would have been a financial crisis. If they have a financial crisis Monday anyway, they might as well regain monetary independence and devalue. I don't see any point in Greece promising to pay its debts to official creditors in Drachmas. They can't accept that (or every country with foreign currency denominated debt would redefine their debts) so simple default seems better for everyone.

My ignorant guess is that the crisis won't spill over to other countries (I'm not trying to empty my Italian bank accounts).

* update: I see that Matthew Yglesias says that Tsipras's best strategy is to fold 'em. I think that it might have been a wise move to accept the extreme undemocratic Eurodemands, but it is too late for Tsipras to do that. The question is what would happen next were Tsipras to announce that the referendum has been cancelled and he is accepting the deal. I think it very unlikely that enough Syriza MPs would accept this for the current coalition to survive. I think Tsipras would have to do a Ramsey MacDonald and try to form a unity government with the former opposition as in "the Labour government was split by demands for public spending cuts to preserve the Gold Standard. In 1931, MacDonald formed a National Government in which only two of his Labour colleagues agreed to serve and the majority of whose MPs were from the Conservatives. As a result, MacDonald was expelled from the Labour Party, which accused him of betrayal." MacDonald is still very much loathed by the few who remember who he was.

Tsipras the traitor would not be useful to the new coalition -- a leader with a history of bluffing and folding is not valuable. I don't see how a second Tsipras government could last.

I think that folding might conceivably be a good strategy for Greece, but I don't see how it could be managed. Another even grimmer historical analogy would be the Franco-Prussian war in which the French were defeated in six weeks then spent three months futily attempting to surrender.

In contrast, the experiences of countries which default isn't so horrible. I am thinking of the cased of Iceland, Russia and Argentina. Argentina didn't even entirely have its own currency. Countries considering default are threatened with terrible things, but International Finanz Kapital is not a united agent -- in practice foreign banks do business with countries which have defaulted. Default is associated with horrible economic suffering, because countries endure horrible suffering while trying to avoid default. I can think of these three cases when default was preceded by horrible recession and followed by rapid growth. I think default is the least bad remaining option for Greece. ** update 3 "(represented by the Eurogroup)" deleted -- Greece is part of the Eurogroup which (officially) therefore isn't Greece's bargaining counter party.

14 comments:

Anonymous said...: Greece could first institute Drachmas at parity with the Euro, then "buy" every Euro in the bank accounts with a Drachma (or perhaps 1.5 Drachma as an enticement to reverse capital flight). The Euros they bought are then used to pay off debt. The inflationary impulse from printing money would be offset by sterilizing Euros through sending them abroad as debt repayment. At least Greek citizens would benefit as long as inflation doesn't eat up more than a third of the drachma's value (which should be avoidable).; 1:36 PM
Blissex said...: First a huge premise: the issue here is that Tsipras is trying to sell to *someone* a few dozens/hundreds billions of greek bonds with which to repay existing loans.

I am now aware of anybody else other than the "institutions" offering to buy those billions of greek bonds: not Krugman, not Saraceno, not you.

In particular, the greek themselves are not offering to buy their own government's bonds: they are queueing at the banks to get euros, not to buy greek government bonds.

But the same Krugman, Saraceno, you, and the greeks themselves are demanding that the citizens of the other EU states and mainly Germany should buy those greek bonds.

Why is nobody suggesting that *Germany* do a referendum asking their voters to approve or reject the terms offered by the greek government to buy their bonds? Is that "democratic"?; 2:09 PM
Blissex said...: «Last week Greece made major concessions and the creditor replied with extreme demands that the primary surplus be increased by spending cuts not tax increases.»

That's for an obvious, obvious reason: plans by the greek government to raise taxes are not credible, and are either lies or delusions.

If Tsipras could have increased tax revenue from the rich he would have already done so, and if he increases tax revenue from the poor, assuming that he can do so, he betrays his voters.

So maybe the greek government either is playing the game of promising higher tax revenue now and then act astonished when that does not happen later, or really think that they can get higher tax revenue, and then they will be astonished when it does not happen later.

The IMF cannot say that they think a member government are liars or fools.

There would have been an obvious way to settle the issue: agree for a certain level of spending and tax revenue as demanded by the "institutions", and also that any extra tax revenue above the agreed level could be used to expand spending *once collected*.; 2:31 PM
Blissex said...: «I don't see any point in Greece promising to pay its debts to official creditors in Drachmas. They can't accept that (or every country with foreign currency denominated debt would redefine their debts)»

It is not a question of "accept that". One of the important technicalies here is whether the existing greek bonds are subject to greek law or to english law.

The vast majority of pre-crisis bonds were subject to greek law, so redenominating them in drachmas would be legal and any lawsuits against that would have to happen in the greek courts, and good luck with that.

The "institutions" have been demanding that any new loans be subject to english law, so that trick would be much harder, and Greece being part of the EU like the UK/England they would probably have to enforce english court decisions.; 2:38 PM
Robert said...: Greece is running a primary surplus -- excluding for interest payments spending is less than tax receipts. This means that Greece doesn't have to sell more bonds -- it it defaults on the bonds it has sold, then it has the cash flow.

Now full default implies much more than defaulting on the 245 billion or so owed to official creditors -- it even implies defaulting on debt to individual Greeks. But default on only that official debt is a fairly attractive option.

I don't invest in bonds. I have checking accounts and home equity (a terrible investment). However, I do know someone who has become very very rich buying and selling bonds, and who was, when last I heard, long Greek bonds (insured by CDS which isn't a problem for the Greek treasury).; 2:46 PM
Blissex said...: «default is the least bad remaining option for Greece»

Y Varoufakies argued very strongly that "greece-cannot-pull-off-an-argentina", and one reason is political: the rich greeks, which means the non-SYRIZA political class and their sponsors, have lots of money in euros in Switzerland, or even in cellars, and a switch to drachma would allow them to buy greek assets at a colossal discount:

yanisvaroufakis.eu/2012/05/16/weisbrot-and-krugman-are-wrong-greece-cannot-pull-off-an-argentina/
«the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes).»; 2:48 PM
Blissex said...: «Tsipras is trying to sell to *someone* a few dozens/hundreds billions of greek bonds with which to repay existing loans.»

«Greece is running a primary surplus -- excluding for interest payments spending is less than tax receipts. Greece doesn't have to sell more bonds -- it it defaults on the bonds it has sold,»

That's exactly what I wrote... Tsipras wants to sell bonds to repay existing loans.

My point is that criticizing the "institutions" for not buying with their members' money new greek bonds in order to avoid a formal greek default is simply not consistent with advocating that default.

Either you argue that the best option for Greece is to avoid default, and that german citizens should be made "democratically" to buy billions of euros of greek bonds even if they and nobody else wants to buy them, including greek citizens, or you argue that the best option for Greece is to default and then you cannot criticize german citizens for not buying the greek bonds that nobody else wants to buy and that would avoid that default.

Sure, the best option for Greece is probably both to effectively default but not formally default, by making german/EU citizens buy greek bonds and let Greece repay them over a billion years, and thus passing the cost of default to the buyers of those bonds. But doesn't that require the consent of the would-be buyers of those bonds? If it does, then the criticism of the "institutions" is a bit misplaced...; 3:17 PM
Blissex said...: «Greece is running a primary surplus -- excluding for interest payments spending is less than tax receipts.»

Far more crucially, the trade balance is also balanced currently, but to balance that and the greek government primary budget took engineering a dive of 20-25% in GDP. Greece has both a trade and a budget constraint on GDP growth.

«This means that Greece doesn't have to sell more bonds -- it it defaults on the bonds it has sold, then it has the cash flow.»

If the current situation is fine, then why argue against the conditions imposed by the "institutions" that would freeze it? :-)

The problem is that SYRIZA was elected on the promise of "end to austerity", and for most greek voters that means being able to reverse some of the huge cuts in consumption they have had to endure, that is reverse some of that 20-25% cut in GDP, and to import more, because Greece does not produce much of what SYRIZA voters want to consume more of (e.g. oil, medicines, ...).

The SYRIZA plan so far was to roll over their debt and capitalize some interest and thus to devote their primary surplus if any to fund a little more (around 2% of GDP...) consumption for their greek voters, and to keep the euro because it is accepted as payment for imports; but the institutions don't agree to buy greek bonds if that's what is going to happen. So a little greek import/consumption increase is "verboten" if the roll-over bonds can be sold to avoid default.

The question as to a default is how a default instead would allow SYRIZA voters to consume more and import a little more in the short term.

Because if they don't deliver that SYRIZA are not going to win the next elections. SYRIZA gets to deliver at least a bit on their promise only if "someone" buys the roll-over bonds at the conditions offered by SYRIZA, and nobody seems *willing* to do that. "democratically" :-).; 3:48 PM
Robert said...: "My point is that criticizing the "institutions" for not buying with their members' money new greek bonds in order to avoid a formal greek default is simply not consistent with advocating that default."

I don't see the inconsistency. It surely isn't a logical inconsistency. I note I criticize the USA (and also more generous countries) for not giving more foreign aid.

In any case, I am not suggesting that the institutions should send more money to Greece. The purchases of bonds would be to roll over existing debt. I think money is now flowing from Greece to those institutions and the question is how much and how fast.

Now let me imagine that the institutions aim to maximize profits (or in this case minimize losses). The fact that Greece can default and might not default affects their interests. It is quite common for a bank to roll over loans even though another bank wouldn't make new loans. This is often extend and pretend bogus accounting so that it would be better for their shareholders if they wrote off the bad loans. It isn't always extend and pretend. I think that with their current policy the institutions stand to take a loss on the order of 245 billion Euros. I think they would lose less if they accepted the Greek proposal.

In sum, I don't think the actions of the non-Greek 18 of the ad hoc Eurogroup can be justified in any way.; 3:57 PM
Blissex said...: «I think that with their current policy the institutions stand to take a loss on the order of 245 billion Euros. I think they would lose less if they accepted the Greek proposal.»

I agree with that, as a *business* case, based on probabilities, not a moral or political one. The institutions don't owe SYRIZA any political or moral duty to accept their proposals, and viceversa. I think that giving SYRIZA a gift of a consumption/imports boost of 2% GDP to relieve the poverty of their voters might be a good idea, but that's arguable; for example: what about the Bulgarians then?

Also because the business case is not obvious, and requires a lot of optimism, as for the past several years the debt has just grown bigger.
The case between roll-over at harsh conditions to theoretically prevent further growth of the debt or just taking the loss once and for all is not so clearcut.

«In sum, I don't think the actions of the on-Greek 18 of the ad hoc Eurogroup can be justified in any way.»

What about "democratically"? The rest-of-EU and in particular (as to magnitude of cost) the German government have to answer their voters, and these voters seem to be in their majority for taking the loss once and for all. They may be wrong that's the best course, but democracy sometimes also means respecting the wishes of voters, not just the greek ones.; 4:18 PM
Anonymous said...: Any political union has to find a mechanism to transfer resources (directly or indirectly) from richer to poorer regions, because a political union will always have richer or poorer regions. But, ask Europeans if they agree on this simple truth, and 99,9% will tell you that they simple do not care. This is one of the few cases where democracy leads to the worst possible outcome. The other one was the election of Hitler at the Reichtsag.; 4:33 PM
Blissex said...: «Any political union has to find a mechanism to transfer resources (directly or indirectly) from richer to poorer regions, because a political union will always have richer or poorer regions.»

This is an outrageous comment because it based on pretending the non-existence of the common agricultural policy and the regional adjustments fund, generous programmes by which Germany and other richer regions of the EU have transferred quite large sums to the poorer regions of the EU over the years.

These generous resource transfer programmes have transformed the living standards of many parts of Ireland, Greece, Portugal, Spain, etc., and they have been mostly paid for by Germany.

Part of the reason why Ireland went along with the bailout of their creditors is that the Irish are grateful for the large amounts of grants they have received from Germany over many years, and they did not want to return that favour by bankrupting Germany's banks by defaulting.

I am sure that german politicians and voters won't forget that Ireland has been grateful for all the gifts they received from Germany. I am sure also that they won't forget how grateful Greece has been :-).; 7:52 PM
Blissex said...: «Any political union has to find a mechanism to transfer resources (directly or indirectly) from richer to poorer regions»

As to this, this is the page with the official numbers on net contributions to the EU:

http://ec.europa.eu/budget/figures/interactive/index_en.cfm

Select "Operating budgetary balance" and click "sort".

Greece received a net transfer of around €5 billion a year from the EU, and Germany, UK and France are by far the biggest net contributors.

Then select "By country" instead of "By year" and unclick "sort" to check that in 2007-2013 it has oscillated a bit but around that €5 billion per year level. If you select "% of GNI" instead of "EUR million" you that it has been around 2-3% of greek GNI, which is not small.; 8:24 PM
Blissex said...: «Greece received a net transfer of around €5 billion a year [ ... ] around 2-3% of greek GNI, which is not small.»

To put this in perspective: greek income taxes received by the government are only about 4-5% of GNI, against a first-world average of around 10%, because of the notorious "difficulty" that the greek government has in getting rich greeks to pay taxes.

Put another way, german (and british and french) citizens have been paying 30-40% of the "income tax" revenue of the greek government.

Sometimes I think that of all "deserving causes" that well-meaning do-gooders could choose, that of greek debt is one of the most brave :-).; 9:50 AM