Something I meant to write the other day: the IMF dilemma has become quite intriguing over the last couple of days.

The latest IMF report, though still based on outlandish assumptions, marks a sizeable debt restructuring as a requisite for further involvement of the IMF in Greece. Germany, on the other hand, rules out debt restructuring of any kind, and haircuts in particular. However, Germany also insists on the IMF's continuing participating in the Troika, because a) noone else has the capacity to provide Orwellian monitoring of a countries' financial actions and b) to provide economic credibility. Of course, having a non-European patsy is always a good idea.

Nevermind the fact that the report was available prior to the last deal and held back intentionally -- I'm curious who's going to give way in this matter.

The IMF cannot back down much further without its members going apeshit at this disaster. They want no share of the blame that will inevitably be thrown around in good amounts once Greek reaches the end of the road. And Germany... well, constant propaganda has pretty much made sure that neither public nor parliament will accept any restructuring, unless it is plastered with a whole lot of make-up and maybe a Sideshow Bob hairpiece.

Pure quality by John, as usual.

There are a few points I'd like to add, in order of appearance.

5:10 – Greek default or Grexit could be manageable by the rest of the EZ, economically. Italy looks a bit shaky and Spain still looks like shit, so things could spiral out of control, but chances would be better now than they were in, say, 2010.

However, Grexit would be a political nightmare. EZ membership is supposed to be irreversible, so Grexit would reduce the Euro from a common currency to a peg when viewed from the outside. That's open season on the rest of the PIIGS. If Greek then rebounds, other people might very well decide to give Germany the finger and leave as well. If Greece fails, you have a NATO member turn into a failed state, which not only gives NATO the shivers, but also buries any notion of solidarity within the EU. This union survives because of the promises it makes, which include increasing standards of living and solidarity among different peoples. Without it, we're left with... what exactly?

And nevermind the humanitarian catastrophe taking part in Greece. We've conditioned ourselves to block out the pain and suffering of people in Africa. We even manage to shrug at the cesspool of corruption that is Kosovo. But if we do that to Greece as well, what little moral authority Europe might still have left would be gone then.

5:32 – The last payment Greece received was in August, long before Syriza took over. The previous government was in disagreement with the Troika and therefore transfers were frozen.

5:57 – Troika payments are required to service previous debt obligations. They are separate from what the Greek banks require to maintain their liquidity. That would be Emergency Liquidiy Assistance (ELA) from the ECB, which is a different thing entirely, even though it comes from a member of the Troika.

The ECB is bound by law to maintain and ensure the stability of the banking system(s) within the EZ. If a bank runs into liquidity problems, support is provided by the national bank of the respective country, which funnels funds from the ECB to the troubled bank. That's ELA, and a limit on ELA is a limit on the amount of funds that banks can draw from through this process. If an illiquid bank is cut off from ELA, it goes belly up. Bad idea.

Some argue that the ECB should not provide ELA to those Greek banks anymore, since they are insolvent, and ECB rules forbid ELA to insolvent banks. But as Varoufakis said, even the ECB's own Single Supervisory Mechanism (SSM) department, which is the new banking oversight, declares the four large Greek banks to be solvent. So there is no reason for the ECB to cut ELA to Greek banks. It's all political, and the ECB is designed to be outside of politics. That's also a reason why its membership in the Troika is so controversial.

The political argument for cutting off ELA is that Germany et al. are on the hook for the total amount should Greece itself go belly up. Somewhere along the line, someone made the glorious decision to install the ECB as a currency issuer without providing it with the attributes of a regular currency issuer. If the Bank of Japan or the Bank of England racks up losses, noone cares. They issue their own currency, they cannot go bankrupt, whatever debt they have in their books is irrelevant, for this discussion anyways. But the ECB has to balance its books, it has to receive funds from its members to balance losses, and in proportion to their economic size.

They made sure that politicians can scare the demos by pointing out how they have to foot the bill for this shit, even though it's the one entity where debt truly doesn't matter at all.

By the way, the funds that Greece is hoping to acquire are meant, primarily, for two purposes: making debt payments and to provide financial room to convert ECB(?) debt into EFSF debt (4% interest down to 1%). That's all. No spending.

6:54 – "Printing" money is generating demand out of thin air. There is a shortage of demand throughout the entire continent. So yeah, if the folks at the ECB could type in a few numbers, that would be swell.

Even Germany has a shortage of demand. We are merely hiding it behind the €200b+ of demand that we steal from other countries, i.e. our current account surplus. But the infrastructure and investment spending over here is at all time lows. We'd need an additional €200b+ just to get the infrastructure back to the state it was in a decade ago.

There is no productivity growth in Europe. The UK actually lost a lot of productivity by its introduction of zero hour jobs and other forms of slavery. Without sufficient demand, there is no need to improve production capacities – they can't even sell what they could produce right now.

First of all, Flassbeck is the only(!) prominent economist in Germany arguing strictly against the madness of austerity. But he's living in the border region between France and Switzerland, so he's a European more than a German.

Among all the economic think tanks in Germany, only the union-sponsored IMK makes a credible case against this madness. Everyone else is more or less in line with the neoclassic perspective. Not a Keynesian in sight, much less a post-Keynesian group.

But now to the meat of the issue. There will be no major political shift in Germany in the near future. As Flassbeck stated, only a single party opposes the financial inquisition commonly known as the Troika. Unfortunatly, it's the socialists, and despite overwhelmingly popular policies, they are still an absolute no-go for large swaths of the demos thanks to the authoritarian regime in East Germany. Sucks, but it is what it is.

So it's up to the French people once again to save the continent from itself. Noone else has the balls or the influence to put an end to this misguided union. How likely is it for the French government to openly challenge German hegemony soon? I wouldn't bet on it. Which means the Greeks are fuuuucked².

In any case, what would it take for Greece to stabilise? And by stabilise I'm talking about a return to a manageable level of unemployment, a working healthcare system and social safety net. A conservative guesstimate would be a public deficit of ~10% of GDP for at least 5 straight years. Alternatively, the EIB would have to prop up Greece with €50b a year for the same number of years. To get a working bureaucracy, to undo four decades of nepotism, Greece would basically need a generation to reestablish itself as a state – and it would require appropriate financing.

Now remember which of Syriza's demands is painted as most controversial right now: debt restructuring. Debt restructuring, while neccessary at some point, is entirely pointless as long as the fiscal policy remains contractionary. Greece needs austerity to stop, right the fuck now. Greece needs to provide income-generating jobs for its people. All the talk about debt is utterly pointless, because at 25% unemployment, we're looking at permanent damage in every way imaginable. The social toll alone should be completely unacceptable within Europe if we truly gave two shits about human dignity.

So, even if Syriza get their way tomorrow, Greece would still be flushed down the shitter. Syriza's proposal is contractionary. Any primary surplus in this situation is contractionary.

Greece is done within the Euro. The use of a foreign currency makes it impossible to use appropriate fiscal policy on their own. Unfortunatly, but also intentionally, the currency issuer, the ECB, is placed outside the democratic control of the European Parliament, or any national parliament for that matter. Fiscal policy within the EZ was taken out of the control of our elected representatives to ensure that the neoclassic/neoliberal approach was irrevocably built into the system. We can thank Germany for that, by the way.

There is a shortage of spending in Greece. There is a shortage of spending in Spain. There is a shortage of spending in Portugal, Ireland, Italy, France. There is a shortage of spending in Germany, for fuck's sake. Put the ECB under control of the EP, add full employment (2-3% unemployment) to its mandate, and have them finance the appropriate programs at the national level. The output gap in Europe is so massive, the un(der)employment so vast, they could spend a trillion Euros and inflation would still not reach the agreed upon target value of 2%.

All it would take to change the rules is consent from every national parliament in the union. Might as well go skinny-dipping instead.

Keynes and others made the same argument against the Treaty of Versailles. You mentioned how that turned out.

Folks did in fact learn from that mistake, but after everything is said and done, it was the Soviet expansion that made the case. Germany was the frontier and to turn it into some shithole or even a failed state would have made it worthless in the struggle against Soviet expansion. Germany was expected to a) keep them in check, and b) serve as a prime example of how much better life is within the realm of capitalism. If it hadn't been for T-34s in Berlin, I'm not entirely sure we would have been treated as favourably as we were.

In any case, even after much of the debt was written off, the remaining payments were stretched out over decades, so as to not be too much of a drain on the economic development of the country.

Still, it's not the same with Greece. We only torched half the continent, but they dodged their taxes. That's a million times worse, it seems.

While we're on the subject of tax evasion: Luxembourg alone accounts for about €20b-€30b a year of lost tax revenue in Germany. Yap, the tax system implemented by none other than troika member Jean-Claude Juncker is more of a drain on the public budget in Germany than Greece could ever be.

There are depressingly few journalists who call Osbourne out on his permanent-surplus horseshit....

While we're on the subject, the rhetoric from the left flank of Syriza against austerity seems to be shifting from failed policy to tool of class warfare. Or maybe it's just getting reported more prominently.

The IMF, and Lagarde especially, is also receiving more heat by the day for letting themselves get dragged into this troika business by Strauss-Kahn.

Yet in all this, there still isn't anyone willing to pull the trigger.

They all try to appease the mighty gods of the economy, with austerity chosen as their way of showing penance.

They came up with plenty of ideas and concepts, if you were to believe them. But none of it can be turned into legislation as that would be a unilateral act, and unilateral acts are a red line for the Troika. Meanwhile, the Troika insists on a comprehensive plan and opposes any form of piecemeal reform, so they can't even get an agreement on things they agree upon.

Again, that's what Varoufakis says. Maybe he's full of shit, maybe they all are.

Like you said, a fresh round of muddling through might be what's ahead of us. Should things go sour instead, it truly would be an epic fuck-up. Some twenty years down the road, historians will probably do their best Rocco impressions when looking at this mess.

That's what's left on the table, isn't it? I'd divide the exit option into orderly and disorderly, but the core of it remains the same.

Yet we have to keep in mind, Syriza was elected on a program diametrically opposed to the troika demands. And an EZ exit is equally far outside its mandate. Not to mention that a significant portion of Syriza is made up of former PASOK supporters, who would need a whole lot of convincing to vote for an EZ exit.

A referendum sounds decent enough, but they should have a strategy in place for the post-EZ time. Merely getting rid of the Euro won't get them out of the shit. In fact, I'd argue that a clear strategy is an absolute neccessity to even get a "favorable" outcome from any referendum. The public needs to have a clear picture of what awaits them behind any choice they might be presented with.

For starters, they should be perfectly clear about what it would take to get the Greek economy started again. Greece has very little to offer at this time, so every effort must be made to improve the domestic market. Plans for rebuilding its productive base should be worked out prior to any referendum. Industrial policy spanning at least 5-10 years would be needed.

Question is: can a non-EZ Greece muster up enough political capital to run the vast fiscal programs required to pull the economy out of the shitter? Or would they be stuck with a recessionary focus on balanced budgets, just like the rest of us?

In any case, within the constraints of a monetary union with neo-mercantilist Germany, Greece will not get the fiscal expansion it needs and will remain a shithole, just shy of a failed state.

If I remember correctly, the Croatians put everything else on hold when they introduced their system and had their entire staff out in the field for 6 months to enforce it. After that, the system was widely accepted and controls could be tuned down to a normal level.

Greece cannot go down the same route if most of what little bureacracy they have is still in cahoots with the previous nepotic governments. Maybe some third party can provide personnel for a few months...

The €2B come straight from our Tax Avoider in Chief, Juncker. Some say he's more of a federalist, more willing to compromise to keep the EZ together. Doesn't really matter though, Greece is too far down the rabbit hole.

As for Syriza: your guess is as good as mine. If they don't start praying to our Lord Austerity soon, the Troika won't hesitate to let them drown. And if they do get on their knees, Syriza will split and everything's back to square one.

In theory, I would suppose so.

But in reality, the one entity tasked with enforcing the legal frameworks of the EU, the European Commission, is also the entity behind many violations in the first place. So tough luck, I guess.

We have a saying in Germany that fits the activities since the beginning of the crisis rather nicely: "legal, illegal, scheissegal". Legal, illegal, who gives a shit.

Just a few appetizers:

- EU parliamentary inquiry says troika acts outside of legal framework, without any oversight
- Special Rapporteur: cuts in Greece would have never passed EU parliament, had to be done outside of any democratic control
- Portuguese Supreme Court rules cuts unconstitutional, European Commission calls court a group of activists
- Troika forced an end of collective bargaining in Greece, in violation of ILO agreements
- Troika forced Greek minister to use decree to cut minimum wage, circumventing parliament entirely
- EC and ECB violate law by being part of the troika
- Eurogroup acts as enforcer for EC wherever law needs to be violated
- Troika forced sale of Portuguese BPN (bank) under extremely shady circumstances
- Bailout, nationalisation and later privatisation of four largest Greek banks equally shady
- Cyprus/Piraeus
- Just about everything the Spanish government has done in the last couple of years

Nevermind all the treaty violations vis-á-vis financing/bailouts, etc. But you won't find a court willing to touch any of this. Nobody wants to destabilize this mess even further, despite all the gross violations. TINA, all the way.

Frankly, I'd be satisfied if these calls were made by parliaments instead of unelected and unaccountable officials.

Last week, I mentioned a report about how Cyprus was sacrificed to prop up Greek banks. Parts of it have now been published in English as well:

http://www.thepressproject.net/article/73470/How-the-troika-and-Piraeus-Bank-sealed-Cypruss-fate

I'm merely regurgitating press reports. Ironically, large parts of my last post were part of a documentary that ran last night on the French-German culture channel, ARTE.

Excellent stuff, but only available in French and German.

Wall of text incoming. Again.

Sorry. Again.

tl;dr:

Debt relief right away was proposed, was neccessary, and was skipped to protect the European financial system.



You are 100% correct, we both are as convinced as one can be that a disorderly collapse would have been much worse for Greece. Might have turned it into a failed state, if things went really bad.

But the situation in Greece at the time the Troika got involved suggested a textbook approach would work just fine. Greece was insolvent, no two ways about it. A debt restructuring, including a haircut, was required to stabilise the system. Yet it was decided against it, thereby creating an enormous debt bubble that keeps growing to this day, destabilising everything.

Why?

People in Brussels, Frankfurt and Berlin knew in May of 2010 that Greece cannot service its current debt, nevermind pay it back. I remember rather vividly how it was presented to us, as it stirred up a lot of dust in Germany. They pretended as if the problem was a shortage of liquidity, even though they knew it was in fact an insolvency. And to provide an insolvent nation with the largest credit in history (€110-130b) is... well, we can all pick our favorite in accordance to our own bias: madness, idiocy, incompetence, a mistake, intent. They threw Greece into permanent indebtedness(?), and also played one people against another. People in Germany were pissed, still are. Not at the decision makers, but the Greek people.

Again, why?

Every European government, pre-crisis, drank the Cool Aid of deregulation, particularly with regards to the financial sector. When the crisis hit, they had to bail out the banks, a very unpopular decision in Germany, given the scandalous way it was done (different story). Like I pointed out before, when Greece was done for, German banks were on the hook for €17b+, and the French for €20b+. So no haircut for Greek debt.

It gets even better. The entity most experienced in these matters is, of course, the IMF. But IMF couldn't get involved. Its own regulations demand debt to be sustainable for it to become involved in any debt restructuring. Strauss-Kahn had the rules changed in a very hush-hush manner (hidden in a 146 page document) to allow the IMF to lend vast sums to Greece, even though they knew it would not be payed back. Former EC members are on record saying the Strauss-Kahn decided to protect French banks this way as a part of his race for President in France. So they changed IMF rules and ignored European law to bail out German and French banks, using the insolvent Greek government as a proxy.

Several members of the IMF's board were in open opposition. The representatives of India, Russia, Brazil and Switzerland are on record, saying this would merely replace private with public financing, that it would be a rescue package for the private creditors rather than the Greek state. They spoke out in favor of negotiations of a debt relief.

And if that wasn't bad enough, there's an IMF email, dated March 25th, 2010, that was published by Roumeliotis, formerly IMF. They put it very bluntly:

"Greece is a relatively closed economy, and the fiscal contraction implied by this adjustment path, will cause a sharp contraction in domestic demand and an attendant deep recession, severely stretching the social fabric."

Even the IMF, who chose parameters according to their own ideology, thought the European program to be too severe. That's saying something.

All that is just about the initial decision. The implementation is another story entirely, with unelected and unaccountable bureaucrats telling a democratically elected government what to do. There are former Greek ministers on record, telling how Troika officials basically wrote legislation for them. Blackmail was common, bailout money held as leverage. The Memorandum of Understanding was to be followed to the letter, and the Troika program was as detailed as a government program, so they really had their hand in just about everything.

The specifics of the program are a discussion of their own, with all the corruption going on. The Lagarde list (2000+ Greek tax dodgers) was held in secret by order of an IMF official – that alone should trigger major investigations. The nationalisation and sell-off of the four largest Greek banks, or the no-bid sale of the Hellenikon area to a Greek oligarch – all enforced by Troika officials.

The haircut of 2012, ~€110b wiped out, came two years late. As a result, it didn't hit any German or French institutions in a serious way. Most of the debt was in the hands of these four largest Greek banks -- NBG, Piraeus, Euro, Alpha – who subsequently had to be recapitalised by Greece to the tune of €50b. Cut by 110, up by 50 right away. Banks were nationalised and shares later sold again, at 2/3 the price. Lost another €15b, because the Troika demanded the sale to appease the markets.

The legal aspects of all this are nightmare-inducing as well. They violated numerous European laws, side-tracked parliaments, used governmental decrees, etc.

Let me just say this: when they forced Cyprus to give away two banks' branches in Greece for a fraction of their worth, Cyprus lost €3.5b, at a GDP of €17b, and those two banks went belly-up. It was pure blackmail, do it or you're out. Piraeus Bank received those €3.5b, and its head honcho had €150m of personal bad credit wiped clean right then and there, all at the command of the Troika. Those €3.5b had to be taken from ordinary folks by "suspending" the deposit insurance, perhaps the most stupid decision they had made so far.

Why did they do it? Because Greece was more important than Cyprus, and Cypriot banks were involved in shady deals with Russian oligarchs. Still illegal, and massively so.

Edit: I cut my post in half and it's still too long.

@radx

Nothing really new I can say again in response.

It's natural that France and Germany being major decision makers in the eurozone will suggest bailouts that also help their own banks, no surprise at all. Witness the US's about turn post WWII from rebuilding Germany into a de-industrialised agricultural state to an industrial powerhouse to counter Soviet influence in about a year.

I think you have to look, not at Troika funding with or without pension cuts and the like, but with or without the funding. See my post above for what I think would happen in a disorderly collapse. I think honestly we can both be certain that the effect on output and unemployment would have been far worse in a disorderly collapse.

Like I said to oritteropo, I'm not debating that the IMF estimates were correct or even that the IMF has a particularly good history of reform (although you could certainly argue that Egypt, Jordan and Tunisia economically at least were successes). As far as low/middle class Greeks suffering, yes I agree it sucks. Most who risk being indicted for corruption are sure to have emigrated permanently to their vacation homes purchased on stolen money, but that doesn't unfortunately change the reality.

@oritteropo

There is a long history of Latin American currency crises which I would refer you to as examples of disorderly collapse. That Tsipras would break most of his electoral promises in his recent 4 month extension agreement should tell you that he knows how catastrophic it would be. You can't quantitatively approximate these kinds of events but qualitatively* (TYPO) the following is likely to occur:

1) Bank run - You saw significant withdrawals even leading up to the meeting with the Troika because of the possibility funding will abruptly stop. A stop to euro lending will see mass outflows with the expectation of bank collapse which will itself likely lead to the collapse of multiple banking institutions.

2) Foreign flows of currencies will dry up - Greek bond yields will spike, in effect no one will lend to the Greek government from overseas. Since like any economy, Greece needs to pay its public sector workers and requires foreign capital for imports, to preserve what it has, it will rapidly convert back to using the Drachma which it can issue and print/create. It is likely the banks will follow in turn and convert deposits to Drachma (another reason why people will withdraw money from banks as soon as they think euro support is over).

3) Drachma collapse - The Drachma will then depreciate rapidly. Again, the expectation of depreciation pretty much causes the depreciation. If people expect their currency to be worth less in the future, they will sell it, causing it to be worth less. Any existing savings accounts remaining will be decimated in value. Wages will fall drastically for everyone. Suddenly the cost of anything that relies on imported products (hint, a lot in any economy, especially Greece) will rise several-fold. This will lead to further job cuts, collapse of industries, which will precipitate further job loss, unemployment, output loss etc etc etc.

The tl;dr version of this is that government funding crises whether caused by debt or currency collapse in the first instance are self reinforcing and the consequences of an unmanaged collapse are all but guaranteed to be much worse than austerity but order. There is some evidence that countries who have a massive collapse and see their currency depreciate are then about to recover faster afterwards (a cheap currency boost exports, tourism etc) but the human toll is much more sudden and much more severe.

As far as IMF estimates being unrealistic, sure. All I'm arguing about is what is likely to happen and which outcome Greeks should prefer.

Sure Syriza has talked about the good kind of reform, but he's also promised the rest of what I talked about. None of which the Troika will let him do if he wants retain their funding. Anyone following this should have known he would not be allowed any of these promises he made in his election. Surely Tsipras himself knew this. It was either posturing/bluster or pure politics. Now the stability of his government is going to depend on how he can manage down his unrealistic expectations.

http://www.theguardian.com/world/2015/jan/28/alexis-tsipras-athens-lightning-speed-anti-austerity-policies

@RedSky

Ah, we've been down this road... I totally forgot, sorry.

Just briefly then: Greece fucked up prior to the crisis. Fudged numbers, corruption, banks run by the worst of the worst, economy exposed to exterior shocks, the works. They were hit hard when the crisis began, and it magnified the pre-existing conditions to a point where the entire thing became unstable.

When their banks finally admitted to being completely screwed, Greece was "motivated" to socialize the problem by bailing out the banks. If the Greek banks had gone bust, the German and French banks would have had to crawl back to Merkel and Sarkozy and beg for a bailout, only a year or so after they were bailed out the first time. Both governments would have been thrown out of office if they had bailed out the banks again, after swearing not to do it. So it was left to Greece to deal with the mess in a way that kept German and French banks out of it.

They did the same in Ireland, just like Bill Black testified before their parliamentary committee three weeks ago.

But the real mess, the social devastation, was primarily a result of "The Program". Some say it was the Greek government who enforced the measures, nobody told them to cut pensions in half. Well, the IMF still provides access to the Memorandum of Understanding, which clearly outlines just that. It was mandated by the troika and the Greek government went along all too willingly. As a result of the first troika program, GDP went down the toilet.

Anyway, the establishment in Greece is to blame for most of this, but the German/French banks (and their governments) are also to blame. Yet somehow, it is the lower/middle class in Greece who receive the punishment, and the lower/working class in Germany/Finland/Netherlands/etc who are expected to foot the bill this punishment causes for the entirety of Europe. Pisses me off to no end.