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

!!!

And yet, it's George Papaconstantinou in court, over that exact Lagarde list, and not Virvidakis.

Something which is often stated as fact is that if you try to tax the rich, they will up and leave. Well, maybe a few would, but most people are more settled than that. I think there is some chance we will get the question answered in Greece some time in the near future. I somehow don't see Varoufakis removing any names from the list... relatives or otherwise.

That video does reflect rather well on the new President of the Greek Parliament, doesn't it

Democracy in Greece, post-crisis, pre-Syriza:

https://www.youtube.com/watch?v=-AgwDfzZp6E

The one MP in opposition during this clip is now President of the Greek Parliament. She's also on record about the Lagarde list of 2062 Greek tax dodgers, 6(!) of whom were checked up on. The list was handed over in 2010, and it has been held under wraps at the bidding of the IMF.

@radx

As I mentioned in our previous conversations, my expectation is that once significant structural reform goes through, all the things I talked about before - much of the debt will be forgiven to speed up recovery for Greece and the rest of Europe. If that's not the case, then I agree that the policy was misguided. But it's the whole issue of trust again. Debt forgiveness certainly won't come before the fact, especially when a country like Germany is the main decision maker.

Putting that in perspective, I still think Merkel is broadly making the politically realistic best of a bad situation. I mean Merkel herself, from what I have read, is facing not insignificant opposition from a euro-skeptic right. Suppose she were more bold in funding Greece, was thrown out of office, and the policy abruptly reversed, what would that accomplish?

I can't speak to the specifics, but all those examples you mention of corruption and/or bad policy throughout the austerity process do not sound good. I have no doubt there were instances of malpractice or favoritism, and I hope if they are credible, they are investigated. I can only really argue on the merits of the broad intentions of the policy.

I would agree that the general attitude towards the Greeks being lazy and reaping what they sowed is unjustified. As an example, public sector workers did enjoy unjustified job security and there was a generously low retirement age compared to the rest of Europe. But much of the population didn't benefit from that early retirement or work in the public sector. From memory, actually measures like hours worked per capita were roughly in line or higher than the rest of Europe.

But unfortunately the brunt of the repercussions are borne by the populace who at best are responsible for not demanding more from their politicians because like mentioned before, the beneficiaries have emigrated and squirreled their ill gotten money away.

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.

Part of me feels like there is an increasingly thin veneer over all of these discussions about what this or that group says will or can happen. People are getting pissed off in my own country about how things are being run, so i can't begin to imagine what that must be like in Greece.

The Greeks have basically been told for a long time that their country is in trouble and they need to work hard to fix it. They get help and told they need to work hard to repay it. The average Greek adult goes out every day and puts in a hard shift. They see no reason why all the effort they're putting in at work and all the tax they pay is falling into a big hole and not making the hole any smaller, whilst austerity measures are making every other aspect of their life more difficult too.

The people have said what they want, how far can you push them exactly, from behind a desk? Austerity has hurt them and made them worse off, completely missed its aims. Now they're being asked to take more of it. If they can't let the Greek people see any light at the end of the tunnel, they're gonna end up with an angry mob on their hands.

@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

@oritteropo

There are analyses floating around by just about every major player. A majority seems to agree that it would be manageable for the Eurozone and better for Greece. Others, including Varoufakis, argue that Grexit would destablize the Eurozone and be a catastrophe for Greece. Too many variables, too many vested interests... who knows what would happen.

The projections on the other hand were a hoot. What a joke they were.

What was the fiscal multiplier in their initial projections? Something along the lines of 0.75, right? Reduce public spending by a Euro and the economy contracts by just 75 cents. Too bad it turned out to be at least 2.5, probably even far more during certain phases. Ricardian equivalence, my ass.

Here is the IMF outlook of 2010. Bill Mitchell made a nice table for comparison. They did a crackerjack job, didn't they.

IMF research admitted their mistake in 2012, but the policy department doesn't seem to care. Shouldn't come as a suprise to anyone, given the role the IMF played in the application of the shock doctrine all over the world in the last decades. Chicago School of Economics, all the way.

If I look at the list of countries that were ruined by the IMF through policy advisory and loans with strings attached, I wonder just how they still manage to paint Syriza as the ones lacking credibility. Is it because they lack the experience of destroying an economy?

Yet with all that in mind, the Greeks actually prefer the IMF as a partner if the alternative is German officials. How depressing for me as a German.

Remember what Christine Lagarde said about Greece in 2012? The Grauniad still has the goods. Or how she argued for expansionary austerity in 2010? Krugman, to his credit, made fun of the concept back then, but even he severly underestimated just how willing these people are to turn this stuff into policy.

But still preferrable to German officials. Ouch.

@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.

It's a bit hard to say whether the fabled Grexit would have been more damaging than The Austerity, has anyone actually done the calculations?

What we can see, fairly clearly, is that the projected outcome of The Austerity by the Austerity freaks has been completely the opposite of what actually happened. Somewhere there was a nice graph showing projected growth vs actual, but the summary is that where they projected growth in year 4, in actual fact the Greek economy actually just kept contracting. (@radx, did you see the graph?)

The reports I saw of the reform proposals were exactly what you suggest, a credible plan to tackle corruption and to use some of the savings to fund social programs and tackle the humanitarian crisis caused by The Austerity. The Grauniad summarised reactions to the proposal as a sensible compromise between the Greek government’s promises and the demands of its creditors.

You are absolutely right, the results of elections in Greece do not create an obligation for fiscal transfers from other European countries.

But that plays right into what Varoufakis has been saying for years, doesn't it? The program over the last seven years has reduced Greek output by a quarter, and thereby its ability to service and reduce its debt. The troika is offering more loans, loans that cannot be payed back, in return for a further reduction in Greece's ability to pay back those loans in the first place. Extend and pretend, all the way. Nevermind the humanitarian cost or the threat to democracy itself.

It is either counter-productive or aimed at a different goal entirely. Greece wants an end to those loans, and all the loss of sovereignty that comes with it, while the Eurogroup in particular wants to stick to a program that only increased Greece's dependency to a point where they can throw the entire country into unbearable misery at a moment's notice (e.g. cut ELA access).

Take the privatisation demands as an example. The program demands that Greece agrees to sell specific property at a specific price. Both parties are keenly aware that this price cannot be realised during a fire sale, yet they still demand a promise by the Greeks to do so. Any promise would be a lie and everyone knows it.

Same for the demanded specificity of Greece's plans. After decades of nepotism, a fresh government made up entirely of outsiders is supposed to draw up plans of more detail than any previous government came up with. And they cannot even rely on the bureaucracy, given that a great number of people in it are part of the nepotic system they are trying to undo in the first place.

Taxes, same thing. The first king of Greece (1832'ish) was a prince of Bavaria who was accompanied by his own staff of finance experts, and they failed miserably. Greece went through occupation, military junta and decades of nepotism, and the new government is supposed to fix that within months.

Those demands cannot be met. The Greeks know it, the troika knows it, the Eurogroup knows it.

Zizek called it the superego in his recent piece on Syriza/Greece:

"The ongoing EU pressure on Greece to implement austerity measures fits perfectly what psychoanalysis calls the superego. The superego is not an ethical agency proper, but a sadistic agent, which bombards the subject with impossible demands, obscenely enjoying the subject’s failure to comply with them. The paradox of the superego is that, as Freud saw clearly, the more we obey its demands, the more we feel guilty. Imagine a vicious teacher who assigns his pupils impossible tasks, and then sadistically jeers when he sees their anxiety and panic. This is what is so terribly wrong with the EU demands/commands: they do not even give Greece a chance – Greek failure is part of the game."

Aside from all that, the entire continent is in a recession. Not enough demand, not enough investment, unsustainable levels of unemployment. Greece was hit hardest, Greece was hit first. It's not the cause of the problem, it is the canary in the coal mine. And Italy is already looking very shaky...

I think the last sentence said it all...
"If we 'come on common ground' (meaning Greece accepts the inflexible terms the EU sets) Europe is ready to help and support the Greek Authorities."

The obvious implication being- if they don't "come on common ground", Europe is not willing to help...so the Greeks can't go ahead with the plans the Greeks voted for and stay in the EU.
I'm not sure why it's so hard to state it simply for some people, it seems clear.

How indeed.

Draghi's ECB has just made a move and I don't understand why. Come Feb 11th, they will no longer accept Greek bonds as collateral, effectively cutting off one of Greece's last two sources of credit. What remains is the Emergency Liquidity Assistance (ELA) provided to the Greek Central Bank, through which the entire banking system must now get most of its credit.

Why did they do it? Why now? I don't think it has something to do with the Advocate Generals opinion piece the other day, declaring the ECB's membership in the troika to be a conflict of interest and that fiscal policy is not to be used as a tool to influence poltical decision-making.

Could it be pure idiocy like the time they pulled to plug on Cyprus only to backpeddle shortly after? Or might they be trying to force a move on part of Germany and Greece? "Stop messing around and get your ducks in a row NOW." -- that sorta thing? Is it mere posturing of sorts, a shot across the bow of Greece?

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Edit #1

I really don't like this. It looks like disaster, smells like disaster and tastes like disaster. And it's entirely too close for comfort. Are they truly going to turn Greece into a failed-state over principle? The way they casually discuss the lives of nearly 11 million people, and the future of the European Union as well, is bone-chilling.
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In the meantime, Schäuble's meeting with Varoufakis went just as expected, reports indicate. Schäuble won't budge a bit. Negotiations with the troika are mandatory, and fiscal waterboarding must be resumed at once. There will be no compromise, not with him in charge. He'll push Greece off the cliff without blinking even once. Convictions worthy of a Templar, that one. Worth remembering that he admitted taking 100k in bribes from an arms dealer in '94 and still managed to become Minister of Finance. A living legend, just not the kind I'd prefer.

With regards to hyperinflation, most folks over here seem to have forgotten, or maybe they never learned, that Chancellor Brüning's austerity regime led to deflation in 1930-32, pushing unemployment to 23%. What followed was a massive influx in membership and infuence for parties at both ends of the political spectrum, similar to Greece. Except in our case, it wasn't the left (KPD) who won the elections in '32...

@RedSky

Selling assets and, to a certain degree, the reduction of public employment is an unreasonable demand. There's too much controversy about the effects it has, with me being clearly biased to one side.

Privatisation of essential services (healthcare, public transport, electricity, water) is being opposed or even undone in significant parts of Europe, since it generally came with worse service at much higher costs and no accountability whatsoever. Therefore I see it as very reasonable for Syriza to stop the privatisation of their electricity grid and their railroad. There are, of course, unessentials that might be handed over to the private sector, but like Varoufakis said, not in the shape of a fire sale within a crisis. That'll only profit the usual scavengers, not the people.

Similarly, public employment. There's good public employment (essential services, administration) and "bad" public employment. Troika demands included the firing of cleaning personnel, who were replaced by a significantly more expensive private service. And a Greek court decision ruled the firing as flat out illegal. For Syriza to not hire them back would not only have been unreasonable financially as well as socially, it would have been a violation of a court order. Same for thousands of others who were fired illegally, according to a ruling by the Greek Supreme Court.

Troika demands are all too often against Greek or even European law, and while the previous governments were fine with being criminals, Syriza might actually be inclined to uphold the law.


On the issue of reforms, I would argue that the previous governments did bugger all to establish working institutions. Famously, the posts of department heads of the tax collection agency were auctioned for money, even under the last government. Everything is in shambles, with no intent of changing anything that would have undermined the nepotic rules of the five families. Syriza's program has been very clear about the changes they plan to institute, so if it really was the intent of the troika to see meaningful reform the way it is being advocated to their folks at home, they would be in support of Syriza.

Interventions by the troika have crashed the health care system, the educational system and the pension system. Public pension funds were practically wiped out during the first haircut in 2012, creating a hole of about 20 billion Euros in the next five years.

I would like to address the issue of taxation specifically. Luxembourg adopted as a business model to be an enabler of tax evasion, even worse than Switzerland. In charge at that time was none other than Jean-Claude Juncker, who was just elected President of the European Commission. He's directly involved in tax evasion on a scale of hundreds of billions of Euros every year. How is the troika to have any credibility in this matter with him in charge?

Similarly, German politicians are particularly vocal about corruption and bribery in Greece. Well, who are the biggest sources of bribery in Greece? German corporations. Just last week there was another report of a major German arms manufacturer who paid outrageous bribes to officials in Greece. As much as I support the fight against corruption and bribery, some humility would suit them well.


As for the GDP growth in Greece: I think it's a fluke. The deflation skewers the numbers to a point where I can't take them seriously until the complete dataset is available. Might be growth, might not be. Definatly not enough to fight off a humanitarian crisis.

Surpluses. If everyone was a zealous as Germany, the deficit would in fact be considerably narrower, which is a good thing. Unfortunatly, it would have been a race to the bottom. Germany could only suppress wage growth, and subsequently domestic demand, so radically, because the other members of the Eurozone were eager to expand. They ran higher-than-average growth, which allowed Germany to undercut them without going into deflation. Nowadays, Germany still has below-target wage growth, so the only way for Greece, Spain, Portugal and Italy to gain competetiveness against Germany is to go into deflation. That's where we are in Europe: half a continent in deflation. With all its side effects of mass unemployment (11%+ in Europe, after lots of trickery), falling demand, falling investment, etc. Not good. Keynes' idea of an International Clearing Union might work better, especially since we already use similar concepts within nations to balance regions.

Bond yields of Germany could not have spiked at the same time as those of the rest of the Eurozone. The legal requirements for pension funds, insurance funds, etc demand a high percentage of safe bonds, and when the peripheral countries were declared unsafe, they had nowhere to go but Germany. Also, a bet against France is quite a risk, but a bet against Germany is downright foolish. Still, supply of safe bonds is tight right now, given the cuts all over the place. French yields are at historic lows, German yield is negative. Even Italian and Spanish yields were in the green as soon as Draghi said the ECB would do whatever it takes.

The current spike in Greek yields strikes me as a bet that there will be a face-off between the troika and Greece, with very few positive outcomes for the Greek economy in the short run.

QE: 100% agreement. Fistful of cash to citizens would not have solved any of the core issues of the Eurozone (highly unequal ULCs, systemic tax evasion, tax competition/undercutting, no European institutions, etc), but it would have been infinitely better than anything they did. If they were to put it on the table right now as a means to combat deflation, I'd say go for it. Take the helicopters airborne, as long as it's bottom-up and not trickle-down. Though to reliably increase inflation there would have to be widescale increases in wages. Not going to happen. Maybe if Podemos wins in Spain later his year.

Same for the last paragraph. The ECB could have stuffed the EIB to the brim, which in return could have funded highly beneficial and much needed projects, like a proper European electricity grid. Won't happen though. Debt is bad, even monetised debt during a deflation used purely for investments.