05 July 2015


Not only did the no vote win the referendum vote on further austerity for Greece, it absolutely crushed:
Greek voters gave their government a desperately needed victory Sunday in its showdown with European creditors as the country decisively rejected a bailout proposal that officials here had scorned as “blackmail.”

With nearly all of the votes counted, “no” had won a landslide 61 percent — a bigger figure than nearly anyone had predicted. The result sent thousands of government supporters streaming into central Athens’s Syntagma Square to wave blue-and-white Greek flags, dance to traditional folk songs, and revel in their collective defiance of dire European warnings.

But even as they celebrated, an angry reaction from European officials suggested that Greece’s profound economic struggles may be only beginning. With Greek banks on the verge of in­solvency, analysts immediately raised the odds that Greece will be ejected from the euro zone. Government opponents despaired that the country may have taken a dark turn.


Several top European officials suggested that there would be no new leeway for Greece, and that in fact the vote had made a deal less likely.

Germany’s deputy chancellor, Sigmar Gabriel, said Greece had “destroyed the last bridges across which Europe and Greece could have moved toward a compromise.”

“Tsipras and his government are leading the Greek people onto a path of bitter sacrifice and hopelessness,” he told the Berlin daily Der Tagesspiegel.

Julia Klöckner, deputy chairwoman of Germany’s ruling party, tweeted: “The E.U. is not a make-a-wish club in which a single member sets the rules and the others pay the bill.”
Nice words from the Krauts, but it is also a bald faced and pernicious lie, as the latest IMF report has revealed that the Troika has been negotiating in bad faith:
On July 2, the IMF released its analysis of whether Greek debt was sustainable or not. The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith. For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations.

As an international organization responsible for global financial stability, it is the IMF’s role to explain clearly and honestly the economic parameters of a bailout negotiation. The Greeks, many said, benefited from low interest rates and repayments stretched out over many years. Therefore, no debt relief was needed. But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.


The creditors’ serial errors are well documented, including by the staff of the IMF. Continuing deliberately to suppress past errors is an act of bad faith but continuing to repeat those errors in making future projections of the Greek debt burden is a willful abuse of the trust that the international community has placed in an organization set up to serve the best interests of all nations. If the IMF’s latest numbers are properly reconstructed, the Greek debt burden is much greater than portrayed—and the policy measures proposed to reduce that burden will make matters worse.


Here is how this principle applies today to Greece. Recall that prices in Greece have been falling for about two years now. Since debt repayment obligations do not change when businesses sell at lower prices or when wages fall, businesses and households struggle to repay their debt in that deflationary environment. Investment and consumption are held back, the government receives less revenue, making its debt repayment harder. If fiscal austerity is imposed in such a deflationary setting, prices and wages are forced down faster, making debt repayment even harder. This is Fisher’s debt-deflation cycle. Greece is in a debt-deflation cycle. It is the medical equivalent of a trauma patient: the blood flow does not stop on its own and, in such a condition, austerity is like asking the patient to run around the block to demonstrate good faith.

The IMF’s latest numbers bear out this diagnosis. In November 2012, the IMF tentatively concluded that Greek debt was borderline sustainable if it would undertake austerity to reduce its debt burden and structural reforms to spur growth. The primary surplus (the budget surplus without interest payments) was to rise from -1½ percent in 2012 to 4½ by 2016—an extraordinary additional austerity on top of the extraordinary austerity that had already been undertaken since 2010. The Greek government actually delivered on the austerity through 2014, bringing the primary budget in balance, as per the proposed timeline.

But look what happened along the way—and this is the debt deflation cycle. In 2012, prices were expected to be broadly stable over the coming years. Instead, prices fell by over 5 percent just in 2013 and 2014. True, it is important for Greek wages and prices to eventually fall. But because of the Irving Fisher theorem, when prices fall, the debt burden increases. To reduce the debt burden, Fisher says, not only must austerity stop, but the economy must be “reflated.” He emphasizes that it was President Franklin D. Roosevelt’s policy of reflation that ultimately stopped the Great Depression. In an analogy similar to the trauma patient, Fisher says that when tipped beyond a point, the boat continues to tilt further until it has capsized. In a deflationary economy, the bankruptcies and distress can go on in a vicious spiral for years.


We may not like the conclusion, but it is quite simple. Greece has not grown and prices have fallen because that was to be expected when persistent austerity is laid on top of an unsustainable debt. The debt-deflation spiral always outpaces the returns from structural reforms. As certainly as these things can be predicted, on the path set out by the creditors, the stakes will continue to be escalated: the debt-to-GDP ratio will continue to rise, the calls for more austerity will grow, and, as the pattern repeats, more debt relief will needed.
The IMF report is very specific, it says that Greece needs billions in debt forgiveness or the debt will remain unsustainable: (See also here)
The International Monetary Fund, a big Greek creditor, conceded a point on Thursday that the Athens government has long been making: Without some reduction in the country’s staggering debt load, Greece has little hope of a sustained economic recovery.

It was a significant acknowledgment, and an indication that if or when bailout negotiations resume, Greece might win some relief from its debt of 300 billion euros, or about $330 billion. It just might not be relief granted to the leftist government of Prime Minister Alexis Tsipras.
It should be noted that the EU bureaucracy aggressively tried to suppress this report:
Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece's debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday.

The document released in Washington on Thursday said Greece's public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

Publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.
This may be the reason for the lopsided vote: Any Greek voter who understood these dynamics could help but conclude that the Troika have no interest in Greece beyond making an example of the country.

My guess is that Germany, with the acquiescence of the EU bureaucracy, will attempt to expel Greece from the Euro Zone, since the alternative is to rip the mask off their attempt at regime change, but Greece could tie this up in legal proceedings for months, if not years:
“The Greek government will make use of all our legal rights,” proclaimed the finance minister, Yanis Varoufakis, according to The Daily Telegraph.
We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable.
But, can a hypothetical Grexit decision adopted by the EU institutions be legally challenged?


So, what decision would Greece be challenging? It would be a decision adopted by the EU institutions and the Eurogroup finance ministers to force a Greek exit of the eurozone due to its default on fulfilling the obligations attached to its participation in the monetary union (criteria laid down in Article 140.1 of the Treaty of the Function of the European Union) and the conditions attached to Greece’s bailout program.

Greece would then still be an EU member state but it will have to revert to the drachma or adopt a new currency. Nevertheless, as mentioned, there is no explicit legal basis for such a decision. One can argue that the failure to fulfil the eurozone commitments would amount to a serious violation of the founding treaties, and that it is possible to adopt the decision based on the principles embodied in the treaties. But the fact is that the treaties would need to be amended in order to provide for this.
I would note that throughout all of this, someone is spreading a rumor that the Greek government is working on a program of depositor bail-ins, where depositor accounts would be raided to pay off the EU lenders, as happened in Cyprus.  (My money is that these rumors are coming from Brussels)

One hopes that the confluence of all these events will result in something other than the moral and economic bankruptcy that we have seen from the EU, IMF, and Germany, but I doubt it.

*Greek for no.


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