Obviously, my analysis of the Greek debt crisis was wrong. My crucial error was the assumption that, having held the referendum and being faced with an unacceptable offer, Tsipras would choose exit from the euro rather than capitulation. Judging by this interview with Varoufakis (H/T Chris), that’s what Tsipras thought too, until, too late, Varoufakis told him it couldn’t be done. Certainly Tsipras’ actions were consistent with that interpretation.

Syriza has clearly been beaten. But I doubt that the outcome will work well for the other side in the long run. (Nearly) everyone understands that the debt can’t ultimately be repaid. But the German voting public hasn’t been told that. A deal that had some kind of quasi-automatic mechanism for writing down the outstanding balance (for example, by multiplying up the proceeds from asset sales) might have got around this problem. As it is, an explicit writedown will be needed at some point, presumably after Syriza has been forced out of office. That will be incredibly unpopular in Germany, while making clear to everyone else the locus of sovereignty in the post-crisis EU.

Update Commenters generally disagree with my take on the Varoufakis interview. I’m not wedded to it. The crucial point is that exit from the euro is extremely difficult, and that this fact will be used to punish any eurozone country that tries to resist the controlling powers.

111 thoughts on “Bluffed

  1. @Ikonoclast

    The post is #3, p2, thread “Backing down….”

    You will find, among other information, small countries in terms of population size have a proportionately higher voting right.

    How does this fit into you priors about democracy?

    Would you agree if a ‘radical idiot’ from say Queensland would try to break international treaties between Australia and other countries? Takes this as a rhetorical question.

  2. Ikon (and others),

    I have just watched this documentary, “Trail Of The Troika” and I highly recommend it as an aid to understanding the whole Greek issue we have been discussing – especially in the context of the complex (convoluted? corrupt?) web of EU/EuroGroup/ECB/EC etc… “governance”.

    It’s 1:30 minutes, but worth settling in for. Spoiler: the problem is almost entirely to do with an ideology.

  3. John, your take on the Varoufakis interview effectively blames Varoufakis for Tsipras’ capitulation because the finance minister didn’t tell Tsipras “until too late [that Grexit] couldn’t be done.” But the other reading of the interview—and almost certainly the one Varoufakis wanted to convey—is that the pivotal political mistake was that the cabinet voted against Varoufakis’ “triptych” plan: “We should issue our own IOUs, or even at least announce that we’re going to issue our own euro-denominated liquidity; we should haircut the Greek 2012 bonds that the ECB held, or announce we were going to do it; and we should take control of the Bank of Greece.” This “aggressive move of incredible potency” was voted down 6-2, leading to Varoufakis’ resignation and Tsipras capitulation. This is a classic case of a brilliant political partnership breaking down over tactics, or even, if you like, strategy. Syriza was never going to choose Grexit, they ALWAYS said that.

  4. The video posted by Megan has a few interesting details but, except for the comments made by the gentleman from Dublin toward the end, misses the major problems.

    To see what I mean, compare Australia’s position in the GFC to that of the countries listed.
    Australia had essentially no government debt and therefore plenty of room for deficit financed policy responses. Australia acted accordingly. Australia’s banking sector was more stringently regulated and none of its major banks (with the possible exception of MacBank) were part of the proverbial Wall Street Bankers. None of them needed to be bailed out. The government measures taken (guarantee of deposits, small relative to the size of some international billionairs funds) were aimed at preventing a bank run. Again well managed. A somewhat mixed blessing was the mining boom. Mixed because clearly the government’s revenue was predictably ‘safe’ but due to the implications for the exchange rate, the manufactoring sector lost out. The Rudd-Gillard government(s) reduced the race to the bottom regarding income inequality by getting rid of individually negotiated contracts introduced by the Howard government. Finally, and this is perhaps one of the most important elements in why Australia is so different, there is strong opposition from the public to letting wealth inequality get out of hand (‘cut down the tall popy’, ‘fair go’, ‘fair dikum’ are symbolic phrases). Evidence the public objection to the May 2014 budget, the outrage about the relevations of ICAC (how oligarchs develop). Straight and blunt talk may also help. And not to foreget, on a per capita basis, Australia is one of the richest countries in the world due to a relatively small population owning – privately or via the Crown – the absolutely biggest part of a continent. On the negative side, the public-private-partnership arrangements for infrastructure (toll roads, privatisation of airports….), discussed over time by JQ on this blogsite in terms of financial implications, shows up in other respects. For example the road usage fees (tolls) in Sydney cause a financial blockage for low income earners from the western parts of the metropolitan area where housing is cheaper. Foreign investment in real estate (15-16% of transactions in Sydney), negative gearing and capital gains tax concessions in real estate affect the wealth distribution of a non-negligible fraction of the total population (Sydney + Melbourne/ All of Australia). Cutting the top income tax rate before raising the tax free level is another one. So, things aren’t quite as people want it. But there is no ‘crisis’. Things can be mended without major ruptions.

    If I understand correctly, the EUROzone countries are individually responsible for their banking sector. What did they do?

    The video does not provide comparative information on this point.

    What does Prof Krugman and Varoufakis have to say on the role played by non-EU banks to bring about the GFC? Where is Goldman-Sachs mentioned?

    Yes, the video is a documentary but it does not tell the whole story. Indeed, it misses the major sources of the crises. JQ’s threads during the past 8-10 years provide a much more informative picture of ‘financial capitalism’ and neo-liberalism than this video. IMO.

  5. @Ernestine Gross

    Why ignore private debt?

    Let us look at some numbers. I say everything is “about” because I am reading off graphs where it is hard to get a number accurate to the final digit.

    Australia: Private debt/GDP ratio at time of GFC = 155% (about)
    Public debt/GDP ratio at time of GFC = 0% or even less (about).

    Greece: Private debt/GDP ratio at time of GFC = 115% (about) * See Note.
    Public debt/GDP ratio at time of GFC = 105% (about).

    * The only figure I could find for this was “Domestic credit to private sector” so this might not be a useful or comparable number. I don’t know what the above numbers might be telling us in themselves.

    Here is where I don’t have enough grounding in even basic national and international accounting. I wonder what number really accounts for the trouble a nation might have with total debt? I imagine that total debt (public and private debt) all counts in adding up to a problem for the nation if the debt is excessive. If they owe the money among themselves there is no net debt in the nation. (This could still cause problems for other reasons but there is no international problem per se.) If they owe foreign debt it becomes an issue.

    Surely, the key number for the nation is net private foreign debt plus net public foreign debt. All of this debt is what will cause a need to “export” money capital to pay off the debt; meaning in turn less money for imported goods and services and less money for domestic goods and services. The result of having a lot of net foreign private debt plus net public foreign debt to be paid down would be domestic recession or depression unless that net foreign debt had been invested in productive assets and the production was able to pay, or more than able to pay, the net foreign debt.

    I think it is disingenuous to talk only about public debt without bringing in these other factors.

    Forbes has an interesting but too short article on this;

    “Greece’s Net Debt Is 18% of GDP, Not 175%. What’s Germany’s?”

    Forbes and others allege that the Eurozone does not calculate its accounts correctly. Now, I don’t know the details of this but it’s food for thought. Follow the link in the Forbes article.

    The IMF is also saying that the current Greek debt deal is unlikely to work. The IMF seems to have split from the ECB and EC part of the Troika.

    This paper is worth reading too:

    Seven Myths about the Greek Debt Crisis – Stergios Skaperdas, Department of Economics, University of California, Irvine October 28, 2011 Modified on October 31, 2011.

    In particular he points out it is not a “rescue” of Greece. It is a rescue of the creditors.

    There is plenty of varied opinion and dissent out there about what is going on. We can be sure that the official EU position is propaganda and that their policies are wrong. The IMF rupture proves that now.

  6. Ernestine, please tone it down. If you don’t like Ikonoklast’s rants, there’s no need to read or reply to them.

  7. @Ernestine Gross

    If Greece’s public debt was doubled in the manner described (and I don’t doubt it) then the debt is what is known as odious debt.

    “In international law, odious debt, also known as illegitimate debt, is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.” – Wikipedia.

    Various arguments could turn on what is meant by “regime”. In older usage it simply means the the form of government. In modern usage the term often has a negative connotation, implying an authoritarian government or dictatorship. In any case, the derivative deal(s) can be seen in hindsight to be highly deceptive on the side of Goldman-Sachs and the Greek government of the day can be seen to have been duplicitous and undemocratic in the sense of not being open and accountable to its people (and to the EU).

    All of this serves to illustrate that the debt is odious debt and ought not be paid. Greece and/or the EBB should default.

    My question is this. Who now are the creditors who hold this debt particularly the doubled portion of Greece’s debt? Did they directly and knowingly participate in these derivative deals? Or were they fooled like Greece?

    It seems plain to me that Greece should default on the odious debt and the creditors should sue Goldman-Sachs and any other culpable private enterprise parties.

    When one looks at the total lineup of who Greece owes money to a number of things are plain;

    (1) This problem had and has ramifications and tentacles everywhere in global finance.
    (2) Goldman-Sachs and the Greek government are clearly culpable.
    (3) It is also clear that culpability does not end with those two parties.

    The creation of the debt is not Germany’s fault in any way I can see. The ECB on the other hand needed better oversight of what was going on. Why couldn’t they discover some of these problems earlier with forensic accounting ? I have alluded to this aspect before.

    The governing bodies EU, EC, ECB not only failed to detect the problem in time and act, they have, since they started acting, acted in the wrong manner, to whit, with austerity economics.

    There are also faults in the Eurozone setup, namely that it is not an OCA (optimal currency area), it has, in the judgement of many, a democratic deficit and it does not have rules and guidelines which would permit certain necessary operations (like fiscal transfers in a true federation and/or orderly temporary or permanent exit for a nation in difficulties like Greece.

    I consider the above balanced. What is not balanced is to seek to blame the entire crisis on Goldman-Sachs operations (financially “morally criminal” though they were) when the systemic problems in both global financial capital and the EU governance go much wider and deeper.

  8. To finish off with a news item appropriate for the heading of the thread:

    “Krugman told CNN Sunday that he may have “overestimated the competence of the Greek government.”

    “(The Greek government) thought they could simply demand better terms without having any backup plan,” he told the news channel in an interview. “So, certainly this is a shock.”

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