Today, I am back in Greece. Yesterday, there was a confidential in-house “Staff Note” leaked from the Institute of International Finance, which purported to estimate the costs of a disorderly default on Greek government debt. Most of the paper was about ECB and related “contingent liabilities” which summed to around €1 trillion. However, once you understand the nature of those “contingent liabilities” in the context of the capacity of the ECB as the currency-issuer in the EMU and compare them with the real losses being endured by the Greek economy and its people, then you soon realise that the Greek government should reintroduce its own currency immediately. The European elites, however, are too busy playing Sudoku to appreciate that, ultimately, their ideologically-motivated austerity will not only impoverish Greece, but will also cause their whole monetary system to collapse.
The German Bild Magazine reported in its article (February 29, 2012) – Schäubles Sudoku-Szene hat Nachspiel für ARD – that the German public broadcasting network ARD was rebuked (RÜFFEL FÜR DIE ARD) for capturing the game-playing finance minister.
Doch diese Indiskretion des Kameramanns hat für die ARD ein Nachspiel!
Nach BILD-Informationen meldete sich das Bundestagspräsidium beim Sender und verwies auf die Hausordnung. Darin heißt es: „Die unautorisierte Ablichtung persönlicher Unterlagen in der Weise, dass diese lesbar sind, ist untersagt.“
Der Sender stimmte zu, die Szene nicht mehr zu zeigen und löschte sie sogar von seiner Internet-Seite.
The debate in the Bundestag was about the Greek bailout. The Finance minister was caught by ARD during the debate.
Apparently, a spokesperson for his office claimed that (Source):
… he was taking a well-deserved break from normal duties
One of his coalition partners said that “It never hurts to do brainteasers. However, you should ask yourself when the timing is appropriate”.
In the aftermath, the German government told ARD it was against the House rules to film such things: “The unauthorized photocopying of personal documents in a way that it is readable, is prohibited.” As a result, ARD was ordered to delete all material relating to this incident from its WWW-site.
You can see the YouTube video of a very sneaky finance minister – HERE.
The Bild article says that tablet computers are allowed in the Bundestag (“Einen Tablet-Computer zu benutzen, auch am Rednerpult, ist erlaubt”) but laptops are not (“Laptops zu benutzen”). Among other things banned in the German parliament is “unwürdige Kleidung (z.B. Shorts)” (undignified clothing, for example, shorts).
Meanwhile, Bloomberg article (March 2, 2012) – Troika to Have Permanent Presence in Greece, Wieser Tells Format – reported that Greece will now be an occupied state. The Austrian head of the Eurogroup Working Group, one Thomas Wieser told a journalist that:
A permanent presence of the troika on site to monitor the reforms will definitely be the case for several years …
But the real clincher was that Wieser was reported as saying that Greece will have to wait until the middle of this century before:
…. growth will “speed up” …
So in the meantime the Greeks might as well get their iPads out and play Sudoku!
This reminds me of something I read in the past. Chicago monetarist Milton Friedman was asked during the high unemployment in the 1970s how long it would take for unemployment to fall back to its so-called (mythical) natural rate if central banks embraced his dis-inflation recommendations. He said about 15 years. So 10 or more percent unemployment was expected for 15 years … as the way in which the mainstream models of self-correction work.
I guess the unemployed can also play Suduko given that their unemployment benefits allow them to luxuriate in material splendour!
A Greek friend sent me some factual data from his reading of one newspaper in Greece yesterday for consideration. Here it is (thanks Vassilis). Other than the comments by Mr Wieser, which as you would expect attracted wide coverage in Greece consider the following articles.
The Greek-edition of Kathimerini published an article (March 6, 2012) – Γραμμή βοήθειας για την κατάθλιψη (Helpline for depression) – which details the descent in mental illness in Greece as a result of the crisis.
It tells us that the helpline for depressed or suicidal people received 40 per cent more calls in 2011 than in 2010. The situation is the same in the general helpline.
According to its operators, people calling to seek advice and information on elementary survival issues, like getting good or shelter, has increased from 2 per cent in 2010 to 4.6 per cent in 2011. And the percentage of people calling to seek advice on basic health and insurance issues rose from 11.5 per cent to 19.6 per cent. The population proportions understate the true situation because only a small portion of the desperate or destitute Greeks seek help in this way.
From the Ekathimerini article (March 6, 2012) – Hostage-taker at northern Greece factory surrenders – we read that:
A man who stormed a plastics factory in northern Greece from which he had been fired, shooting and wounding three people and taking another two hostage, surrendered to police around 1 a.m. on Friday morning.
Apparently, the mainstream press has already started smearing the hostage taker because he was about to get married for the third time.
I particularly liked this story in Ekathimerini (March 6, 2012) – To reach reforms, don’t take a cab – which bears on the consistency of those who are arguing for widespread “structural” reforms in Greece based on their claim that the country is crippled because it is non-competitive.
The press story reports on the recent OECD article (February 24, 2012) – Structural reforms can make the difference as countries rebound from crisis. The article summarises the findings in the Going for Growth report.
The OECD claim that the:
… that the pace of reform has accelerated where it is needed most – in the European countries hardest hit by the sovereign debt crisis, including Greece, Ireland, Portugal and most recently, Spain and Italy.
The Kathimerini article notes that according the OECD “Greece is a world leader in structural reforms” but it still has “lot of catching up to do”:
But while the article says that some of the reforms “make absolute sense” the plethora of reforms demanded by the Troika are questionable.
They consider the “liberalization of dozens of closed professions” and show that in certain occupations the reforms make no sense at all.
As an example, they consider taxis:
Greece has been agonizing for more than a year over how to open up this sector. Plans for total liberalization have been drawn up, agreed and then scrapped in favor of a watered-down version. There is something disconcerting about the fact that the limited number of cab licenses issued by the government meant these pieces of paper became a tradable commodity, which turned some cabbies into investors rather than drivers.
But then they cite a recent Financial Times article which likens the design of the taxi industry in Greece to that which operates in New York. We read that the taxi industry in:
… that symbol of free market, capitalist culture … [New York] … does things pretty much the way they’re done in Greece.
The New York system of licensing is replicated throughout the world.
The point is obvious – selective treatment – “Given that Athens and New York, which is not known for its aversion to the market, operate similar systems for taxi licenses, isn’t it odd that there has been so much pressure for Greece to free up this profession?”
And finally, this article (March 5, 2012) – Value of properties auctioned soared to 4.5 billion euros recounts that forced real estate sales are rising (“(c)onfiscations of properties more than doubled within three years” and “the combined value of bouncing checks and unpaid bills of exchange” has soared – up by 15 per cent in 2011).
Then there was this leaked (confidential report) from the Institute of International Finance – Implications of a Disorderly Greek Default and Euro Exit (1.3 mbs – thanks to Jared for text version). You can also read it at HERE but you are unable to download it.
The IIS Staff Note says that if there was “a disorderly default on Greek government debt … would impose significant further damage, already beleaguered Greek economy racing serious social costs.”
And apart from saying that the “most obvious immediate spillover … that it would put a major question market against the quality of a sizeable amount of Greek private sector liabilities”, the IIS report is about the “official sector in the rest of the Euro area”.
They outlined a series of “contingent liabilities” which they say would not exceed €1 trillion.
These “contingent liabilities” include “direct losses on Greek debt holdings (€73 billion)”, “sizeable potential losses by the ECB (€177 billion)”, “likely need to provide substantial additional support to both Portugal and Ireland … Spain and Italy (€730 billion)”, “sizeable bank recapitalisation costs (€160 billion)”, “lost tax revenues from weaker Euro Area growth”, ” lower tax revenues resulting from lower global growth”.
When you actually examine these “costs” and understand the nature of them, then the conclusion you might draw is that, given the scale of real damage being done in Greece by the fiscal austerity, these contingent liabilities are not of the same scale.
The IIS Staff Note thinks that the most profound issue relates to “increased involvement of the ECB in supporting the euro area financial system” which “would lead to significant losses and strains on the ECB itself” and the Greek government defaulted in a disorderly fashion.
They claim that:
When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exhort of Greece from the Euro Area, this financial shock to the ECB could raise significant stability issues about the monetary union.
If the “financial shock to the ECB” is all that they are worried about, then they are not worried about very much.
The ECB is the currency-issuer of the Euro. It can never run out of Euros.
Willem Buiter noted in his 2008 Discussion Paper – Can Central Banks Go Broke? – that in “the usual nation state setting” there is a unique “national fiscal authority” (treasury) which “stands behind a single national central bank”. He concludes in this situation that:
There can be no doubt … the fiscal authorities are, from a technical, administrative and economic management point of view, capable of extracting and transferring to the central bank the resources required to ensure capital adequacy of the central bank should the central bank suffer a severe depletion of capital in the performance of its lender of last resort and market maker of last resort functions.
Does this mean that central banks cannot go broke? Answer: no.
Willem Buiter provides the qualification that is essential:
… the central bank can always bail out any entity – including itself – through the issuance of base money – if the entity’s liabilities are denominated in domestic current and nominally denominated (that is, not index-linked). If the liabilities of the entity in question are foreign-currency-denominated or index-linked, a bail-out by the central bank may not be possible.
Which is the standard Modern Monetary Theory (MMT) definition of a risk-free sovereign government – one that only issues liabilities in its own currency. If the consolidated government sector – the central bank and the treasury – issue liabilities (for example, take on debt) – that is denominated in a foreign currency, then insolvency becomes a possibility.
What about the Eurozone, where there is no fiscal authority? In the Eurozone, the pecking order is that the member state treasuries are deemed to guarantee their own national central banks which “own” the ECB and which provide lender of last resort facilities to their own banking systems. There is no fiscal authority backing the ECB but despite all the legal niceties (complexities) involved in how the national central banks might carry out their lender of last resort duties, the reality is that the ECB is the ultimate lender of last resort in the EMU
The other point to note (which is made by Buiter) is that it :
… is not necessarily the case that a central bank goes bankrupt even if its equity capital is completely depleted by its engagement in unorthodox monetary policies. The reason is that there are differences between central banks and commercial banks and a static visual inspection of the central bank balance sheet does not convey a complete picture.
Why is that?
Consider the US Federal Reserve which could easily buy all the outstanding US federal government if it wanted to and if the Federal Reserve lost capital it could simply issue new currency to replenish it.
The same logic goes for the ECB – it alone creates the Euro currency. It can never go bankrupt.
While the mainstream economists would consider this to be dangerously inflationary if the central bank acted in this way the point is that at least that observation (erroneous or not) takes the debate beyond the inane level of insolvency.
So the argument that the the argument that the ECB is exposing itself to credit risk (buying up dodgy assets) and could go broke is erroneous.
Please read my blogs – The US Federal Reserve is on the brink of insolvency (not!) and Better off studying the mating habits of frogs – for more discussion on this point.
The following graph combines IMF World Economic Outlook data (from the September 2011 database) with latest population and real GDP estimates from the EU and the IMF. It shows real GDP growth (per cent) – left hand axis since 2000 (entry into the Eurozone) and real GDP per capita (red line – index = 100 at 2000 – right axis). The red bar is the 2012 estimate (a decline of 6 per cent).
I have been checking each time the real GDP data comes out as to where Greece is in relation to the past. Each time I check the situation gets worse. Real GDP per capita is now back to the 2002 level and falling. Soon, there will be no real gains as a result of entering the Euro (if per capita GDP is considered).
Of-course, with all the hacking of wages and pensions and other public spending, the level of inequality that real GDP per capita figures obscure will rise. So already, it is likely that millions of Greek citizens are vastly poorer than before they entered the Eurozone and this is likely to get worse.
If Mr Wieser’s predictions play out then poverty rates in Greece are certain to rise. Already, Eurostat reports that the poverty rate in Greece had risen to 27.7 per cent in 2010. Some 33 per cent of Greeks over the age of 65 are in poverty.
Further, most of the IIF “cost” estimates noted above are, in fact, zero “cost” contingencies because the ECB can issue the currency without cost. Costs should be thought of in real terms. There are no real costs involved in the ECB extending its SMP, or extending long-term credit to the banks, etc.
I know that the majority of Greeks still think the Euro is a good thing for them although they hate the imposed fiscal austerity. That juxtaposition just tells me that they are ill-informed about the true nature of their problem.
Consider the following arithmetic.
Average real GDP growth between 1994 and 2007 in Greece was 3.64 per cent per annum. Imagine that the Depression (I now use that term for Greece) had not have occurred and the Greek economy had have continued growing at that average pace.
The following graph shows the comparison between actual real GDP growth (blue line) and projected real GDP growth (in the absence of the Depression). The blue line is based on actual data up to 2011 and then used the projected 6 per cent contraction in 2012, followed by a 1 per cent growth rate to 2016 (which I think is optimistic given the way things are going at present).
The gap between the two lines is the lost real national income as a result of the Depression which has been created by the fiscal austerity. If you sum the annual losses (which I think are conservative estimates) then the total losses to 2016 alone would be of the order of 510 billion Euros.
Then you have add in all the real costs for people that extend beyond the lost income.
If the Greek people really understood that these alleged “financial costs” for the ECB and others that the neo-liberals elevate to top priority were in fact a sham, and understood the design flaws in the EMU, then would they really continue to support retention of the Euro?
If they did, then they deserve all they get – which will be decades of stagnant growth and increased poverty.
I am not one for conspiracy theories except I do consider class-based analysis to be an essential organising framework for understanding what is going on.
Modern Monetary Theory (MMT) tells us how the economy operates and the consequences of different actions and provides a guidance to the best policy solutions for certain given macroeconomic goals (such as full employment and price stability).
But you have to dig deeper to understand why governments choose the policies that they do.
A recent UK Guardian article (March 5, 2012) – What now for Greece – collapse or resurrection? – offers an interesting view on that question.
The by-line for the article was “Neoliberal economics planned in Brussels and Berlin will push Greece into third-world working conditions”.
The author notes the poor forecasting performance of the mainstream of my profession:
The reporting of the Greek tragedy over the last couple of years gives the impression that economics is a master science. Yet, the mainstream economists who gave Lehman Brothers a certificate of rude health just before its collapse, predicted that by 2012 the Greek economy would start growing. The economy shrank by 7% last year and a further 6% contraction is predicted for this year, with worse to come. This is the fastest slump in recent times. The discipline of this type of economics is often closer to a confidence trick than a science.
Please read my blog – 100 per cent forecast errors are acceptable to the IMF – for more discussion on this point.
If you examine the major macroeconomic textbooks that students using university studies, it will become readily apparent that the theory they are exposed to were incapable of predicting the crisis.
A further examination of the mainstream macroeconomics literature over the last 15 years would lead you to the same conclusion.
Further, the movements in the aggregates since the crisis (real GDP, interest rates, inflation, budget deficits, public debt ratios, etc) are totally at odds with the predictions that one would glean from the mainstream macroeconomic models.
It is not too far-fetched to conclude that mainstream macroeconomics is a “confidence trick”.
The UK Guardian article suggests that:
The slow death of Greece was a political project from the start, with politicians accepting the prescriptions of neoliberal economics. The country has become the guinea pig for the future of a Europe ruled by German capital and Eurocrats. The economic measures were planned in Berlin and Brussels and are implemented in Athens by pliant politicians. They aim to reduce violently the standard of living of ordinary people, abolish the few remaining social safeguards and create third world working conditions …
The wholesale destruction of the weak welfare state, the massive transfer of public assets to private hands at bargain basement prices, the largest internal devaluation since the 1930s and the loss of national independence are part of the necessary re-arrangement of capitalism for a period of low growth and popular militancy. The supposed “rescue” is a test run for a new type of predatory capitalism after the failure of growth through the financial bubble.
The article documents the way in which the political parties in Greece have become captured by the European elites and implemented the neo-liberal agenda, sometimes without realising that this would “hasten their own political demise”.
The article argues that “the appointment of … Papademos … Was aimed at capitalising on the prestige of mainstream economists, and reversing the distrustful politicians”.
Further, as popular support for the fiscal austerity waned, “democracy itself became the target”. We are all familiar with the events that followed – including, the “proposal that Commissioner … be appointed to run the Greek economy”, and the fact that the two main “party leaders have signed a letter agreeing to pursue the austerity measures after the election”.
The article concludes that the “Post-civil war” divide in Greece between the left and others:
… is now coming to an end as both working people and modernisers realise that the political elite has betrayed them. For the first time, new types of political action are on the agenda. A hegemonic bloc combining the defence of the welfare state, democracy and national independence can bring together parts of the population who were historically on opposing sides but now express their indignation together.
However, I have my doubts given how in-grained the neo-liberal logic is, even among notable progressives.
Greece can only go forward now if it abandons the Euro. A restoration of currency-sovereignty will allow for immediate domestic-oriented growth to occur.
As I have argued in previous blogs – for example, Greece should default and exit the euro immediately
– my assessment of the real costs of such an action is that they be lower in the medium- to long-term, and the current course of action.
The increasing recognition that Greece will be in a stalled, if not contractionary state, for years to come only reinforces my assessment.
The IIF document supports my conclusion.
By the way, I don’t play Sudoku!
The next two days will be a data bonanza. Tomorrow Australian National Accounts for the December quarter comes out and Thursday the February Labour Force data will be out. A picture will emerge of how well the Australian economy is currently faring.
That is enough for today!