Greece joined the euro in 2001. This gave it the right to print/mint euro currency, as well as to issue Greek sovereign debt in euros. The second is important because issuing euro debt is like having access to a giant EU credit card–payment was at least implicitly guaranteed by every member of the EU, not just Greece.
Greece probably didn’t meet the criteria of economic health necessary to qualify to join the euro. Everyone in the EU seems to have known this at the time but thought that having the cradle of Western intellectual and political history in the euro was symbolically important.
In 2009, the ruling party lost an election. The new administration discovered, and announced to the world, that Greece had been systematically falsifying its national accounts–official reports of the country’s fiscal health and growth–for years. Greece’s apparent prosperity during the opening years of the 21st century turned out to be a combination of lies and living beyond its means, funded by large-scale euro bond issuance. Most observers agree that Greece run up more debt that it can ever possibly repay.
Negotiations between Greece and its creditors are at an impasse. Broadly speaking, the EU and IMF want to see structural economic reforms (which may prevent a repeat of the country’s woes) in Greece before any debt forgiveness. Greece, whose current government has already reversed some of the few reforms implemented over the past six years, wants debt forgiveness first, talks about structural reform later.
The EU put a take-it-or-leave-it offer on the table about a week ago. The Greek government has decided to call for a national referendum vote on the issue, scheduled for Sunday. In the meantime, it has shut down its banks, so no one can take their money out of the country.
There are some odd technical issues with the referendum. For example, one political party is suing to stop the vote, saying it’s unconstitutional. It’s also coming at the start of vacation season, so it’s not clear whether people can get home to vote, especially with atm withdrawals limited to €60 a day.
Domestic Greek polls indicate that likely voters favor accepting an EU bailout plan by 52/48–even though the administration is campaigning against it. A “No” vote probably means Greece leaves the euro, and maybe the EU as well.
I have mixed feelings about the negotiations themselves. On one hand, I’ve got to admire the ingenuity and determination of the Greek side in trying to get the best possible deal. On the other, everything I’ve I’ve read and heard to make me think Greece regards negotiation as a blood sport. The point is not to get a fair deal, but to suck the other side dry and toss the husk to the side of the road. –even a little bit–about the needs of the other side. It’s turned the negotiations into a fool me once, fool me twice situation, in my view.
I think the current Greek administration may have done a huge amount of damage to the country’s long-term economic prospects by trying so hard.to wriggle out from responsibility for the current crisis.
Ironically, the better outcome for the EU might be for Greece to vote to leave the euro. The resulting damage to the Greek economy will be enormous, I think. Seeing what happens will likely silence separatist movements elsewhere in the EU.
Dan, as you know, I find your blog a consistently valid touchpoint for my own practice. This post is a great “nutshell” summary, substantive enough to trade profitably from, and it addresses the whole debacle with just the right amount of diligence relative to the needs of an Americas-centric investor. That is… for now.
Let me add some thoughts:
a) It is perhaps widely known amongst investors, but not the public at large, that the EU power centers (esp. Germany) view the Greeks (including their Greek elites, past and present) with utter and complete contempt. This is stifling matters and emanates from the creditor side. That feeling stems from historic issues (not least the Greek elites’ failure to tamp down the war reparations dispute) and general cultural rhetoric that German politicos have found resonating with their electorate (i.e. the non-fact the Greeks don’t work as hard as Germans, given productivity stats that don’t factor in TFP). For a more visceral understanding, one need only look to the “Geithner”-gate leaks with EU elites wanting to take baseball “bats” to the Greeks.
b) Mr. Varoufakis has been at pains for years to NOT advocate leaving the Eurozone, while acknowledging precisely your point that Greece should never have joined in the first place. However, all parties can only move forward. To be sure, you can hear Varoufakis as early as 2011 commenting on Doug Henwood’s Behind the News radio show where he was incredibly insightful, very frank about Greek economics (the successes and exceptional failures), and informative well beyond the headlines. Recall, this was at a time when Ken Rogoff’s research was considered Gospel and especially among Peterson Institute types. Note that Mr. Henwood, although left leaning, is no crackpot given his work on the Liscio report, and, while aligned with Varoufakis on many points, does ask many tough questions.
c) Count among the minds advising the Greeks’ finance ministry, the economists Stuart Holland and James K. Galbraith (see “A Modest Proposal”), sympathetic comments by a “reformed” Jeff Sachs and recent weigh-ins by Joe Stiglitz which point to systemic issues that only the Greeks, through Syriza and years of pain and austerity, have had the fortitude to raise. The predatory bank lending by mostly German and French banks (as if they couldn’t possibly have vetted their investments properly) was conveniently offloaded to European “monetary authorities” which could then use all political suasion to compel more and more austerity and enforce covenants that stop at nothing. As even Stiglitz points out, there is no such thing as orderly bankruptcy on sovereign debt, and that is a BIG problem.
All this taken together, and given that we’ve moved well past the media being a conduit for “right-think”, I think it’s just a little dangerous to oversimplify the Greece situation as creditor misbehaviour. That Greece is back on the radar after 2011, after they agreed to those austere bailout terms, speaks more to the failure of austerity in that country than any lack of servitude by the previous Greek party elites. There is something much larger at stake and this is why Spain, Portugal etc… are watching closely. Greece is a lever. Those peripheral nations don’t want to get burned, but should Greece save themselves from more austerity and systematic disenfranchisement, we may well see Podemos perk up and things get much more harrowing for investors.
Then, North American analysis may need to be a bit less myopic if investments, especially those tied to EU GDP, are to be made with adequate risk adjustment. We are into tail risks here, but there’s no reason to ignore tail risks.
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