No diamonds without pressure? Yanis’ response, Part 1

What is the right amount of pressure? Pressure gauge by wwarby

Yanis Varoufakis, whom I recommended to you in my last post, has written an extensive reply, for which I would like to thank him. I also think that such a debate is the best way to counteract the unfortunate mutual disdain that seems to be growing between Greece and Germany. I don’t ask for much (…!?), my dear readers, but I do ask you to read his response in full. My response will be split into several posts, there is simply too much to discuss. I will start with market pressure on the periphery.

Before I start, let me add two apologies. I did not represent his Modest Proposal entirely correctly because that would have taken more space than I thought was necessary for the key issues. But it turns out: I was wrong. Second, if Yanis and other readers felt that I was accusing him of a blame game, something I despise myself, my apologies. I’ll explain what I meant in a soon-to-follow post.

Regarding market pressure, Yanis writes:

Mrs Merkel told us only the other day that her objection to eurobonds is that they will reduce interest rates; something she said is counterproductive because it takes countries like Italy and Spain off the hook. … [Kantoos] may agree with Mrs Merkel (that high interest rates must be maintained as an incentive) – but this only means that [Kantoos] agrees with the first reason I gave as to why Germany is resisting proposals such as ours [The Modest Proposal, K.].

However, with Yanis’ Modest Proposal, interest rates on the non-ECB-backed bonds will go up, and in part considerably so. What is more, he writes that this is a good thing:

Since we divide each member-state’s debt between Maastricht-compliant and the rest, and suggest that the ECB manages the former but not the latter, it would be rather helpful if a ‘healthy’ interest rate spread emerges between the two classes of debt making sure that, while the Maastricht-compliant debt of fiscally-stricken member-states is cheap to refinance, there is a market determined premium to pay for excessive public debt.

So Yanis agrees with Merkel?! After all, it is the margin that counts for incentives, not the average interest rate paid on debt. So what’s going on here?

Yanis would probably argue that the transition period of the Modest Proposal, during which countries can get up to 60% of GDP at the ECB at low rates, will take countries off the market for the next couple of years, and reduce pressure. This is where Yanis disagrees with Merkel and the German position. Then again, he also seems to argue that a proper market signal is probably a healthy corrective in general, as reforms and spending cuts are hard, painful and politically difficult – which is the basis for the German position. His view is not entirely clear, in my view.

My point was that too high market pressure, that forces countries into massive austerity and political turmoil, is destructive and not in Germany’s interest, for the reasons described by Yanis in his response:

From experience, I can tell you dear reader that the severity of the cutbacks in Greece have reduced our society’s capacity to reform. … [R]eform requires investment. Any CEO will tell you that to improve management structures one needs to invest in them. Greece, Italy, Spain et al are so busy cutting that no investment goes into genuine reforms. … [T]he cruelty of the austerity packages (that is evident for all who have eyes to see, and want to use them) destroys the common will to effect reforms.

In my view, and here I disagreed with Yanis, more (!) pressure is not Merkel’s aim either. Yanis wrote in his original post somewhat ambiguously (emphasis mine):

Mrs Merkel feels that fiscal waterboarding is what the Periphery needs more of these days.

Anyway. The more important question is whether giving countries a grace period might lead to too little pressure?

On the one hand, the economic situation is horrific in Greece or Spain as it is. I think one could make a valid argument that additional pressure through the market is not necessary in order for these countries to reform (which is much more important than short-term budget cuts). What is more, the outstanding debt under the Modest Proposal, that will still be traded on the market, will give countries at least an indication of what they will face when they have to turn to the market again. But is it credible that these countries have to return to the market? Can the eurozone afford this, if yields are still 8% or more? Will therefore the medium-term fiscal incentive be enough?

On the other hand, and this is something I would like to hear Yanis’ views on, a dismal economic situation alone may not lead to the most needed reforms. The powerful groups in society may still get what they want, at the expense of the overall economy and society. It is, after all, not a coincidence that Greece is in the current economic mess, is it? A grace period is fine, but conditionality, by the IMF for instance, may still be helpful to focus reforms on the right areas, and to prevent that policy makers back down when bureaucrats, banks, protected professions, public sector employees or the rich resist reforms. As far as I know, the IMF has learned a lot from past failures. It did a good job in countries like Iceland according to those involved and was not the one in the troika that focussed on austerity. The EU/ECB plus European politics is clearly not the right institution that should impose conditionality, however.

Yanis’ position is very similar to that of the German government: market incentives are helpful. Yanis acutally wants to strengthen them with his Modest Proposal (on the margin where it matters). Whether an unconditional grace period is appropriate at the moment is an open question, in my view. For the sake of the countries themselves, it might be good to engage the IMF that forces the elites to take on the most needed reforms.


  1. jopa schreibt:

    @ kantoos:

    I don’t like the trend of this discussion very much. The interest level currently felt by certain European governments is not an educative measure imposed by some evil powers, but simply the price for additional loans asked for by prospective lenders. If a country does not like this price, it purely remains this country’s problem and does not constitute an obligation by other countries to assist. After all, the EMU is not a fiscal or solidarity union, and if assistance by other countries is given on a take-it-or-leave-it basis only, well, then that’s it. There is no right to assistance and also no need for “pressure” beyond that which may be imposed by the markets anyway.

    • kantoos schreibt:

      @ jopa

      On the gounds of market principles, you are correct. But make a cost-benefit calculation and you might end up at the conclusion that assisstance is better. After all, why do we need the IMF if the market is right? We need it to manage an orderly adjustment, just as in Greece.

  2. Dudi schreibt:

    May a give an analogy that could illustrate Yianis position that.. “I can tell you dear reader that the severity of the cutbacks in Greece have reduced our society’s capacity to reform”… It’s like having an obese person. His life is in danger from his excessive weight and lack of physical exercise. Thus his cure is cut back on his caloric intake and start an intensive exercise program. However it seems the program in not properly balanced, they are cutting so much of his food (=calories) that the person starts to feel weak while at the gym (remember: to burn the calories stored in bodies as fat, we still need to add some daily-calories in our system to get up in the morning) and can’t perform the maximum. Of course he doesn’t pass the physical exam after one month on the program and they order more cut-backs no his caloric intake and even more are intensive exercise. By this point the person has trouble to even walk up the stairs to go to the gym… something has to give, for this person to lose weight at a healthy pace and get the benefits of the exercise. Right now we are losing the patient..

    • kantoos schreibt:

      @ Dudi

      THanks for your comment. Usually I am not a fan of metaphors in economics, but I agree to a certain extent: forcing Greece to cut back, and reform everything at once is too much. So market pressure is good to prevent chaos, but is not helpful once you are in the mess. Fair point.

    • cangrande schreibt:

      @ Dudi
      (and @ kantoos, who hat the right haunch saying he is “not a fan of metaphors in economics”, but then accepting Dudis view anyway):

      You said: “However it seems the program in [recte: is] not properly balanced”

      Mind if I phrase your similie in a slightly different way? Like:

      “They” prescribed a mixture of sweet and bitter tasting pills, of which the patient decided unilaterally, that he would only swallow the sweeties.

    • Dudi schreibt:

      You are correct. Evolution theory dictates that when in a enviroment of limited food, organisms will eat and focus only on consuming foods high in calories, and nothing is higher than “sweeties”
      Thank you for accepting the metaphor. I will agree with you, metaphors are like oracles from Delphi.. tell me what you want to hear and I’ll find you one.

  3. Jopa schreibt:

    @ kantoos:

    … that assisstance is better.

    As we can clearly see at present? The problem we are facing is that nobody really knows the appropriate amount of “pressure” necessary to achieve an acceptable result, we at best pretend to know.

    The thing with market principles is not that I couldn’t imagine good politics achieving a better result occasionally, the only problem is that the Realpolitik we are currently experiencing in my impression does not only not really solve any problem, but creates a lot of collateral damage by doing so – in all countries of the EMU.

    • kantoos schreibt:


      Correct. But we don’t know the counterfactual either. A country under threat to leave a common currency with the inflation dynamics it had in the past is a sure recipe for disaster. I don’t share Yanis claim that this was easy to solve.

  4. anon schreibt:

    I think the main problem in Greece and other GIPSI countries has to do with short-term macro stability, not the difficulty of cutting back per se. Hence, the best way to ensure that policymakers in such countries can cut back fiscal balances sustainably is avoiding a collapse in nominal expenditure in these regions. This means that (a) it is imperative for the ECB to meet their target for Eurozone inflation and avoid excess monetary tightening, even if this means higher-than-usual inflation in core countries; (b) policymakers should act to stem capital flight from weak countries and indeed attract more investment to them, by enacting targeted incentives; (c) the banking system in such countries should also be restored to its normal functioning in some way, so that investment is again not impaired.

    None of these policies would require lessening the incentive of policymakers to reform their countries and attain fiscal stability; indeed, these would do the very opposite, by offsetting the unavoidable effect of fiscal contraction on cyclical conditions. In the longer run, macro-stabilization policy should probably be addressed by revising the fiscal compact treaty, because European trade integration is clearly not high enough to avoid the development of large imbalances in nominal expenditure.

    • kantoos schreibt:

      @ anon

      Very good, I agree. I am not sure your policies are enough, though. The fiscal situation in Greece would still be very difficult to handle, and would require some form of non-market assisstance. And then is the question of how much pressure you apply, or conditionality.

  5. Rob schreibt:

    Hello kantoos,

    i followed yanis’ blog for some time now and read the recent debate between the two of you with much interest. In your current post, imho you are slightly misunderstanding yanis’ policy number 2 (ecb-bonds), as you write:

    “Yanis would probably argue that the transition period of the Modest Proposal, during which countries can get up to 60% of GDP at the ECB at low rates, will take countries off the market for the next couple of years, and reduce pressure.”

    Actually, the modest proposal suggests the following:

    “For member-states that wish to participate in this scheme (a scheme that can be enacted through Qualified Majority Voting), and upon maturity of a sovereign bond of the said memberstate, the ECB services a portion of the maturing bond that corresponds to the percentage of the member-state’s debt which is Maastricht-compliant. E.g. for a member state whose debt to GDP ratio is 90% of GDP, the ratio of its debt that qualifies as MCD is 2/3. Thus, when a bond matures with face value, say, €1 billion, two thirds of this (€666 million) will be paid (redeemed) by the ECB.”

    Thus, the countries exceeding the Maastricht-compliant debt, will still be exposed to the markets, though to less extent than now. So, there will be continuos pressure on the participating member states to reduce their debt to GDP ratio and for states like greece or spain that may seem to much. But don’t forget the other to policies in this place. As yanis emphasizes, policy number three (investments by EIB/ECB) will allow for shifting idle savings into productive investments. This policy has the potential to induce growth of GDP in burdened states like greece and spain, while not counting on their own national debt. Furthermore, policy one (bank recapitalization) further reduces pressure on the national debts, by europeanising the insolvent banks recapitalization.

    Another point is that, while the super seniority status for the debit accounts may push the interest rates, there are other forces that work against this: hope and trust. Note that the debt conversion scheme already reduces the overall debt of a country, as it can refinance a major portion (granted, with exception for greece, as its debt to GDP is far too high) of every maturing bond at a very low interest rate. This already reduces the burden on the country and will probably, together with policy one and three, lead to more hope for recovery of and trust in the countries and therefore to lower interest rates for the non-ecb-bonds.

    As noted above, the case of greece is still a flaw in this argumentation. But even if implementation of the Modest Proposal may be not enough for Greece to fully recover, it would most probably arrest the crisis instantly in portugal, spain and ireland (as these countries rather suffer from a liquidity problem, instead of a bankruptcy problem like greece), and will prevent spreading of the crisis to italy or further. To halt spreading of the crisis and the euros desintegration was always a main incentive of the modest proposal and its authors. For Greece there can still be further measures if the MP is not sufiicient there.

    I hope you enjoyed reading my post and i’m looking forward to further discuss with you =)

    Kind greetings from Potsdam,

  6. cangrande schreibt:

    Die intellektuelle Respektabilität des Herrn Yanis Varoufakis, bzw. seine Technik des “Moral-Waterboarding” habe ich heute detailliert in einem Kommentar zum vorangegangenen Blog-Eintrag von Kantoos ( untersucht.

    An dieser Stelle will ich ergänzend auf Varoufakis Blog-Eintrag “If greed did not cause it, what did?” ( (vom 07.12. – 2010?) verweisen. Unabhängig davon, was man sonst noch gegen Varoufakis vorbringen mag, ist schon die seinen “Lösungsvorschlägen” zugrunde liegende Narrative (bzw. genauer: seine Behauptung, dass diese Narrative die Problemursachen auch für Griechenland adäquat beschreibt) grundfalsch.

    Zwar räumt er ein
    “The Greek government, along with a few others did allow borrowing to run riot and acquiesced to tax dodgers, pilfers of the public purse, vested interests and the like”
    Doch pflügt er diese Einsicht sogleich wieder unter (oder hat das Eingeständnis überhaupt nur pro forma gemacht). In Wahrheit hängt nämlich alles mit allem zusammen; das kleine Problem der Griechen war bei richtiger Betrachtung nichts weiter als der Ausfluss der Weltfinanzverzerrungen, die V. so beschreibt:

    “… my term for the period after 1971: The Global Hoover: From the late 1970s until 2008 the US acted as a gargantuan vacuum cleaner that sucked in the trade surpluses of Germany, Japan and, later, China while, at the same time, attracting into Wall Street something in the order of $3 to $5 billion net on each working day. What does this have to do with Greed, Financialisation and the Greek sovereign debt? Everything! They are all mere byproducts of this Grand Hoover.”

    So betrachtet, ist das alles irrelevant, was die griechischen Regierungen verbrochen haben; letztendlich ist Griechenland die Unschuld vom Lande und konnte (wie auch immer das im Detail zugegangen sein mag) dem Sog des Großen Staubsaugers gar nicht wiederstehen.

    Dem entsprechend sind Reformen für Griechenland auch relativ unwichtig. Hauptsache, dass endlich wieder Staub ins Land kommt! (Und zu solchen Behufe hat Meister Varoufakis einen Sauber der Marke Modest-Hoover gebaut, welcher über den nebelumnachteten Germanen hovert.)

  7. cangrande schreibt:

    “Wir sehen ja, dass … Konditionalität nicht funktioniert. Das heißt, die mit den Krediten verknüpften Strukturanpassungsauflagen werden von den Empfängerländern nicht ausreichend umgesetzt. … Die Empfängerländer aber können uns erpressen: Gebt uns neue Kredite und weichere Auflagen, damit wir Wachstum stimulieren können. Sonst können wir leider, leider die alten Kredite nicht zurückzahlen. So läuft doch das Spiel. Dann leisten wir dauerhafte Transfers und Subventionen. Und wenn auch das nicht mehr reicht, droht eine noch größere und schlimmere Insolvenz als jetzt schon.”

    Zitat aus dem FAZ-Interview “Schuldenkrise „Die Euro-Rettung ist ein Fiasko“ ” mit Prof. Bernd Lucke (Organisator des “Bündnis Bürgerwille” gegen den ESM usw.) v. 29.05.12 (

    Liebe, liebe blonde, blau- und großäugige, rosenwangige deutsche Mitbürger:
    Lasst euch doch bitte, bitte wenigstens ein einziges Mal NICHT einwickeln bzw. erpressen!
    Weder von schlitzohrigen mediterranen “Brudervölkern”, noch von den Finanzintermediären, noch von den eigennützig ratspendenden Angelsachsen, welche ihr Motto “prass dich reich” [Paul Krugman] nur auf Kosten fremder Völker verwirklichen können!

    Die “größere und schlimmere Insolvenz” WIRD kommen!
    Auch deshalb, weil mitnichten nur die Griechen reformresistent sind (cf. Ökonom Juan Ramos Rallo: “Die spanische Regierung will gar nicht sparen” –
    Und dann kommt “unendliches Leid über Europa” (Felix Zulauf –

    Also auf zur Demo in München am Karlsplatz (Stachus), morgen, 02.06.12, 11.00 h!

    P. S. Und danke an Kantoos, dass du meinen Mörderhammerkommentar in deinem vorigen Blog veröffentlicht hast! ;-)

    • kantoos schreibt:

      @ can

      Hab kurz gezögert… Bitte beschränkt Dich in Zukunft wieder. Danke.

    • Very Serious Sam schreibt:

      “Liebe, liebe blonde, blau- und großäugige, rosenwangige deutsche Mitbürger:
      Lasst euch doch bitte, bitte wenigstens ein einziges Mal NICHT einwickeln bzw. erpressen!”

      Ich bin weder lieb noch blond, blau-und großäugig, oder rosenwangig. Dennoch: lass’ ich ja nicht. Nur, da unsere eigene politische ‘Elite’ jedweder relevanten Partei keine Alternative anbietet sondern schlechtem Geld immer noch mehr gutes hinterherwirft, in die Finanzindustrie und die GIPSIFs, kann ich halt wenig bis nix machen.

      Wir und unsere Nachkommen werden für diesen Transferirrsinn abgezockt, wie fast alle anderen Bürger Deutschlands (und der Niederlande, Finnlands, Österreichs…) auch. All die Ökonomen und Politiker scheinen vergessen zu haben, was die Folge des ersten Versailles war.

      Zum Thema: alle Vorschläge von Yanis zielen, natürlich, auf noch mehr Transfers. Auch eine Trennung in blue- und red-bonds vermag das nicht zu bemänteln. Diese IMHO reichlich krude Idee wurde übrigens derletzt von Tyler Cowen in kurz und zumindest auf den ersten Blick überzeugend abgekanzelt. Ich kopiere:


      The model by Mr. Delpla and Mr. von Weizsäcker , for instance, would let countries put some of their debt — equal to no more than 60 percent of gross domestic product — into so-called blue bonds issued by all members. These would presumably carry a very low interest rate.

      The rest — the red bonds — would remain the responsibility of individual countries and would probably carry much higher interest rates.

      Countries would need approval from a central committee to issue blue bonds, and could do it only if they followed responsible economic and budgetary policies. Germany would effectively have veto power.

      “If you behave well, you have access to blue debt,” Mr. Delpla said. “If you start to behave like Berlusconi, you will not have access to blue debt, and the price of red debt will go up.” He was referring to the former Italian prime minister, Silvio Berlusconi, whose policies were blamed for much of Italy’s current economic and debt woes.

      Thus Spain and Italy would still feel acute pressure to improve the way their economies function and to get better control of public spending. One big advantage of the proposal, Mr. Delpla said, is that it could be put into action quickly without a major restructuring of the European Union.

      That is from Paul Geitner, here is more. What are the problems with this?:

      1. GDP figures will be manipulated, to allow for the issuance of more guaranteed debt.

      2. The key is guaranteeing the banks and their deposits, at reasonable cross-border cost. This doesn’t accomplish that.

      3. Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds. That makes the purely national bonds subordinated debt and may raise rather than lower their risk. Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.

      4. Germany still ends up with its finger on the “send you (and me) to doom” trigger, which already isn’t working out in the Greek situation. If Spain or Italy is approaching insolvency, can the Germans really withdraw credit? Didn’t the ECB just lend over a trillion euros, starting December 2012? How well is that going? Is Germany finding it easy to say “nichts mehr!”, or is the pressure for ever-greater bailouts integration? Why should the Germans let themselves be led further down that gangplank? Why not just call the plan “Germany commits to no more bailouts, not ever, ever again” and cross your fingers behind your back?

  8. cangrande schreibt:

    Damit niemand glaubt, dass ich ausschließlich auf südliche Kuckucksvölker schimpfe:
    Dirk Schümer hat völlig Recht, wenn er Fiskalpopulismus auch bei uns kritisiert: “Parteien in der Eurokrise. Euer Kredit für unsere Leut’ ” (

    Und ich selbst habe natürlich sowieso und immer Recht (“Griechenland im Ostallgäu” –

    Aber Vorsicht vor denjenigen bailoutistischen Brunnenspringern, welche Fingerzeige auf unsere eigenen Klientelismen nicht selten propagandistisch zu einem logischen Salto Mortale missbrauchen: “Weil wir nicht besser sind, müssen wir zusätzlich auch denen unser Geld in rauen Mengen zukommen lassen.”

    Dass frühere Bewohner des Griechen-Landes einem ihrer größten Philosophen den Schierlingsbecher gegeben haben, ist gleich gar kein Grund für uns, um die heute dort lebenden Menschen (inklusive Gastarbeiter – das sollen mal 1 Mio. gewesen sein!) massiv aus dem deutschen Steueraufkommen zu alimentieren (

    Immerhin kann man die laufenden und die bereits absehbaren Bailout-Ballons fiskalisch damit begründen, dass Papier und Druckerschwärze bei der EZB schon nicht ausgehen werden.

    @ Kantoos: Das ist ein Problem bei Indizienbeweisen, dass man sie nur mit weitschweifigen Worten führen kann.
    Manche dieser Argumentationsketten halten dafür aber auch.

  9. Erich schreibt:

    Nobody can seriously expect that Greece will ever pay back their credits completely. 2 years ago only very little of the greek bonds was in the hands of the European tax payers. Today they have most of them. Just in 2011 the tax payers spent about 50 Mrd. Euros for Greece (target2, greek bonds, and other EU money).
    But only a minisculous Part of that “help” did really arrive in Greece. Most of that was used to substitute private Bonds by Public money, and to finance the capital export from Greece to other saver countries.
    For sure this did Not help the poor People there. In Terms of Efficiency this could not be worse. This did profit only the wealthy People and some banks, who could Save their Money. This is not how I want my tax money to be spent. Those who give credits also have some responsibilty. If their speculation goes bad they should loose their money and Not expect the tax payers to buy them out.

  10. cangrande schreibt:

    Yanis Varoufakis hatte auf den vorangegangenen Blog-Eintrag von Kantoos am 28.05.12 u. d. T. “A reply to Kantoos Economics on the merits of the Modest Proposal” ( geantwortet.

    Ich habe dem Herrn Prof. Varoufakis in meinem Kommentar vom 3.06.12, 0:48 h zu seinem o. a. Blog-Eintrag verschiedene Fragen zu seinem modest proposal, bzw. zu seinen dort nicht erläuterten Vorstellungen, zu stellen (und mich bei dieser Gelegenheit als Deutscher auch massiv gegen seinen bodenlos unverschämten Vorwurf eines “financial waterboarding” verwahrt).

    1) What I fail to see is why there should be any need for the ESM, Mr. Varoufakis, if your suggestions are implemented. The ECB would issue the bonds, and no other institution, or country, could be a better guarantee for repayment, since the ECB could, if the countries default, simply print the money.
    Weren’t you promising us that northern European taxpayers would be spared of expenses once your suggestion was implemented? Or am I a victim of some misunderstanding here?
    So why do you need, or what use are you suggesting to make of, the ESM in the scenario of your modest proposal?

    2) Since you expect Greece to default, I fail to see how it could even repay the 60%-of-BIP-debt. Are you trying to burden the ECB with debt that you know Greece will not repay, or did I misunderstand your intentions on this particular subject? However that may be, I am modestly alarmed that you you fail to present any cure for the specific economic problems in Greece, which are fundamentally different from e. g. the Irish problems, in your modest proposal.

    3) For all I know, at the moment Greece has a primary deficit, which is being covered by the IMF and the fellow Europeans. Your modest proposal does, in my modest opinion, not adress the question of who is going to pay for this primary deficit. You claim, after all, that, your modest .proposal lets the German etc. taxpayers off the hook. So then who is ON the Greek deficit hook?

    4) I was rather surprised by your claim that YOU do not approve of, or play, any blame game. Words like “financial waterboarding”, when hurled against the chancellor of my country, leave me with the impression that this extremely derogative term is being used in a effort to morally waterboard the German etc. taxpayers into sending more money to Greece.
    Considering the fact that European taxpayers are already paying for a primary deficit in Greek, and further taking into consideration that this deficit is partly caused by Greek tax evaders, I am definitely not amused about your invective against my chancellor, and therefore against my country.
    But maybe you have some free lunch proposal as to how the Greek state spending can be financed at the current level, without burdening foreign taxpayers.

    5) You claim: “… under the Modest Proposal they [the states] would be spared of any need to recapitalise anyone – unlike what is going on now, i.e. a process that guarantees that the German, Dutch and Finnish governments will have to re-capitalise everything in sight (banks, ECB, EFSF-ESM) without even any success in stopping the fragmentation of the Eurozone.”

    To me, this statement appears to be contradict what you hav said in your modest proposal:

    “With the EFSF/ESM now relieved of its task to fund the public debt of insolvent
    member-states, the largest share of its capital is to be used for the purposes of
    direct bank recapitalisations. These capital injections shall flow directly from the
    EFSF/ESM … “.

    So if Greece would default on its debt (which you assume, and so do I), the fellow Europeans would have to recapitalise at least those banks that would themselves default as a result of the Greek insolvency.
    I do realise, of course, that you under your plan taxpayers money would only be give in exchange for equity to those banks, meaning the shareholders would be disowned at least in part.
    Now a major concern in the European assistance for Greece has been the fear of contagion.
    Are you sure, that disowning the shareholders might not hamper your aim to attract more international capital to Europe? Who can be sure, after all, that Greece – or another country – does not again go bankrupt? After all, Greece, in particular, does have a certain tradition of defaults. And the money it has borrowed in the past appears to not have advanced the development of the Greek economy.
    So in addition to your well-meaning musings about the situation in Ireland and Spain, I am sure your readers would appreciate your well-informed suggestions on how to effect an economic boost for the Greek economy.

  11. Rien Huizer schreibt:


    With all due respect for attempts at looking for tricks to make the refinancing of existing debt maturities and the financing of fresh primary deficits (in the private markets, ie not by transfers within the EUR system) more affordable and/or feasible, this is an unproductive debate.

    The key question is: is there a combination of (a) output (b) net gvt receipts (tax minus transfer payments) and (c) finance charges (interest, repayments) for a given country that would lead to a fiscal sustainability. There is of course a fourth determinant: the existing stock of debt.

    (a) is related to the other three (in a currency union) by the degree in which output responds to changes in net gvt receipts caused by gvt policy (ie changes in tax rates and benefits/subsidies rates. I do not know enough of what the specifics are for Greece but a prima facie there appears to be a certain degree of policy space in the comparatively low levels of taxation of certain groups that could be increased without these groups having a large downward effect on output: they could maintain their consumption by dipping into their offshore (Cyprus) savings, if the tax authorities of Greece and Cyprus would cooperate (which is unlikely). Another matter is the weak link between imports and exports: more than likely measures with a depressing effect on consumtion will hit foreign production more than domestic ones. Of course that would lead to lower VAT and similar taxes but thet could be addressed by raising the respective rates (and introducing a few luxury taxes). These things require political will (suicidal probably) but can be done. No doubt Spain would do this if required, so why not Greece.

    (b) It is doubtfull that even if Greece would collect much more tax and fire appr 20% of public sector workers (who could then fill the places of illegals*) the current stock and anticipated future flows could be accomodated unless interest rates are very low and maturities are very long. Would there be a way to raise non-fiscal money by selling state assets (Some ten years ago, the City of Chicago sold its parking meters to investors: why not do the same in Greece?).

    (c) if there are no combinations of interest rates and maturity schedules that would result in a sustainable debt service profile (which apparenly the IMF does not believe, they believe that there is a solution to these three related issues, given a much lower stock (the fourth problem)) Greece should not only default as soon as possible, but also return to the “middle income” status where the were in the 1990s, and seek development assistance. Whether or not they should do that whilst keeping the EUR or seeking a currency board arrangement with a limited-purpose domestic currency linked to the EUR, where the EUR would continue to ciculate in Greece but not under the control of the Greek authorities (more or less the same way the EUR circulates in parts of Eastern Europe).

    All in all, whether one uses a bookkeeping trick with lots of unintended consequences for the EU, the ECB (why on earth would a Central Bank issue or guarantee debt?, why on earth should German taxpayers do for Greece what the Greeks do not want to do themselves) should not go further in assuming credit risk. Relaxing monetary conditions is fine, but monetizing worthless debt is not the way to achieve that. Having a EUR zone banking authority that can discipline, restructure and recapitalize banks would be useful (but politically unviable, so only a trick to gain time). Having a federal tax authority likewise. But there is no authority in the EUR zone to force that upon ALL members (and it will require brute force of the type authoritarian systems have at their disposal) so these things are mede rhetoric. We may see a series of debt restructurings and maybe even defaults of EUR member states, wirhout these states leaving the EUR zone. So what we need is a section in the EU treaty that deals with state bankruptcy and overcomes “sovereign” impediments to debt recovery. That would very quickly teach politicians a lesson to govern for the longer term and for the benefit of the greater community they have been thrown into by history.

  12. Ralf T schreibt:

    Hi Kantoos,

    I believe you started of with a very interesting question in your first post and slightly dropped the ball what that question is concerned in the current one. That question is: “Who pays ultimately?”(through higher interest rates/ direct transfers/ losses taken on existing claims/…). I do believe Yanis, in his response, made quite a convincing argument, that it most likely will not be northern european governments. But still the question remains. Given that his proposal is to issue new ECB bonds senior to present debt, the answer seems to be the holders of current government debt of the peripheral countries in question. Leaving aside the issue of whether or not this might trigger CDS´s and thereby collapse the financial system(or not), it still boils down to a transfer of who ultimately pays. What I do see as an improvement in Yanis´s proposal is that it would move us away from poor/average people in the centre(i.e. the vast majority of the taxpayers) paying for the shenanigans of the rich and well connected in the periphery towards the ones who actually took the risks in lending in the past(i.e. the banks) and the ones who have been trying to profit from buying peripheral debt for pennys on the dollar and hoping for full repayment and large gains taking the losses.
    This however does not solve the problem that led to the bailouts in the first place: It´s currently impossible to let the financial system fail without very severe repercussions.
    I fail to see how Yanis´s idea would lead to a better outcome, sure, it might well work for Greece: mostly Greek,German and French banks(large holders of GGB´s) take a hit, Greece recapitalizes it´s banks for the losses they incurred due to their bonds suddenly being subordinated to the new funds Greece draws via ECB bonds; French and German banks may very well be able to take the hit without further government support.
    I fail to see however how such a scheme would help countries like Italy or Spain, where substantial part of gvnt. debt are held domestically and that actually do carry systemic importance. Recapitalizing banks in Italy and Spain for losses incurred due to the subordination of gvnt. bonds they hold seems like a right pocket -> left pocket transaction!(If you prefer you could also put it as recapitalizing them first but impairing them by subordinating the bonds they currently hold by taking on new debt through ECB bonds).
    In summary the only really interesting point about Yanis´s idea seems to be the distributional(mitigation of moral hazard) question, which is a valid and important point and worthy of discussion!
    He however presents his “modest proposal” in a way as if there was a free lunch to be had, I find that intellectually dishonest and I salute you for having zeroed in on precisely the right question in your first post on this matter: “Who pays ultimately?”

    • kantoos schreibt:

      @ Ralf

      Thanks for your comment.

      I will split my responses to Yanis into several posts, so I started with this issue. I will come back to some other aspects.

    • kantoos schreibt:


      One quick note: in a world of multiple equilibria, there is indeed something like a free lunch. If you have one institution that can steer expectations, you can reach a better place than if all market participants reinforce each others’ panic. A bank run is a classic example of this. For Greece, it is costly, naturally, but helping to steer the Greek economy to a better equilibrium might be worth the input in the sense that there is a “profit” to be made.

  13. cangrande schreibt:

    “… helping to steer the Greek economy to a better equilibrium might be worth the input”:

    Questions are, however,

    a) whether showering money over the country really does help Greece to stand on its own feet.
    So far the European help seems to have been counterproductive (cf. FAZ-article “Michalis Chrysochoidis warnt vor einem „großen Knall in der Gesellschaft“. Die Subventionen seien für den Niedergang seines Landes verantwortlich, sagt er im Gespräch mit der F.A.Z. ” – And

    b) whether this society isn’t a lost cause alltogether. To me, the Greek attitude towards the state looks very much the same as in southern Italy (Mezzogiorno).
    The state is not “us”, but “them”: Some kind of a monster, that you have to arrange with, and if possible, exploit to your own personal advantage.
    A southern Italian proverb nicely illustrates this attitude:
    “Roba dello stato è roba del governo: Chi non la mangia, và nell’Inferno” = State money is up for grabs. Whoever doesn’t reach out for it is simply stupid. [My translation into German: "Staatsgut ist Regierungsgut, zur Hölle fährt, wer's nicht fressen tut."]
    The predominant mentality down there obviously is that of cuckoo kids: “The state, they (the other Europeans / dumb northern barbarians) simply has/have to help us. (Even if we bite their helping hands.) ”
    If at all, you can only break this mentality by making it absolutely clear to those peoples, that they themselves are responsible for the state of their country. Give them technical help if they ask for it, but no money. They want respect? Okay: Let’s treat them as adults: but then, please, in EVERY respect!
    If they don’t make it on their own: tough luck!

    • kantoos schreibt:

      @ can

      I don’t think such generalizations about another society are very helpful. Please use other people’s blogs to make your statements about “the Greeks”, or your own blog, but not mine.

  14. cangrande schreibt:

    Okay, Kantoos, you may criticise me for speaking about “the” Greek attitude.
    But you won’t get around an (explicit of implicit) assessment of the Greek society, when making a decision for or against futher gigantic “credits”. And that necessarily involves the use of abstractions.

    What I have described is, of course, not the attitude of each and every person in Greece. (And it is, on the other hand, an attitude that you will also find with many poeple in Germany.)
    So what I diagnose is an assumed “prevalent attitude within the Greek society towards the state”.

    Fact is that Italy in about 150 years of national unity has found it impossible to turn its Mezzogiorno into a prospering economy. So it is hardly unreasonable to assume that there must to be some deeprooted anthropological problem (an attitude more widespread there than elsehwere) behind this situation. I assume that this problem consists of some kind of “Mediterranean attitude”, which in my opinion (based on what I have read on the reaction of people and government in Greece to the present crisis) is also behind the Greek problems.
    When even a man like Jürgen Fitchen of Deutsche Bank calls Greece a “failed state”, and even a woman like Christine Lagarde gets highly upset with Greece’s performance in the crisis (as compared to even poorer countries in a similar situation), it cannot be illegtitimate for a German taxpayer to voice doubts about the effectiveness of sending our tax money down south.

    Besides: Aid for development generally has not been overly effective in helping underdeveloped countries. So the question is, why that should be different in Greece, and how much money we are willing to spend, before we find out.

    So I simply don’t want my money to be sent down there, because I think it would not achieve any economic and social modernisation of the country, but be the start for huge and eternal transfers (like in Italy and, well, in a way even between the “Länder” in Germany).

    And reading and understanding Varoufakis’ proposal and his blog-postings better and better certainly does not convince me otherwise.

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