More about Greece

Tikitu, firstly many congrats for your nice blog. Here are some of my personal thoughts related to your text.

Nowadays, there is no doubt that euro is dying for many reasons. Then, a crucial question comes “concerning the fact that the collapse of euro is inevitable, why not return to our national currency drachma?”

Personally, the answer is absolutely no. Euro must not be collapsed. This is a response independent of whether we believe that the euro should or should not be created. I believe that the euro – process was built on weak foundations. Given its structure then, Greece should not have entered the eurozone, but after a decade of participation in it, Greece would suffer a lot from a possible collapse of euro. Having no common currency at all means automatically the end of European Integration. Specifically for Greece, it would be a continuous devaluation of drachma, a great inflation rate, which will be combined with high unemployment rates.

So, as the euro continues to exist, we should forget the return of drachma, because a Greek exit will mean the end of the common currency. Indeed, the euro could not stand a Greek exit. It is no coincidence that the Lisbon Treaty does not provide exit process and it makes clear that leaving the euro means exit also from the EU.

However, can you imagine what will happen in Greece, having drachma (or a new national currency) together with the existence of “foreign” euro?

With large amounts in euro already in the market and in deposits, issuing a new currency would create a double-divided economy. On the one side, we will have most of our savings in euros. On the other hand, we will have salaries and pensions in drachmas. In a logical way, people will try to exchange drachmas into euro, knowing that it will be an underestimation of drachma. So we will have two Greece: One Greece with individuals with no access to euros and a second Greece of individuals with access to euro, which develop inequalities and underdevelopment.

Maybe a solution could be the publication of debentures / promissory notes in the name only of ECB, in order to serve the majority of euro-area debt and to finance a new deal for growth for whole Europe.

Thank you for your time.

Geo, thanks for your comment.

I don't entirely understand it, but what I do understand I don't entirely agree with.

You seem to be saying that (a) the collapse of the euro is inevitable, and (b) Greece should not leave the euro because that would lead to the collapse of the euro.

I agree, on the other hand, that the article I linked makes an argument of the logically suspect form "Entering the euro has lead to problems, therefore exiting it is a good idea": being against the creation of the euro does not logically entail being for abandoning it.

Your point about a divided economy is interesting (although the article explicitly says that we should expect debts and savings held within the country to be transferred to the new currency). I'm far from knowledgable enough to be able to evaluate it. But it seems like someone should do so, and someone who has Greece's interests in mind rather than the interests of her creditors.

Firstly, I should introduce myself and say that I am a young person in Greece and for sure, I look always my country’s interest, not only from a national perspective, but also from a European one. Of course, your thoughts and beliefs are more than respected, but let me clarify myself for Myth#6. As the majority, you follow the plausible conclusion “If the collapse of the euro is almost inevitable, given that the strong euro crushes the weak Greek economy, perhaps it's time to go back into the national currency?” In these difficult hours we have to answer two questions: First, what we want to happen at the European level? Secondly, what should we do here in Greece, taking into account all the processes are taking place.

So, for the Europe as a whole, we should not want the collapse of euro. The euro is almost dying, but still time remains for its rescue. That’s why it is proposed the publication of debentures / promissory notes in the name only of European Central Bank, in order to serve the majority of euro-area debt (including the Greek one) and to finance a new deal for growth for the whole Europe.

And what about Greece? Personally, I support the position of many people that as the euro continues to exist to forget the return drachma or the construction of new currency, because a Greek exit will mean the exit of Greece from EU (believe me, nobody in Greece want the country to exit EU after 30 years) and the end of the common currency (a Greek exodus means lack of money in Ireland and Portugal, high rates above 30% of Italian spreads and of course Germany will announcer its own exit from euro).

Moreover, Greece has a 30% deficit in trade balance deficit of agricultural products. So, with an exodus from eurozone and with no institutional funding through EU and IMF, with no production base, where are we going to find funding sources? China, Qatar is not the answer.

You also stated that according to the article “we should expect debts and savings held within the country to be transferred to the new currency”. Ok, but you should also have in your mind the large amounts of euro that are already in the market, and even the high possibility of deposits, which is saved out of banks or in foreign accounts abroad.

Again people will try to exchange the new currency into euro, knowing that it will be an underestimation of the new currency. And again, we will have two Greece with the power of those with access to euro to be greater than those of no access, and the situation will remind us Turkey of the 80s with its dual economy (“easterners” that worked with local currency and “Europeanized” citizens using marks or dollars). That’s why I insist on that the creation of a new national currency, as “foreign” euro still exist, in this case, it will be disastrous, because in Greece, we do not have our own currency in a stable equivalence (peg) to a foreign one.

Thank you and please accept my apologies for the length of my response.

Absolutely no need to apologise; like I said, I really don't understand the economics behind this so it's very interesting to hear the perspective of someone who obviously knows a bit more about how these things work.

As far as I can see, the article indeed follows the logic you describe in your first paragraph. Because I know how little I understand this stuff, I'm saying something weaker: that Greek national-finance folk should be investigating the possibility of exiting the euro.

Here's what I take from the article, without necessarily accepting that the correct move is to leave the euro.

First, the current situation is going to leave Greece in terrible trouble for many years to come. One way to improve the long-term prospects is to get more of the current debt written off. The haircuts so far have been kept to a minimum by Greece's creditors; basically they've written off just enough to prevent an immediate and total default, as I understand it. If Greece wants to argue for more, they need an economic argument (since the social one "Our society is being ruined" seems not to carry much weight). One possible argument is that unless more debt is written off, Greece might as well leave the euro, since in the long run the effects of staying in but with crippling debt repayments won't be any worse.

I don't say I accept this argument. But here's the important thing: it is only Greek financial experts who can ever make this argument. For everybody outside Greece, if they believe this to be true then they will keep their mouths firmly shut. For exactly the reasons you gave: if Greece leaves the euro then the effects on the rest of Europe will be enormous and probably highly unpleasant (certainly so for Greece's creditors). This is not something that anyone outside Greece wants.

But exactly that fact makes this a bargaining point for Greece; or to put it more bluntly, a threat. "Make a real haircut, not just trimming your sideburns, or we'll turn the whole show upside down."

What the article points out (and here I buy the story completely) is that this threat is completely useless unless it's credible. Without an analysis of just how bad exiting the euro would be, this threat simply won't be believed. And if nobody outside Greece can be trusted to make that analysis while focusing only on the outcomes for Greece itself, then Greeks have to do it.

(I think I follow the dual-economy argument, and it seems a good one. The important point for me, though, is not just to note that exiting the euro would damage Greece's economy and social structure. It's to admit that the current situation also damages the economy and social structure, and to ask --somewhat hard-heartedly-- which solution does less damage.)

The problem as I understand it is that Greece holds all its debt in Euros. So if it where to leave the Euro and return to the Drachma, the Drachma would fall in value compared to the Euro. But the debt would remain the same (perhaps even higher if the euro increased in value).

At this point Greece would have no option but to default on its debt. This isn't necisarily easy though. Just saying we default doesn't make it so. I note that Greece has the worlds largest Merchant Marine. Are her ships at risk of confiscation in countries with a large debt ownership? Will some nations choose to impose sanctions? It is unclear.

Further I am unclear as to whether Greece could run a balanced budget even without a debt burden. If it can't then after defaulting it would either have to impose further cuts on spending or borrow further, not an easy task I'm sure given a recent default.

Rob, some of that is addressed (at least as speculation) in the article I linked. In particular, apparently a substantial portion of the debt at the moment is held under Greek law which would make it easier to default.

The article is artfully vague on just precisely how Greece would recover from the immediate aftermath of a default (and it handwaves away the danger of sanctions). It does suggest, though, that borrowing after a default wouldn't necessarily be any harder than now: now anyway nobody wants to lend because it's perfectly clear the current debt levels are unsustainable; if a default leads to sustainable debt levels (yes, big if) then creditors might actually be more willing to lend.

I am glad that I managed to give you a deeper approach of how economics works. Personally, I agree with you that the current situation is going to leave country in a bad position.

However, since you mention the “tragic story” of the haircut of the debt (actually means to delete part of the Greek public debt), let me highlight a few points: a) The haircut was inevitable since January 2010, b) it was its delay for 2 years that have damaged Greece, since it delayed the reform process in our country and put Europe in a process of degradation that threatens all of Europeans.

Yes, the haircut could have seen a bargaining point for Greece; but because of the above mentioned 2 year delay, we had our chance in the past and we miss it. Now, the country only monitors the negotiations among other parties, which determine the amount and the type of the haircut, without take into consideration the Greek government. In other words, we have no negotiate power to demand things. The crucial part is the accompanied unavoidable procedures that follow the haircut. Because if the haircut could be done without additional measures, then the higher the haircut, the better for Greece and Greeks, meaning that we have the opportunity for a real recovery. However, I wonder if Greek politicians want really a high haircut, because that leads to high probability of bankruptcy for the banks, and especially for bankers. So, I suppose that here a compromise made with a haircut of 50%, for its people and the banks.

As for the deposits, they remain safe as long as the Eurozone exists (funds from EFSF) and Germany does not leave it, that’s why I support euro and not a new currency, as long as euro exists. Citizens’ everyday life is not depended anymore on the question “how much the haircut should be”. It depends on the haircut impact in Italy and French German banks and the willingness of countries with surplus to try to connect the measures with a punishment for Greeks, functioning as an example for Italians.

Finally, I agree also that a credible analysis is needed, but personally speaking, the current situation will make less damage. The crucial part for me is to transform the current crisis in an opportunity of a new pattern of development. As John F. Kennedy said, “When written in Chinese the word crisis is composed of two characters. One represents danger, and the other represents opportunity”. Crisis could be seen as a process of transformation where the old system can no longer be maintained. A behavioral change of Greek society and youth that will combine imagination and practice together can make a great contribution for an effective development, with a country with no corruption and a shadow-economy.

However, I wonder if Greek politicians want really a high haircut, because that leads to high probability of bankruptcy for the banks, and especially for bankers. So, I suppose that here a compromise made with a haircut of 50%, for its people and the banks.

Ah, here at last I find something I can wholeheartedly agree with. (Except that the "50%" figure is more a PR soundbite than a reality.)

As for having no power to negotiate, that's the whole point of thinking through what leaving the euro would entail: perhaps taking that option seriously can give Greece a position from which to negotiate.

(I'm afraid the Kennedy quote doesn't grab me either. I'll take a sinologist over a president any day, on this particular subject.)

At least you agree with smt :):) However, could you explain more that the agreement of 27th October for 50% haircut is more a Public Relations soundbite? Yes, its a compromise but we should not ignore its impact. As for the Kennedy quote, as an optimist person, I am trying to explore/find also some good elements of smt, what if this crisis could make Greece better? Ah, if you have time a suggestion for future reading "The Shock Doctrine", by Naomi Klein.

I said the figure of 50% is a soundbite: the agreement is for a 50% haircut on part of the debt, which ends up being much less than a 50% reduction (perhaps under 10%). "Cutting the debt by 50%" sounds great, but it's not actually what's happening.

Thanks for the recommendation, I haven't read The Shock Doctrine. It sounds like it would depress the hell out of me, but I will give it a try.

I should mention that I found that 50%-link just by googling "Greece 50% haircut"; I don't know if their specific numbers are accurate or up to date, but I believe the general point still holds.

Now, it’s clear what you meant. Exactly, the agreement was locked for a 50% haircut on part of the public debt. Indeed, as you mentioned in practice there is another scenario, taking into account also the agreement signed on July 21th. Remember also that it will excluded from the “haircut”, Greek governmental bonds worth around 60 billion euros, which held by European Central Bank (ECB) - so we have 50% reduction of the remaining debt of Greek state, worth 300 billion and not 360 billion. Also, from the haircut will be excluded 65 billion, which are loans that Greece has recently taken, by the Troika EU - IMF - ECB on the basis of Memorandum. The "historic" agreement of July 21 refers only for only to Greek government bonds that expire in 2020 and not the long-term debt bonds, which expire after 2020. All in all, we have 235 billion euros that will be reduced by 50%. Thanks once again for your time and the “blog room” provided. It was a great pleasure to be part of this discussion and exchange some ideas. ps As for "Shock Doctrine", I am sure that is going to give you a deep insight of how the system works.