The Greek dilemma - To default or not to...

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Rank: Senior Baboon | 193

The focal point of the austerity debate in Greece revolves around the question of nominal debt write offs or what is popularly referred to as the debt haircut. A direct consequence of participating in a monetary union is that the government cannot pursue ‘active ‘fiscal policy along with accommodative monetary policy i.e. print money and repay debt. An important consequence of this is debt devaluation i.e. we pay back less than what was borrowed in real terms. Unfortunately since Greece is tied to the Euro debt monetization is not an option.

Thus frames the conundrum facing the radical left who after its landslide victory is bargaining a nominal debt write down and Germany is holding strong against it.

A bit of historical recap might be insightful here. Nominal debt write down is a particularly sensitive topic for the Germans since post World War II they were in a similar situations as the Greeks are facing now. Germany owed close to 30 Million Deutsch Marks to 70 countries. Under the London Debt Agreement signed on February 27, 1953 Germany witnessed 50% write down of its nominal debt and the remaining restructured to a longer term repayment framework.

Under the revised debt structure a large part of the repayment depended on servicing through trade surplus. In other words the turning point of the German economy towards a country experiencing export fuelled growth was largely facilitated by the debt restructuring program.

While Alexis Tsipras has been citing the German example towards debt write downs, it is imperative to note that the causes were completely different. While a war ravaged German economy was rebuilding an entire nation, a large part of Greece anomalies is due to government excesses in inefficient management/allocation of resources.

At present the Greek government has 320 billion euros worth of aid to the ECB and the IMF. ECB officials are inclined to ease the terms of repayment of the bailout program which is due for renewal at the end of February.  

While the ECB promises to preserve the spirit of the Euro and retaining Greece as a member country, further haircuts on debt seem unlikely. All eyes are now on the financial package to be proposed by Alexis Tsipras.

On one hand he has to live up to the anti-austere spirit that won him the majority at the other end looms the danger of default as Greece is scheduled to make a payment of 10 billion euros over summer with cash backup that is sustainable only for a few months. Faced with sky high rates (10% and 17%) the choices appear limited.

So what are your thoughts?

The content for the blog has been sourced using:

Merkel rejects debt writedown for Greece - Die Welt , German economic miracle: thanks to debt relief?, Germany Deserved Debt Relief, Greece Doesn't

 

Comments (20)

Feb 10, 2015

I don't see it happening.

Feb 10, 2015

Germany was able to successfully pay via trade surplus because following WW2 the deutsche mark was low. Thus, it was enticing to import cheap goods from Germany. This isn't possible with Greece on the euro as the currency would have to artificially devalue for everyone - not going to happen. Furthermore, in the case of W. Germany the West needed it to be strong in face of a potential WW3, which is why maybe they got such a great deal (i.e. 50% write down). Right now most of the international community outside of Europe has much else to worry about while the EU believes this is Greece's own doing. That's why we are seeing such rough austerity measures.

Greece is in between a rock and a hard place. As long as the EU holds firm on the current measures Greece will continue to struggle and more likely default on its payments. Just as you mentioned, Tsiparas needs to somehow come up with a better plan. However, this is easier said then done because amidst the economic collapse radical political groups have sprung up that are gaining momentum as they are playing on many Greek's sentiments. I watched a Vice documentary the other day on Golden Dawn, a far right group, and they were absolutely insane! I am not entirely sure the Greeks realize that they haven't truly bottomed out yet and things could in fact get much much worse if they don't get their sh!t together, collectively.

If I were in charge it would be to avoid defaulting and instead come up with a better plan to satisfy the EU. Obviously this would be coming back on his anti austerity but his job is to save the country, not campaign. Leaving the EU and going back to the drachma seems more and more a sensible scenario each day.

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Feb 10, 2015

If I were Greece I would exit the European Union, become part of the European Economic Area, drop the Euro, but not default on sovereign debt. I'd focus on a pro-economic growth strategy and grow my way out of fiscal peril. Unfortunately, Syriza--communists--are fully grown children (blithering idiots), and their idea of "pro-economic growth" is to increase government expenditures. That's not going to work when you can't borrow efficiently in the sovereign debt market.

I've got numerous friends who are Greek Americans and they are wonderful, but Greek nationals in the collective are literally some of the stupidest people to ever walk the face of the Earth. What a horrible generation of individuals that make up the modern Greek state. Lazy, corrupt, entitled.

Feb 10, 2015
DCDepository:

If I were Greece I would exit the European Union, become part of the European Economic Area, drop the Euro, but not default on sovereign debt.

have fun dropping the euro without redenominating existing debt and avoiding default bro

Feb 10, 2015
whatwhatwhat:
DCDepository:

If I were Greece I would exit the European Union, become part of the European Economic Area, drop the Euro, but not default on sovereign debt.

have fun dropping the euro without redenominating existing debt and avoiding default bro

I'm not a currency expert, and I'm open to instruction, but I don't think re-denominating existing debt would necessarily constitute default. If anything, it seems that inflation would make it easier to re-pay debt, thus easier to avoid default.

Feb 10, 2015
DCDepository:

If I were Greece I would exit the European Union, become part of the European Economic Area, drop the Euro, but not default on sovereign debt. I'd focus on a pro-economic growth strategy and grow my way out of fiscal peril. Unfortunately, Syriza--communists--are fully grown children (blithering idiots), and their idea of "pro-economic growth" is to increase government expenditures. That's not going to work when you can't borrow efficiently in the sovereign debt market.

I've got numerous friends who are Greek Americans and they are wonderful, but Greek nationals in the collective are literally some of the stupidest people to ever walk the face of the Earth. What a horrible generation of individuals that make up the modern Greek state. Lazy, corrupt, entitled.

Regardless of currency implications, your post is absolutely correct. Laziness and entitlement pushes to a new low when you see what the Greek people have demanded from their government. It's ridiculous. Wonder when Merkel and the Euro union teat will choose to shut off the milk.

Feb 10, 2015

If Greece exits, they would likely default on a good chunk of sovereign debt that belongs to the European holders - both private and the public holder plus the ECB.

They would likely keep their obligation to the IMF and to any non-European holders. There's no such thing as a pleasant breakup and the purpose of keeping their obligation to non European holders is to make sure they have some kind of link to outside funding as they will already be burning a bridge w/ the creditor nations in Europe.

That's what I would do if I were Greece as well. Get a fresh start, do my best to save face to the rest of world and uphold that segment of the obligations. If you control the narrative or at least continue on the narrative that they have now, which is that they can't honor their words to those that act as a slave driver, and that Greece would always honor those who are more fair to us, Greece may have a slight chance of keeping some kind of relationship with the outside world.

Feb 10, 2015
Lexington55:

If Greece exits, they would likely default on a good chunk of sovereign debt that belongs to the European holders - both private and the public holder plus the ECB.

They would likely keep their obligation to the IMF and to any non-European holders. There's no such thing as a pleasant breakup and the purpose of keeping their obligation to non European holders is to make sure they have some kind of link to outside funding as they will already be burning a bridge w/ the creditor nations in Europe.

I guess my point is not what I think will happen--I think if Syriza were to cut ties with the EU and European Union they probably would default for the reasons you mentioned--my point was to state what I would do if I were leading Greece moving forward. Leaving the EU and Euro doesn't necessarily mean Greece HAS to default on their European debt. I'm an Alexander Hamilton-type guy--I would pay 100% of my debts, with interest, because that's in the best long-term interest of the nation. Leaving the Euro and the EU may be in the best short-to-medium term interest of Greece, but long-term they MUST pay their debts.

Feb 10, 2015

But I do agree whole heatedly with the latter part of your assertion.

I actually hope that Greece exits and that they would crash and burn. As a reminder to everyone that swinging for leftist fence would end in tragedy.

Best Response
Feb 10, 2015

There will be some sort of restructuring. Either that or Greece exits the euro and its the beginning of the end for the single currency.

As poorly as Greece has managed its finances and despite how corrupt its elites are, the policy mix imposed by the Troika has been impossibly stupid and forced Greece into a vicious cycle of debt deflation that is impossible to get out of. It shows that the Germans would rather extend and pretend while punishing the Greeks than reach an actual solution.

Protecting the euro is obviously in Germany's best interest since it fuels the teutonic export machine so Greece actually has all the cards in right now, believe it or not.

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Feb 10, 2015
GoodBread:

T

As poorly as Greece has managed its finances and despite how corrupt its elites are, the policy mix imposed by the Troika has been impossibly stupid and forced Greece into a vicious cycle of debt deflation that is impossible to get out of. It shows that the Germans would rather extend and pretend while punishing the Greeks than reach an actual solution.

This is the most (probably only?) intelligent comment in this thread so far.

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Feb 10, 2015

Amen. 25%+ unemployment, a 25% accumulated reduction of GDP and 6 consecutive years of recession. That's a depression ffs. I dislike Syriza, but hopefully its election will ring some bells on some stubborn thick-headed bureaucrats who previously had a much friendlier government and could work things out. The real threat for the eurozone is Troika's divorce with reality, Greece is the scapegoat.

The reality is: a 40% of the population doesn't have - financially - to lose anything anymore. It might soon become 50%+. Scaremongering is over. There's no incentive for them to stay in the euro anymore, and more and more start to support an exit.

Colourful TV, colourless Life.

Feb 11, 2015
Bonus:

Amen. 25%+ unemployment, a 25% accumulated reduction of GDP and 6 consecutive years of recession. That's a depression ffs. I dislike Syriza, but hopefully its election will ring some bells on some stubborn thick-headed bureaucrats who previously had a much friendlier government and could work things out. The real threat for the eurozone is Troika's divorce with reality, Greece is the scapegoat.

The reality is: a 40% of the population doesn't have - financially - to lose anything anymore. It might soon become 50%+. Scaremongering is over. There's no incentive for them to stay in the euro anymore, and more and more start to support an exit.

What's the alternative to the current economic state of affairs in Greece, communists in power notwithstanding? Who would loan Greece (affordable) money to stimulate their economy through government spending? Would you? And at what interest rate? There is an economic depression in Greece because it's economy was far too dependent on government spending. The debt markets awoke to this fact when Greece required a bailout due to insolvency/potential insolvency. Greece didn't need a bailout because the balance sheet was bad--the nation was literally insolvent/approaching insolvency; they didn't have the cash to pay their debts. The 25% unemployment rate is a natural consequence of this.

There is no viable alternative in Greece to the current situation other than to restructure the economy through pro-growth economic reforms and a privatization of the economy. That's why, in my view, Greece is doomed for the foreseeable future. Even its "conservative" parties are run by economic illiterates. Electing communists is the final act of suicide by the descendants of the founders of Western civilization. It's really a national shame.

I agree that there is no incentive to remain in the Euro. I think they need to re-pay their debts, however. Look at the long-term mess defaults have played on the Argentinian fiscal state over a decade later.

Feb 11, 2015

Hello

Greece is going to Default (will happen)
Greece will be out of the EU (shouldn't be there in first place...) (will happen)
EU don't need Greece anymore (will happen)
Maybe Italy will join Greece but that means the end of Euro (unlikely to happen)

HUE

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Feb 15, 2015

Well first, I am not sure if Troika was just giving targets or actually suggesting the tax hike (anyone here knows?). But anyway, I think the blame is for sure on Greeks and their politicians. They had a great opportunity to change things - reform the labor market, tax system, public sector etc. People were in the streets anyway and the rest was ready for the pain. The point is they didn't do much! Some of the cuts in number of public employees are just fake - in some cases nobody actually lost a job, they closed jobs which were sort of vacancies. And if you take into account how crazy inefficient the Greek state was/is, even 10% cuts look very low. Most of the people who lost their jobs came from the private sector. But more importantly, they didn't do much to make the labor force more flexible and to cut the red tape. Also there are still lots of companies owned by the government which should be private.

Regarding the size of the debt itself. On one hand, it looks large. On the other hand, the maturity is stretched into 2040 or so and the coupon is artificially low, anyone wants to guess what's the present value of all that? Their interest payments are lower than that of Italy or Portugal (as % of GDP). They should stop complaining and start doing.

Also as a side note, their politicians look a little bit silly when they go all casual to "negotiate" about the bailout, while promising increase in pensions when the bail out money is provided among others by Slovakia where pensions are a fraction of these in Greece.

Feb 15, 2015
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