5 ms·

The core of the matter is that Greece simply cannot pay back even the payments due on their government bonds / loans without further loans, and this has been th

The core of the matter is that Greece simply cannot pay back even the payments due on their government bonds / loans without further loans, and this has been the situation for a number of years now. Now while Greece has made major reforms as already demanded by the Troika, it has also suffered a 25% reduction in its GDP: this is a simple byproduct of austerity, you cannot (easily) reduce government spending without it having a flow-on effect on GDP, and it is rather easy to push an economy into a debt spiral, where austerity leads to reduced GDP, and thus reduced government revenue, which requires further austerity, and produces further GDP contraction. For it's part, the Syriza government has offered to run a budgetary surplus of around 1% of GBP this financial year (which would affect GDP negatively) to around 3.5% of GDP in 2018 (which is flat-out insane). This has not been accepted by the Troika. My own view is that the rest of Europe is acting to protect those who made the risky loans to Greece, knowing full well that there was a risk of default, and for which they extracted high rates of interest. There has now been plenty of pain from the Greek people, and to expect more to protect bondholders who knew exactly what risk they were getting in to reeks of moral hazard.

_delirium 11y ago
I agree with the first part: the bailout package so far has failed, which is not a huge surprise. An interesting aspect has been that, more or less, the Americans were right on this one: American economists thought the plan's projections were unrealistic and that significant GDP contractions were more likely. The ECB had very rosy projections about the economic growth that would be follow on very soon after the austerity program (within 1-2 years), which were not really in keeping with reality. I'm not sure I agree with the who-benefits part in the last bit, though. As an explanation of the 2010 bailout, protecting the bondholders has some truth to it. But by now that has mostly already happened: the bailout package shifted most of the debt held by the private sector (mostly German and French banks) to the IMF and ECB's books. That is one reason that Greece's negotiating hand is worse now. At that time they had a mutually-assured destruction angle, because the bailout was necessary to bail out the German and French banks. Greece did a poor job playing that hand, agreeing to a package that successfully bailed out the German and French banks (with EU, ECB, and IMF money) but without even plausibly solving the problem on Greece's end. What's the motivation now? It could be to protect the remaining bondholders (basically, the "troika"), but realistically even they cannot believe they will actually receive payment in full, so their interest can't be rationally protected by simply demanding it. In my opinion, the motivation is more driven by two political constraints: 1) Europe is in a national-populist mood, and other countries' politicians have their own domestic voters to worry about. Parties like True Finns, Alternative for Germany, and Dansk Folkeparti exert significant influence (in the case of True Finns, within government), and their line is "tough on foreigners" and euroscepticism. 2) The EU & ECB don't want to admit that their economic policy in this case has been poorly designed, so there is a bit of saving-facing stubbornness going on. (The IMF by contrast has come close to admitting a policy rethink is necessary, though not officially.)
stock_toaster 11y ago
The inability of the Greek government to print their own money to try and counter deflation (I read it was something like between 2% and 3% year over year for the last two years) is also pretty rough. Not only due to probably further contracting GDP, but also by making loans more expensive!
- akg_67 11y ago
  This is the main problem. Greece can't get out of the problem without printing money, devaluing currency, that result in cheaper export and increasing revenue through increased export and getting out of the trouble. Euro experiment is showing that Monetary union without Fiscal union doesn't work. How do you reconcile Germany's need to keep Euro strong and Greece's need to make Euro weaker? Some sort of transfer payments need to be made from Germany and other economically stronger countries to countries in weaker situations such as Greece or this monetary union without fiscal union experiment is going to fail.
- keithpeter 11y ago
  And Germany has not seen its exports rise in cost over the last decade or so as they would have done if the Deutsche Mark still existed. Currency union cuts both ways. UK: after the experience of Black Monday and the European Exchange Rate Mechanism, many people here were wary of joining the Euro.
MrBuddyCasino 11y ago
The german and french banks have already been saved, since roughly the beginning of this year, they don't have any meaningful positions in greek loans anymore. I assume good faith and suspect that Greece is forced into reforms that will be beneficial for its long term development, but would not happen otherwise. Everyone expects there will be talks about debt cuts afterwards, basic math proves there is no other way. If Merkel is interested in keeping Greece in the eurozone, it has to be kept stable long-term, or else it all was in vain.
Pyxl101 11y ago
How well are GDP figures isolated from the loans that Greece was taking on? For example, imagine that we measure GDP based on income. Greece takes on loans in order to pay its pensioners, who pay corporations, who report the amount as income. Does the act of taking on this loan automatically increase GDP? (By an amount greater than the loan itself due to trickle down effects?) I assume that because of these loans, someone in Greece became richer than they would have been otherwise, and the wealth allowed them to buy a sportscar, which contributes to Greek GDP. But that doesn't mean they 'should have been' buying sportscars, and you can imagine an alternative timeline where there were no loans, and they weren't rich enough to afford it. No growth, no contraction. If the economy is temporarily stimulated by heavy borrowing, and then the borrowing is shut down, it seems like the GDP will grow and then contract. The percentage of change will depend on the size of the loans versus the overall economy. Is it potentially the case that the "old" GDP was in some sense false because it was supported only by the loans? Is the contraction a "bad" thing if the previous GDP was artificially inflated by the borrowing and in no way sustainable on its own? Is it "bad", or might this adjustment be necessary to realign the economy around operating without heavy borrowing? I'm not an economist and don't know these answers, but they're certainly questions I'm wondering about. Describing the crisis, the World Post wrote: > Nobody expects Greece to repay its debt. It has for a long time been incorporated in behavior and financial planning that this would be absurd. It is therefore a misunderstanding when the crisis is sometimes represented as creditors forcing Greece into impossible austerity. It is not at all about that. > It is about getting Greece to change its economic model from the existing one dependent on heavy borrowing year after year to a model where revenues and expenditures broadly speaking match each other."
- tomp 11y ago
  > Greece takes on loans in order to pay its pensioners, Apparently, what actually happened is that Greece took on loans (from the ECB, EU and IMF) in order to pay its previous loans (private banks). The people haven't seen much, if any, of that money.
  - Pyxl101 11y ago
    Yes. They took on new bailout loans with different people in order to pay their existing loans. They were for that purpose specifically so it shouldn't be too much of a surprise. If they didn't need the money to pay the old loans, they wouldn't have taken new loans. And likewise, since they took out new loans to pay their old loans, it's understandable that the money didn't stay in Greece. Money would only have stayed in Greece if the new loans were even bigger than the old ones. Ultimately, the risk of default was transferred from one group to another. But, the money was in Greece initially, in the form of the original loans. That money has been propping up the economy and stimulating investment for years. The money should have already had its effect, and now Greece's creditors want it to be paid back. Greece hasn't fixed a lot of its dysfunction, so it seems like the loans haven't accomplished much in the way of permanent benefit.
vixen99 11y ago
its part
zmb_ 11y ago
>My own view is that the rest of Europe is acting to protect those who made the risky loans to Greece The loans haven't been held by private banks since the bailout started (who took a 50% write down in the process). The debt is now mostly held by the Eurozone states, and to lesser degree the ECB and IMF. The debt, by the way, is about 3% of the European GDP, and Greece's yearly interest payments are below many other Eurozone countries, and the maturity on the bailout funds is long (starting in 2030). The competing argument from the beginning was that the Eurozone governments should have just bailed out their own banks directly, and let Greece default. In hindsight that might have been the better solution, for the Eurozone at least. When you bailout a bank, you get control and you can sell your stake in the market later (for profit or loss). When you bailout a state, you have very little leverage and are exposed to the whims of the voters and politicians in a volatile situation, as shown by Greece. The argument that won in the end was to keep Greece afloat by a joint bailout by the Institutions (which goes against the no-bailout clause of the Eurozone treaties).
- leaveyou 11y ago
  Sorry, I accidentally upvoted your comment. I don't get why you aren't more outraged by the abundance of "bailout" in your arguments. If a man makes a bad investment it's a tragedy, if a million men make it, it's statistics but if a bunch of banks do it, it's politics ? I want to be able to lend money like a bank and if my debtors want to default, I want the state to give me at least 50% of my money back first and then to squeeze the last penny from the debtor in a long process of negotiations and black mailing paid by everybody's money, because it's for a common good right ?

_delirium 11y ago

I agree with the first part: the bailout package so far has failed, which is not a huge surprise. An interesting aspect has been that, more or less, the Americans were right on this one: American economists thought the plan's projections were unrealistic and that significant GDP contractions were more likely. The ECB had very rosy projections about the economic growth that would be follow on very soon after the austerity program (within 1-2 years), which were not really in keeping with reality. I'm not sure I agree with the who-benefits part in the last bit, though. As an explanation of the 2010 bailout, protecting the bondholders has some truth to it. But by now that has mostly already happened: the bailout package shifted most of the debt held by the private sector (mostly German and French banks) to the IMF and ECB's books. That is one reason that Greece's negotiating hand is worse now. At that time they had a mutually-assured destruction angle, because the bailout was necessary to bail out the German and French banks. Greece did a poor job playing that hand, agreeing to a package that successfully bailed out the German and French banks (with EU, ECB, and IMF money) but without even plausibly solving the problem on Greece's end. What's the motivation now? It could be to protect the remaining bondholders (basically, the "troika"), but realistically even they cannot believe they will actually receive payment in full, so their interest can't be rationally protected by simply demanding it. In my opinion, the motivation is more driven by two political constraints: 1) Europe is in a national-populist mood, and other countries' politicians have their own domestic voters to worry about. Parties like True Finns, Alternative for Germany, and Dansk Folkeparti exert significant influence (in the case of True Finns, within government), and their line is "tough on foreigners" and euroscepticism. 2) The EU & ECB don't want to admit that their economic policy in this case has been poorly designed, so there is a bit of saving-facing stubbornness going on. (The IMF by contrast has come close to admitting a policy rethink is necessary, though not officially.)

stock_toaster 11y ago

The inability of the Greek government to print their own money to try and counter deflation (I read it was something like between 2% and 3% year over year for the last two years) is also pretty rough. Not only due to probably further contracting GDP, but also by making loans more expensive!

akg_67 11y ago
This is the main problem. Greece can't get out of the problem without printing money, devaluing currency, that result in cheaper export and increasing revenue through increased export and getting out of the trouble. Euro experiment is showing that Monetary union without Fiscal union doesn't work. How do you reconcile Germany's need to keep Euro strong and Greece's need to make Euro weaker? Some sort of transfer payments need to be made from Germany and other economically stronger countries to countries in weaker situations such as Greece or this monetary union without fiscal union experiment is going to fail.
keithpeter 11y ago
And Germany has not seen its exports rise in cost over the last decade or so as they would have done if the Deutsche Mark still existed. Currency union cuts both ways. UK: after the experience of Black Monday and the European Exchange Rate Mechanism, many people here were wary of joining the Euro.

MrBuddyCasino 11y ago

The german and french banks have already been saved, since roughly the beginning of this year, they don't have any meaningful positions in greek loans anymore. I assume good faith and suspect that Greece is forced into reforms that will be beneficial for its long term development, but would not happen otherwise. Everyone expects there will be talks about debt cuts afterwards, basic math proves there is no other way. If Merkel is interested in keeping Greece in the eurozone, it has to be kept stable long-term, or else it all was in vain.

Pyxl101 11y ago

How well are GDP figures isolated from the loans that Greece was taking on? For example, imagine that we measure GDP based on income. Greece takes on loans in order to pay its pensioners, who pay corporations, who report the amount as income. Does the act of taking on this loan automatically increase GDP? (By an amount greater than the loan itself due to trickle down effects?) I assume that because of these loans, someone in Greece became richer than they would have been otherwise, and the wealth allowed them to buy a sportscar, which contributes to Greek GDP. But that doesn't mean they 'should have been' buying sportscars, and you can imagine an alternative timeline where there were no loans, and they weren't rich enough to afford it. No growth, no contraction. If the economy is temporarily stimulated by heavy borrowing, and then the borrowing is shut down, it seems like the GDP will grow and then contract. The percentage of change will depend on the size of the loans versus the overall economy. Is it potentially the case that the "old" GDP was in some sense false because it was supported only by the loans? Is the contraction a "bad" thing if the previous GDP was artificially inflated by the borrowing and in no way sustainable on its own? Is it "bad", or might this adjustment be necessary to realign the economy around operating without heavy borrowing? I'm not an economist and don't know these answers, but they're certainly questions I'm wondering about. Describing the crisis, the World Post wrote: > Nobody expects Greece to repay its debt. It has for a long time been incorporated in behavior and financial planning that this would be absurd. It is therefore a misunderstanding when the crisis is sometimes represented as creditors forcing Greece into impossible austerity. It is not at all about that. > It is about getting Greece to change its economic model from the existing one dependent on heavy borrowing year after year to a model where revenues and expenditures broadly speaking match each other."

tomp 11y ago
> Greece takes on loans in order to pay its pensioners, Apparently, what actually happened is that Greece took on loans (from the ECB, EU and IMF) in order to pay its previous loans (private banks). The people haven't seen much, if any, of that money.
- Pyxl101 11y ago
  Yes. They took on new bailout loans with different people in order to pay their existing loans. They were for that purpose specifically so it shouldn't be too much of a surprise. If they didn't need the money to pay the old loans, they wouldn't have taken new loans. And likewise, since they took out new loans to pay their old loans, it's understandable that the money didn't stay in Greece. Money would only have stayed in Greece if the new loans were even bigger than the old ones. Ultimately, the risk of default was transferred from one group to another. But, the money was in Greece initially, in the form of the original loans. That money has been propping up the economy and stimulating investment for years. The money should have already had its effect, and now Greece's creditors want it to be paid back. Greece hasn't fixed a lot of its dysfunction, so it seems like the loans haven't accomplished much in the way of permanent benefit.

vixen99 11y ago

its part

zmb_ 11y ago

>My own view is that the rest of Europe is acting to protect those who made the risky loans to Greece The loans haven't been held by private banks since the bailout started (who took a 50% write down in the process). The debt is now mostly held by the Eurozone states, and to lesser degree the ECB and IMF. The debt, by the way, is about 3% of the European GDP, and Greece's yearly interest payments are below many other Eurozone countries, and the maturity on the bailout funds is long (starting in 2030). The competing argument from the beginning was that the Eurozone governments should have just bailed out their own banks directly, and let Greece default. In hindsight that might have been the better solution, for the Eurozone at least. When you bailout a bank, you get control and you can sell your stake in the market later (for profit or loss). When you bailout a state, you have very little leverage and are exposed to the whims of the voters and politicians in a volatile situation, as shown by Greece. The argument that won in the end was to keep Greece afloat by a joint bailout by the Institutions (which goes against the no-bailout clause of the Eurozone treaties).

leaveyou 11y ago
Sorry, I accidentally upvoted your comment. I don't get why you aren't more outraged by the abundance of "bailout" in your arguments. If a man makes a bad investment it's a tragedy, if a million men make it, it's statistics but if a bunch of banks do it, it's politics ? I want to be able to lend money like a bank and if my debtors want to default, I want the state to give me at least 50% of my money back first and then to squeeze the last penny from the debtor in a long process of negotiations and black mailing paid by everybody's money, because it's for a common good right ?