What on earth is the ECB up to?

http://www.tradervox.com/sites/default/files/images/European-Union/Greece_ECB_flag02.jpg


The ECB has abruptly announced withdrawal of the "waiver" under which it was prepared to accept Greek sovereign bonds as collateral for liquidity. This created a considerable Twitter storm, with lots of angry people saying the ECB's action was beyond its mandate and far too precipitate: it should at least have waited for the Greek Finance Minister, Yanis Varoufakis, to meet his German counterpart, and it should not be acting as if the bailout programme was ended when negotiations were still proceeding. I admit, I was one of those people.

And I stand by my views. The ECB is acting far beyond its mandate in seeking to influence negotiations between Eurozone member states regarding the terms and conditions under which member states lend to their distressed partners. It has no business interfering in fiscal policy: if the Greek government decides to run 1.5% fiscal surpluses instead of 4.5%, hike minimum wages and create lots of government jobs, it is none of the ECB's business. The ECB's monetary policy failures are legion: it should put its own house in order, rather than interfering with the conduct of fiscal policy. And worse, its persistent interference in fiscal policy is a clear conflict of interest, as the Advocate General of the European Court of Justice noted in relation to the OMT programme. It should not be a member of the Troika at all, and certainly should not use changes in fiscal policy by a democratically-elected sovereign government - even one that has inherited an economy in tatters with a massive debt burden - as justification for limiting liquidity to that country's banking system. Monetary policy should never be used to serve fiscal or political ends. Not ever. 

OK, rant over. I've thought about this a bit more now. Something doesn't quite add up.

Firstly, there is the timing. The Syriza government has now been in power for ten days. Why did the ECB wait until now to pull the plug on the waiver? It might simply be that today was the first planned meeting of the Governing Council. But that doesn't exactly suggest that this is an urgent problem - so why is the ECB doing this now, given that the bailout extension is not until 28th February and Greece has already asked for time to come up with an alternative plan?

Secondly, there is the timing. (Yes, I mean that). Varoufakis met ECB chief Mario Draghi yesterday and he meets German Finance Minister Wolfgang Schäuble today. In between those two meetings the ECB pulled the waiver. Why? Well, Schäuble is openly hostile to Varoufakis's ideas of debt relief and an end to austerity, while Draghi has so far kept very quiet (though his deputy Vitor Constancio has been more forthright). Schäuble will no doubt be looking for explicit backing from the ECB. Should this action be taken as the ECB's governing council signalling whose side it is on?

And thirdly, there is this:
Note the date. Yes, you read right. Over 6 months ago, Varoufakis predicted that the ECB would attempt to pull funding from the Greek banks.

Of course, today's action is not pulling funding from Greek banks, since they can still pledge other assets at the ECB. But all funding using any form of Greek sovereign debt must, from 11 February, be obtained from the Hellenic Central Bank under the Emergency Liquidity Assistance (ELA) scheme. And the ELA scheme itself is under the control of the ECB and reviewed bi-weekly. The ECB could pull it at any moment.

Varoufakis's comment is undoubtedly a reference to the fact that pulling ELA from Greek banks would cause their sudden disorderly collapse. The ECB has used this trick before: it threatened to pull ELA from Irish banks in 2010, and it actually pulled ELA from Cyprus's Laiki Bank and the Bank of Cyprus, forcing immediate closure and restructuring. This second piece of brinkmanship resulted in the worst bank bailout decision in the history of the planet, which was (fortunately) subsequently overturned by the Cypriot legislature. Undermining deposit insurance is almost criminally insane.

But pulling ELA from Greek banks would have a much larger impact. Germans fantasise that ELA can be pulled without systemic impact, but this is not remotely credible. The impact would be smaller than it would have been in 2010, but it would still be highly destabilising to the global financial system. Such an action would greatly enhance the ECB's reputation for incompetence and probably end the careers of its senior officials.

If the collapse of the Greek banks precipitated the disorderly exit of Greece from the Euro, there would be significant losses for the ECB itself, the other Eurozone governments and probably the IMF. The impact on the European economy would be devastating and it would send shock waves around the world. And it would set an important precedent. If one member state can leave, so can others. How can the ECB have any credibility as guardian of the Euro if it is seen to be actively forcing out member states?

If the ECB forced a banking collapse by pulling ELA, Greece might try to limp on within the Eurozone as Cyprus did, using capital controls to prevent capital flight. But this would be the worst possible situation for Greece and it seems highly unlikely that the Greek government would even consider it. Greece's economy is already in worse shape than Cyprus's was at the time of its banking collapse, and Cyprus's banking system was crippled but not destroyed by the restructuring. Greece's banking system would be wrecked beyond repair. Greece would have no choice but to create a completely new currency and reflate its economy directly via the central bank. That means leaving the Euro, at least temporarily.

So as Varoufakis said, the ECB's threat to pull ELA appears to be empty. I said on Twitter that I thought the ECB's action was sabre-rattling. Karl Whelan, it seems, thinks so too. "Relax, it’s no big deal. Just some muscles being flexed." he says at the start of this blogpost. But whose feathers is the ECB trying to ruffle? Lorcan thinks the target is Greece:
So, all together, the move from the ECB should have very little immediate effect on the Greek banks, provided there is not a complete loss of confidence in the Greek banking system in the coming days, and should be viewed as what it is: The ECB is pressuring the Greek government.

Greece's finance minister, Yanis Varoufakis, has been agitating for Greek debt relief since his appointment after January's election. Today the ECB gave its answer to his moves. If the Greek government does not agree to reenter a program, the ECB will not allow its debt to be used as collateral.
I don't believe it. If this is the ECB's intention, it is playing right into Varoufakis's hands. It's as if a chess player deliberately chose to adopt the exact game strategy that his opponent, six months before, had published in a chess magazine. Draghi is every bit as good a game theorist as Varoufakis, and the two men met before the ECB's decision. It's just not credible that Draghi would unintentionally adopt Varoufakis's game strategy.

Charles Forelle observed that the ECB's action doesn't just pressure Greece:
Is it possible that this is not an antagonistic move at all, from Greece's point of view? Could it be that far from kicking Greece, the ECB's real target is Germany? For some time now, it has been evident that Draghi is no fan of Germany's "Austerity Forever" stance. Pressuring Germany into negotiating might be his intention. But if so, it is a highly risky strategy. Pulling the waiver is likely to increase capital flight from Greece and raise Greek bond yields still further, putting further pressure on Greece's fragile finances. How exactly would this help Greece?

Alessandro Del Prete helpfully sent me this piece by Jacques Sapir which explains how weakening Greece's position could actually strengthen its hand (my emphasis):
In this strategic game, it is clear that Greece has deliberately chosen the strategy qualified by Thomas Schelling, one of the founders of game theory, but also of nuclear dissuasion, as « coercive deficiency »[5]. In fact, this term of « coercive deficiency » was imagined by L. Wilmerding in 1943 in order to describe a situation where agencies enter into expenses without prior financing, knowing that morally the government will not be able to refuse funding them [6]. Schelling’s contribution consists in showing that this situation can be generalized and that a situation of weakness can reveal itself to be an instrument of coercion upon others. He also showed how it can be rational for an actor knowing himself to be in a position of weakness from the start, to increase his weakness in order to use it in negotiation. Reversing Jack London, one can speak in this instance of a “strength of the weak.” [7]. It is in this context that we must understand the renunciation by the Greek government of the last slice of aid promised by the so-called « Troïka, » amounting to 7 billion euros. Of course, having rejected the legitimacy of said “Troïka, » it could not logically accept to take advantage of it. But, in a more subtle way, this gesture is putting Greece voluntarily at the edge of the abyss and demonstrates all at once its resolve to go the bitter end (like Cortez burning his ships before moving up to Mexico) and to increase the pressure on Germany. We are here in a full blown exercise of « coercive deficiency ».
This explains Varoufakis's "Do ahead" (he probably meant "Go ahead"). He stands at the edge of the cliff, and the ECB says "Do what we want or we will push you over". His response: "Go on then, push".

It must be remembered that this game is being played on a global stage. The US President, Barack Obama, has openly sided with the Greeks, warning that "You cannot keep on squeezing countries that are in the midst of a depression. At some point there has to be a growth strategy in order for them to pay off their debts and eliminate some of their deficits". And the UK's George Osborne, while calling for the Greek finance minister to "act responsibly", also criticised the Eurozone for its lack of a coherent plan for jobs and growth. Calling for the two sides to strike a deal, he warned that the standoff between Greece and the Eurozone is the "greatest risk facing the global economy". This seems like hyperbole to me, given the continuing crisis in Ukraine and military game-playing in the South China Sea, not to mention the Islamic insanity in the Middle East. But it all helps the Greek cause.

Varoufakis is gambling that the Eurozone, and more particularly Germany, will not dare to push him off the cliff because of the consequences for international political relations. If Germany was seen to force Greece out of the Euro by refusing to negotiate, it would become an international pariah. There are already voices reminding Germany of its own debt forgiveness in 1953, and anti-austerity movements in many other Eurozone countries would only be encouraged by Germany and/or the ECB looking like bullies. Forcing Greece out of the Euro could result in the disorderly unravelling of the whole thing.

I may be completely wrong, but this looks far more plausible to me than a simple explanation that fails to take account of the signals given by both Varoufakis and Draghi. In which case, Schäuble should beware. His position is nowhere near as strong as he thinks. He is dangerously close to the cliff edge himself. If Germany pushes Greece over the edge, Greece may well take Germany down with it.   

Related reading:

Greece's brinkmanship - Jacques Sapir
So what did the ECB just do to Greece? - Karl Whelan
ECB's overnight surprise forces Greece to act - Juhani Huopainen
What the ECB's move on Greek government debt is really all about - Lorcan Roche Kelly
So whose problem is Greek debt, anyway? - Forbes





Comments

  1. Elegantly to the point. Your first two paragraphs are the best of yours I have ever read. Bravo.

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    1. Whatever are you talking about?

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    2. I thought anon 5:50 made it quite clear… and agree, brilliant first two paragraphs. Whole this is impressive.
      Just found this site. very astute, Coppola; and a fun rad to boot. Thank you.
      kass

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    3. kass:

      I thought my question of 5 February 2015 at 09:37 made quite clear what I think.

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  2. The Goldman touch again, Frances?

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  3. I wish Draghi was a better politician but finally I don't so

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    1. It seems that you are not alone to think that Draghi has to act as a politician. But Draghi is a bureaucrat. He has to follow the mandate he has, he was appointed and not elected.

      Bailing out Greece has to be a political decision. The ECB is not legally allowed to bail out eu member countries. The ECB may have done that already - but it is arguing that it does not do so. The ECB has to argue that it assumes that Greece can pay its loans back.

      The ECB argues that if Greece follows the program by the troika the loans are not unsafe. Most economists and even politicians did not believe that. But a bureaucrat can make a mistaken judgment, this is not the same as explicitly violating the no-bailout-rule.

      The ECB having previously argued that under the condition that Greece is following program by the troika its purchases of greek debt are in its mandate, has to act now that Greece does not want to follow through. So not extending the loans is only logical if the ECB wants to save its credibility.

      A bailout for Greece is still possible, but this has to be a decision made by democratically elected politicians. The ECB may have given them some time, but it can not go on pretending if Greece does not play by the unwritten rules...

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    2. Sreak ironic....You are right anyway

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  4. I dont think the ECB are capable of thinking at this game theory level Frances. Remember the Cyprus debacle? The simple explanation is that they just drunk on power and throwing their weight around. The best analogy is Varoufakis is a highly skilled poker player who is trying to play against a donkey(to use the poker terminology). The problem is it is extremely difficult for a highly skilled player to get a read on a donkey which is why sometimes the more skilled player makes a mistake against the donkey and ends up losing his shirt!

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  5. Monetary policy should always be used to serve fiscal or political ends.

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    1. Just not the ones the ECB is pursuing.

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  6. The internal decisions made by Syriza show that they only care for the unions and the public sector workers. This is the problem that EU is facing and not the debt (which has average duration of 16 years and its rate is compressed).
    Whats the point of saving Greece if they start spending again? Reinstatement of public sector workers and support of PPC ..

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    1. Nonsense. Syriza recognise that the neoliberal economic model is busted. Strong unions are a good thing - look at Germany! As for the public sector - virtually every single macroeconomist on the planet has been screaming for the past 3+ years that the global economy is demand deficient - the only realistic way to solve this problem in a world that is still recovering from a financial crisis that has meant the private sector has been fiercely deleveraging is for governments to boost agg demand by boosting investment - especially infrastructure etc. So yes we need a strong public sector to make this happen - higher capital spending, retain good public sector servants etc.

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    2. Retain good public sector servants? That is a joke for Greece (and many countries). Are these the ones that retire at 55 or work from home?

      Demand deficient is not what the economy is. If anything CBs have tried to increase demand the last years and they still have not solved the issue. In the end what goes in Greece is irrelevant to what the world economy is doing.

      The only nonsense is the changes that Syriza is proposing:
      -Reinstate 15K public sector workers.
      -Minimum wage at 751 Euro (higher than EU countries!)
      -Increase tax free amount to 12K
      -Giveaways to farmers yet again
      -They want to fight rentiers but still allow PPC to be intact..

      Sorry but this is just a continuation of the policies of the previous parties.
      Nothing different over here. Move on. Pasok n2.

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    3. 150b of euros in weapons purchases in 10 years, often through hundreds of millions in bribes for each contract, all financed by big banks. Greece as third largest arms purchaser in the world during the oughts. 14x as much as any other EU nation.

      Eliminate 130b of euro debt from Greece's overall total back when it was at 280b in 2009, and you will see that Greece's gov't workers (inefficient and full of patronage hires as they are) were not the problem.

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    4. You know who sold them the arms, yes? Funny how we blame Greece for spending money it didn't have on armaments, but we never ever blame the large German and French state-backed arms manufacturers that sold them the arms, nor the large German and French banks that financed those deals.

      Even when Greece was being bailed out it was buying armaments from France. Germany objected, but not because it didn't think a country in a debt crisis should be buying arms. No, it objected because its own arms manufacturers wanted the contract: http://www.spiegel.de/international/europe/germans-question-contract-france-to-sell-frigates-to-greece-in-controversial-deal-a-792189.html

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    5. Frances Coppola5 February 2015 at 19:18

      Nobody forced Greece to buy those expensive armaments. You've heard of demand. What's wrong with supply as long it isn't illegal (drugs etc.)? Econ. 101?

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    6. Hmm. Is it ok to sell alcohol to an alcoholic? It's not illegal, but it may be immoral.

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    7. So you disagree with Paul Krugman who says that the economy is not a morality play?

      And is it wrong to give your armament workers employment when the democratically elected Greek government can get their armaments elsewhere if you refuse?

      As for alcoholics, of course it's immoral, but it's done in all countries that do not have prohibition. Why don't you write a post on how good the Swedish system is? And try to explain why most Western countries have not followed that example? But would you be talking economics? Or just venting your moral opinions (good as they are)?

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    8. Greece does not buy arms and maintain large forces just for fun, but because it faces an aggressive and expansionist opponent in Turkey. Turkey seized Greek territory in 1922 (just as it illegally occupied Northern Cyprus in 1974) and refuses to recognise Greek air space and the territorial waters of the their islands in the Aegean. There are constant non-lethal dogfights between jet fighters over the Aegean and there have been a number of incidents including mid-air collisions and 'accidental' weapon firings. Have a look at YouTube to see Hellenic Air Force imagery of clashes with the Turkish Air Force.

      Without this constant threat Greece would not feel under so much pressure to spend money it does not have on defence. Incidentally, if NATO members start declining to sell weapons for self-defence then that nice Mr Putin will certainly do so, at a knock-down price. Forcing Greece out of the Eurozone and perhaps the EU eventually will result in Greece becoming a de facto Russian ally, something already advocated by some in Syriza. That will really help European long-term stability and economic prospects.

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    9. So, Frances?

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  7. You post a long fairy tale - for a very simply story really.

    The ECB simply followed its rules. No bailout, no ECB liquidity. Technically the ECB would have had to pull liquidity already a week ago when Greece rolled back reforms and exited the bailout agreements.

    And you are wrong: the ECB acted entirely unpolitical. Continued funding of Greece would have been a political decision as well. So the only correct option was to state the obvious (bailout canceled => no liquidity) and kick the ball back to Greece and the Eurogroup. If the Eurogroup decides that Greece should have ECB liquidity then Greece will get it. Simples.

    Finally, a Grexit - or better Grexident - seems survivable looking at the market reaction. Italian bond spreads have shown little reaction. QE insulates the EU from the Grexident. And the stock markets don't care - only Greece is messed up.

    The markets speak a clear - very clear - language this time. The EU is stronger without Greece.

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    1. "Finally, a Grexit - or better Grexident - seems survivable looking at the market reaction. "

      You are dreaming. A Grexit will spark speculative attacks against weaker peripheral countries. It will also cause all kinds of political upheaval - especially in Spain. Grexit would be a catastophe as none of the periphery want to exit the Euro but they would likely be forced out in a chaotic fashion.

      The safest way to end this crisis is a more orderly exit by Germany - this would give oxygen to the periphery and also allow Germany to boost demand in their economy.

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    2. Good point about the ECB following its own rules. It would have been totally inconsistent for the ECB to act in any other way. Greek bonds are junk-rated and the new Greek government has explicitly rejected a continuation of the bailout which was an explicit condition for the exception being made. Greece unilaterally (and quite needlessly) tore up the architecture of the existing bailout programme and is only just realising what this means.

      ELA is a different matter and I think the ECB will try to keep on making it available for an extended period.

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    3. @BlueNut: The only one who is dreaming is you. Had a look at Spanish and Italian bond yields recently? That's all you need to look at to know that there is zero risk of a speculative attack on other countries, as long as they do not behave as lunatic as the new "PASOK 2.0" in Greece. Quite to the contrary, should a Grexident happen, it would teach Podemos a lesson they will never forget.

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  8. The thing is, its a binary choice, either countries that don't follow the rules are ejected from the Eurozone, or they aren't, and the rest of the Eurozone subsidises them. How this is decided over the next few weeks will be critical for the future of Europe.

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    1. It's a binary choice, either the rules and institutional foundations of the Eurozone are changed in way which allows economic adjustment in other ways than internal devaluation or this project will not be feasible in the long term, whatever the result of the current stand-off may be in the short term.

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  9. At this point it's just a matter of fiscal union. After meeting Draghi, Varoufakis stated that the ECB is the central bank of Greece. The ECB, by pulling the ELA, denied this. They did not literally cut liquidity from the Greek banks, since they still can borrow from the central bank of Greece, at a higher rate of cource. They just said that the ECB is not the central bank of Europe. This makes more sense if we recall the QE program that Draghi announced the other day. The bond buy outs will be held by the central banks of the states, not by the ECB (correct me if I'm wrong). In other words, step by step, disintegration. That is the card the austerity clan is playing. As for Draghi, his hands are tied.

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  10. Germany will go for a split EZ - North and South.

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    1. If they do that the "northern" euro value will skyrocket and their exports will ground to a halt....

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    2. Anon, That’s a circular argument. A Northern Euro (more or less aka Deutschmark) would be strong because North Europe’s export performance is (excessively?) strong. A North Euro would float, just like the US dollar, Japanese yen, etc etc, and that “float” at least in theory keeps a country’s external balance of payments in balance in the long run.

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  11. It looks to me the ECB has pulled its liquidity support for Greece to force the issue. Greece, Germany negotiate something and we will work with that. What they don't want is for the parties to talk around each other and not to come to agreement because it's easier not make concessions. The ECB is then left to muddle through without direction or authority.

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  12. All your speculations based on far fetched solutions like, Grexit - Germany Exit - Split Eurozone etc... are total crap, mainly because the Eurozone and their Leaders (Germany-France Particularly) has never shown any balls on radical Changes and that should be taken into account when talking on futures.

    Any Solution that will be radical will surprise the markets and thus mean a great exposure to the System.

    To the article now, we must aknowledge that the ECB did what it should do! Its there to protect the wealthy and thus although in a deadend it should at least show some reaction otherwise there would be a serious issue for them highly paid technocrates. Its a theatrical show upthere and we can only sit and watch their ugly performances.

    Somebody please answer us if there is actually the framework under which Greece or any country of EZ can Exit the EURO?????
    The Lisbon treaty hasnt predicted that, at least that is what i am aware of.

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    1. http://www.ecb.europa.eu/pub/pdf/scplps/ecblwp10.pdf

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  13. Pulling ELA requires a two-thirds vote on the Governing Council. Until then it is effectively an unlimited overdraft - brought about by the pegged dynamic nature of the Euro.

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  14. In point of fact, it's not that Greece won't comply with an external fiscal regime, it's that it won't comply with THIS external fiscal regime (4.5%, Troika Draconis, 25% unemployment, massive -- and foolish -- debt swaps , etc...)

    If the EU reviewed their policy and understood it for what it is, meaning, failed, shortsighted, and misdirected, they could author a slightly more growth oriented regime and save the Euro. (Modest Proposally, which IMHO mostly makes sense, minus the growth-pegged Bonds which are mostly useless)

    But it really all boils down to how much will the bureaucrats reflect on their own foolishness, which is, at this point, exactly none. But Varoufakis needs to ropadope for at least two months while we try to foster this reflection. Hopefully Greek banks can hold out that long.

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    1. The current greek finance minister (with Stuart Holland) have tryed to explain how to solve the situation for years:
      http://yanisvaroufakis.eu/euro-crisis/modest-proposal/

      In fact, this is the reason he is in politic:
      http://yanisvaroufakis.eu/2015/01/09/why-i-am-running-for-a-parliamentary-seat-on-syrizas-ticket/

      It's the final game of the other side what I don't undernstand.

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  15. I am worried, because I would not underestimate the sheer incompetence of Wolfgang Schäuble. This guy thinks incredibly hermetically and is obstinate like a mule. Anything that goes beyond "debts need to be repaid by working more and spending less" is cognitive dissonance at an epic scale to this lawyer whom someone put in charge of a key finance ministry.

    I hope I am wrong and unfair to Mr. Schäuble, but I am really worried at this time.

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    1. Unfortunately, being myself a German, I think you're perfectly right. Schäuble who once seemed to be a smart man, evolved to being an absolute ignoramus on all things macroeconomic. So I'm afraid, there is a huge danger the Germans won't get it and will kick the EZ into the abyss. Just read the German newspapers, each and everyone of them, and you will understand.This is really frightening.

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    2. Well, if you think that "work less and spend more" is the solution to the problems, which is what "PASOK 2.0" is suggesting, then good luck to you. You will need it!

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    3. Spot on comments about Schäuble. That and Frances closing comments are the truth of the situation for Germany.

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  16. Frances may be right about the ECB exceeding its mandate - I'm not an expert on the details there. But
    I'm not impressed by complaints about the "not democratically elected ECB" riding roughshod over "democratically elected" Euro governments. The ECB is owned by democratically elected governments and is presumably carrying out their collective will.

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    1. It is? Because as a "pig", I don't see their politics working in my country interest. Only now, after years, and when Germany is starting to see the wolf in the door, they admit that "maybe" we have a demand problem here..

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    2. Well obviously the ECB (and if I’m right, the politicians giving it orders) are not acting in the interests of pigs: if by “in the interest of pigs” you mean giving Greece etc never ending loans which they clearly won’t pay back and paid for by German taxpayers. The Troika (including the ECB) are trying to enforce a regime in which every country pays its way even though that results in severe social problems for pigs. But that’s an inherent problem for common currencies.

      Re the idea that Greece’s problems can be solved by a simple rise in demand, that is naïve. There could be SOME SCOPE for a little more demand, but any significant increase would just raise inflation in Greece which would make it even less competititive.

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    3. "Well obviously the ECB (and if I’m right, the politicians giving it orders) are not acting in the interests of pigs"
      Well.. And why not? Are we not european? are we not enough people? Is the ECB our central bank or not? Should the europeans of the south to believe in Europe when all the decisions come from Germany?

      "and paid for by German taxpayers"
      Are we talking about Greece here? Because only counting Italy and Spain, together have more money in Greece that the Germans.

      The idea that Europe economic crisis is the fault of the implemented politics is not naive. It's what the ORTHODOXY economist think (including some nobel). Proof of that ECB is going to start QE but, we are not going to recognize that we were wrong from the start, are we?




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  17. I think the ECB is just acting as a Bank . If it thinks the Bonds are default risk then thay are not accepted as collateral. The ECB is pulling the Bond colaterlal programme not the ELA.

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    1. This could be the first real test for a Central Bank holding Bonds that have to be written down.

      Concerns from BIS might be more to the point, as they are final conduit

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  18. If you're right and it's all been gamed out like this then Yanis Varoufakis is a genius.

    The first act of Syriza was to lay roses at the memorial of dead Greek communists, executed by the Nazis.

    Greece's last act in the Eurozone will be an execution at the hands of Germany. They're really laying it on thick for drama!

    There will be a lot of pain for Greece, but most Greeks will blame Germany not Syriza. The left wing Podemos party in Spain will look on in horror, and blame Germany. The right wing Front National in France will look on in horror, and blame Germany.

    Germany will be the new devil of Europe but I still think the Euro will shamble on. I cannot believe how entrenched the centrist establishment pro European parties still are. It may take another election cycle and several more years of depression to kill them, and kill the Euro.

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  19. Excellent post, and I hope you're right. But given the choice between conspiracy and cockup to explain things that go wrong, I fear that the ECB's actions owe more to the latter than the former

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  20. awesome post

    with appropriate deference from Krugman

    :)

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    1. Ah, Krugman, is that the guy who always gets things wrong but still believes he is God's gift to mankind?

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  21. Frances,

    Clausewitz and Sun Tsu would be proud of your strategic analysis.

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  22. Your analysis is very interesting and could be correct but I am inclined to believe in a more simple explanation of the ECB move, that they are putting pressure on the Greek side. As a Greek, I give credit to Varoufakis for his fresh ideas but I am not yet convinced that he knows what he is doing. In the end, Greece is in a very weak bargaining position and its only real alternative is to leave the eurozone. A key difference from previous rounds of negotiations in 2010-2012 is that Greece now has a primary fiscal surplus and a current account surplus which mean that if it comes to Grexit, the devaluation will be contained. Whether the current Greek government is considering Grexit as a last resort

    Another point I want to make is that the situation in Greece is very different from that in Cyprus. The banks in Cyprus in 2013 were insolvent, with their assets below their liabilities due to the haircut in Greek government bonds in 2012. In Greece today, the banks are solvent, at least in paper. Their problem is that they cannot refinance their liabilities because deposits are fleeing in other countries and their assets (loans) are inflexible.

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  23. Frances have to congratulate you for this article.
    About the public sector in Greece: the same families and their favorites were in the Government for the last 40 years (not to say 100 years).
    In all those years the Governments participated to several crimes against public funds. This and their greedy made them vulnerable to blackmails, in order to buy more and more of arms, even when some of them were defective (submarines from Germany sagging p.e.). After all, the same parties, N.D. and Pasok, were in charge from 1974. Question: Those who created the debt have the ability to reverse it?
    About the crisis in Greece -term crisis is euphemism, cause crisis is something temporary- and its contagiousness: this economic equation has more possibilities to lead to the right result, if you add the paragon geopolitics.
    Greece is the east border of EU and a passage for anyone to Mediterranean and, of course, Turkey and Asia. Is an unsinkable aircraft carrier so near to the flames and in Balkans.
    A Grexit is not as easy as it seems. Especially when there is not a member in the new Government who is listed (Lagards’ list, Luxembourg list etc) and, pretty much they are not as vulnerable.

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  24. Greece will default and the Greek banks will be bankrupt.

    Mr. Varoufaki will then have time to write another lengthy book on game theory. As a title I would suggest: "When game theory meets political reality - and why it's all Germany's fault."

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    1. Or, Germany will force Greece out of the EU, which will bring Russia into play. The EU itself will start to collapse, and the USA will intervene to maintain a coherent western sphere of influence and the power of NATO.

      The book title then would be "When game theory meets political reality -- and why Germany tried (again) to destroy Europe".

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    2. I agree with Xenos. The trouble with a lot of economic theory and commentary, some of it on this blog, is that it assumes economics and finance are automatically at the heart of all debate. In the long term this may be (partly) true, but in the shorter term it tends to be issues such as nationalism, international relations, political ideology, geopolitics and conflict that drive the decision-making process forward. Money can always be found to pursue these interests (when was the last war that ended because one or both sides had simply run out of money?). If Greece is forced out of the Eurozone then it will seek new friends elsewhere and the EU may come to regret the German attitude of just letting them go. Greece will exist in a 100 years' time. I wonder if the EU or Euro will?

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    3. @Anonymous, 7 Feb. Interestingly, the whole concept and history of state borrowing derives from raising the money required for war. So at a time that the global economy is in actual or potential depression -- and politicians are too incompetent and pig-headed to do anything intelligent -- then war as a solution to economic problems may be a second best option.

      However, personally I would prefer that German (and other) morons would stop chanting the mantra "If you borrow money, you have to pay it back", and address issues of the real world rather than of German Protestantism.

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  25. I think you're basically looking in the right direction, although the exact strategy details may differ. It's hard to tell at this point.

    My view is that it's mostly a cheap way to establish credibility ("we're tough") while not doing anything actually damageable (as you've explained), so as to (a) give the more enlightened Northern politicians something to reassure their electorates with and (b) it may play with internal ECB politics as well, get brownie points with the hawks on the governing council so that they don't actually do something stupid when it matters. It does make things clearer as well -- some idiots in the eurogroup may have wanted to negotiate on that thing and thus waste everybody's time if it was still on the table.

    On timing I see nothing complicated: it was done as soon as Draghi met Varoufakis, presumably explaining to him what was going to happen (or hinting) and why. Common courtesy and diplomatic propriety?

    Same point put in another way, maybe the ECB just wanted the German press to write that type of article:

    http://www.sueddeutsche.de/wirtschaft/schuldenkrise-ezb-genehmigt-griechenland-notfallkredite-in-milliardenhoehe-1.2338243

    Summary: "ECB strong with Greece, ELA backed by Greek central bank therefore any losses are for Greek taxpayers [sic!]". Hilarious, isn't it?

    (But however wrong arguably better than the outrage about Syriza's dress code elsewhere in the German press...)


    And BTW here's my take on the Kosovar version of Grexit (which may or may not be relevant):

    http://commentisglee.wordpress.com/2015/02/06/the-greek-kosovo-scenario/

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  26. Yes... This is exactly what I also foresaw, and Yanis Varoufakis is way ahead of the curve! And so was I and a few others. The whole Credit Rating Agencies joint conduct has been beyond suspicious all along! Major agencies have come to understand this! Efforts by corrupt politicians to sell out European societies, hence deliberately wrecking the power of governments and key institutions, to the short-term false benefit of Global-reach Cos-Monopolists became apparent to those within with enough ethical conscience. What We The World have been witnessing is nothing less than The Most Dangerous Ongoing and Current Global Heist in Human History! It is as if in the days of The Old West ( days of Cowboys, Native American Indians, etc. ) a Town's entire population was busy on Main Street shopping and/or Enjoying a Carnival being held in the Town's Central Square, all while their only Bank was being Heisted and then some people begin to notice that Thieves are hauling tons of Cash and Other Liquid Assets ( Bars of Gold, Platinum, etc. ) and putting them on horse-drawn wagons, and more and more towns-folk people begin to stop doing all their shopping and what not and begin to also see the terrible crime that keeps on going on for many minutes; except that the Town is The World, the days of old are Today and Now, the Bank contains All Our Money, including that of The Sheriff, the Town Government Council, etc., and instead of mere minutes this ongoing Mega-Bank-Robbery has been taking place for many years now!!! But what the Bank Thieves did not count on was that their efforts to distract the Town's people with a Carnival in the middle of the Town Square had failed! Except that in Our World's Case the Carnival is this Very Real Set of Global Threats; from Severe Climate Instability to the Insanity of Psycho-bat-sh-t Ruthless Terrorist Thugs who have totally distorted things to fit their sick agenda! I have been saying this all along! So; what's next? Simple! The Thieves and the Carnival Operators serving them are Caught and are offered one of two options: either they nice and slowly, but not too slowly, begin to return most of what they have been Stealing and will then be let go free without having to be Locked Up in Jail and Sentenced to Prison, or they can take their chances in an all-out No_Okay Corral-style shoot-out! Except an all-out fight would easily end up with everyone losing everything forever! Best, The Free Advice Man

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  27. Germany appears to be between a rock and a hard place; if it backs down and accepts Syriza's proposals it will strengthen anti-austerity parties in Spain, Italy, Ireland, France, possibly even Die Linde in Germany. If, however, it does not compromise at all and pushes Greece out of the Eurozone the results will most likely be even worse and Greece might drag down Germany and the rest of the Eurozone down the hill along with it, like you wrote. Perhaps they might find a middle ground, but if Germany does compromise in anything, I really hope Syriza will persist, even when the Grexit card is openly pulled. The current system of 100% austerity and 0% growth has not work, does not work, and even if it is applied unaltered for another 5 years it will still not work at all; it will just slice another 25% off the GDP of Greece, and unemployment will exceed 50+%.

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  28. nikolas, socialist systems didn't work too - and i'm pretty sure that it work much worst then sensible austerity and working hard for paying your debts - but you will have a chance for front row seat observing that very soon - i'm betting that greece will be second venezuela in europe in months if not weeks.

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    1. I have been arguing against such nonsense ad neuseam on various blogs for a long time now and surprisingly there's always someone new that needs to be "convinced". Are you all on some black PR agency's payroll ? :)

      Someone is very scared not because Greece might fail but SUCCEED.

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    2. greece will succeed by exiting eur and ue but it will take decades [like poland succeed by finishing wight socialism] - but it will be road through hell - citizens will be literally destroyed by inflation. and these neo-communist-lunatics - it's beyond comprehension how naive one's could be to vote for something like that. and btw, i would love to live in reality where when totally broke you could thrive by spending more, don't have to pay back your debts - i would sincerely, literally love to live in such reality.

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  29. Congratulations to Syriza for brilliant geopolitics (so far).

    Greece does have an option which most have not mentioned: Greece could continue printing its own Euros. The ones with Greek faces on the coins and Greek words on the banknotes. It would be up to other countries whether to accept them or not...

    ...but the thing is, it would be *incredibly advantangeous* for most of them to accept the Greek "illegally printed" euros. Because there aren't enough euros floating around. So if (for example) Spain, Italy, and France all agreed to take Greek euros... where would Germany be? Germany might be the one who had to leave the Euro.'

    I read somewhere that over 30% of the banknotes and coins in Victorian England were estimated to be counterfeit. This didn't matter; they performed their function admirably. The Bank of England and the Mint were not producing enough money and the counterfeits were valuable in increasing the money in circulation. Greek euros printed in contravention of ECB rules would have the same positive effect.

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    1. Greece doesn't have to counterfeit anything. With EURO QE they can just sell their T-bonds to the local branch of ECB.

      Banknotes are only a few per cent of money in circulation it would be very hard to operate using cash only. Unless they figure out how to get "counterfeit" deposits accepted in the international banking system this is not really an option.

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  30. I published an article on my own blog yesterday making that point. All I would add to your comment is that having Greece print it’s own money is the equivalent of the various cities round the world which do likewise, e.g. Lewis and Bristol in the UK and Ithaca in the US. The latter local currencies are not the ideal solution, but they help a bit, plus they don’t cause havoc for the Pound Sterling or the US dollar.

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  31. I think you're right that this puts pressure on European governments to face up to what's coming, but I don't get the sense that anyone seriously thinks it can be avoided. This was a decision by all the central bank governors of the Euro Area to shield Europe as best as possible from further losses when Greece defaults. It disavows responsibility for most Bank of Greece loans to Greek banks, unless they're backed by EFSF notes or other quality foreign assets. It also effectively caps total BoG lending to Greek banks, because ELA is capped and their supply of quality assets is limited, which limits the contingent liability of having to plug a capital hole in the Eurosystem if Greece exits. The side effect they knowingly accepted is that there is a very limited amount of deposits Greek banks can lose from here before they run out of cash. This is much worse than the Cyprus scenario, as there's no bailout pending and that's unlikely to be decided quickly. Bank deposits are likely to be frozen and stay frozen for a while.

    http://globalizedblog.com/2015/02/europe-girds-for-greek-default.html

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  32. Great article.

    There is another interpretation: that Draghi knows a lost cause when he sees one.
    Perhaps Germany isn't the real stumbling block as this is not an existential threat for them.

    We should remember that decisions are taken by individuals not by countries.

    Spain would have much to gain from the EZ softening its stance, but Rajoy would have the most to lose.
    Anything that looks like a victory for Syriza would feed Podemos. The Portuguese and perhaps Italian leaders may feel similarly, but with less urgency.

    The best thing for the leaders of these countries (although not the rest of the country) would be to see Greece pushed off the cliff and then to ask their own citizens if that is really what they want to vote for.

    So if Draghi thinks that the Greeks are going out unless they back down, he knows which side he has to be seen to be on afterwards.

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    1. I completely disagree on this. Podemos will gain more power if Syriza fails. Spanish electorate wouldn't accept a bow to the Germans and not a ultimatum as such. They are fed up with PP and most of PSOE. If you understand Spanish try to see some of the current debates at TVE or similar.
      If Greece gets out, nothing won't stop the others to follow. Especially if Germany remains the same neanderthal austerity religion

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    2. If Greece gets out and collapses into hyperinflation and rioting it might give the Spanish pause, no matter how much they dislike the PP.

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