Boris and Osborne say no to saving Greece


8:24 am - June 20th 2011

by Sunny Hundal    


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I’ve been saying for a while that Labour should strongly oppose bailing out Greece on a matter of principle.

Greece is not only likely to default – it should default so that bankers face the pain rather than ordinary Greeks.

Today, it seems the Conservatives are doing their best to ensure Labour does not reclaim that space.

Sky News reports that George Osborne will say today that Britain should not be part of any new aid package to bail out the Greek economy.

It’s mostly just positioning on the Chancellor’s behalf.

The UK was not involved in the original 110 billion euro (£96.5bn) deal approved a year ago, which was put together by the eurozone countries to help save one of their own.

The only UK commitment came from its share of an International Monetary Fund (IMF) contribution, in the form of loan guarantees which will only be called in if Greece defaults.

Right on cue, Boris Johnson is making the same point in the Daily Telegraph today.

Boris however does make one admission that the left have been making for months:

The trouble is that the Greek austerity measures are making the economy worse.

As was the case in Ireland and (on a smaller scale) in the UK.

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Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


“it should default so that bankers face the pain rather than ordinary Greeks.”

Again Sunny shows his lack of knowledge about the financal system.

International banks have mostly written down the value of their Greek bonds – they are forced to thanks to mark to market accounting.

The people who are set to lose the most on a default are Greek banks (who use Greek bonds as collateral), Greek Pension funds who hold them and the ECB who are holding huge amounts of Greek debt at face value against short term loans, which will both be worth nothing in the event of Greek default. They have enough of this junk to bankrupt the ECB.

So it will be Greek and European taxpayers who will suffer in a default. International banks won’t suffer much directly.

“The trouble is that the Greek austerity measures are making the economy worse.

As was the case in Ireland and (on a smaller scale) in the UK.”

So what Sunny is saying that we should spend our way into a 160% debt/GDP ratio like Greece, which is the real cause of their crisis? It’s not austerity that is their problem directly, it’s that they spend too much, have too much debt and far to many other liabilities, so no-one is willing to lend to them. They are insolvent.

Ireland’s austerity measures were painful but working till they foolishly decided to gaurantee all their bank’s debt, totalling more than national GDP.

Greece is not only likely to default – it should default so that bankers face the pain rather than ordinary Greeks.

Considering that the reason that the economy is tanking is because the Ordinary Greeks wanted to spend more than they earned, why should the banks be the ones paying the price?

You might argue that the banks took on the risk and shouldn’t have loaned money to a “sub-prime economy”, but then you would have ranted about the government being forced to balance its books by the evil banks.

They lend money, they’re evil. They don’t lend money, they’re evil.

However, the Greek government is borrowing more than the cost of the debt repayment. If the Government defaults, then it is locked out of the debt market – and ends up with less money, not more.

That means more taxes and less government spending – in other words, more pain for the taxpayer.

As it happens, it does make sense in the long term for the government to default – but at a considerably higher cost in the sort term. More austerity, not less, more taxes, not less.

Which seems to be the exact opposite of what you expect to happen.

The trouble is that the Greek austerity measures are making the economy worse.

Fanfares and marching bands!

A member of the Right finally gets it!

@Tyler

Ireland’s austerity measures were painful but working

AHAHAHAHA!

@4 BenM

Irish GDP was recovering from what was a severe recession and their bonds only blew out properly after they decided to back all their banks. Might not have felt like it to people on the ground but that’s what the data (source: Bloomberg) shows.

Tyler doesn’t seem to get it. Actually, we should ‘spend our way out of debt’, because historically that has been the best way to reduce it. There are few, if any, examples of austerity working (especially in a downturn/recovery).

I honestly don’t see how anybody can argue that this austerity is working or justified. It’s not like the Greek people are directly responsible for everything their government did – imagine if I suggested your righties were responsible for mistakes Gordon Brown made? Ha

The responsibility falls on the lender. It is their money, they should make sure they gather the relevant information. They know there is a risk attached, and they are rewarded for this risk by a premium, otherwise known as interest.

As for default being painful, well yes, in the short term. But austerity will only prolong the inevitable, and Argentina had a phoenix-like recovery after they defaulted. Insolvent banks, unfortunately, will always be insolvent, and need to fail.

Greece is not only likely to default – it should default so that bankers face the pain rather than ordinary Greeks.

You need to think things through a little more Sunny. If it were the case that the only thing causing the Greek deficit were its interest payments – that without those the budget would be in surplus – then a default would not be too disastrous domestically. But that’s not the case. Even if Greece defaulted on all its debt, it would still be running a sizeable deficit.

And now we’re post default – how is Greece supposed to pay for that deficit? It can’t borrow on the international markets (this is true already – Greece is now the lowest rated country in the world, and a two year Govt bond is running at 33%). It will no longer be able to borrow from the ECB. Where does the money come from?

If Greece has left the Euro and is on a New Drachma, then it could just print them off. (I believe Ben M advocates this). But a new currency with substantial existing downward pressure on its value is likely to react to large increases in money supply by tipping the economy into hyperinflation, to go with the existing stagnation.

Greece is fucked. It’s fucked because for over a decade it has run fictitious economic books, has failed to run any sort of effective revenue system, has overspent wildly on everything from civil service salaries to social security to defence and has relied on borrowing in the international markets to sort it all out.

Again you crticising austerity for Greece’s economic woes is like blaming the chemotherapy and not the cancer.

The trouble is, banks and speculators (or at least the worst of them) won’t be forced to ‘face the pain’ in the event of a Greek Default – the most cynical have taken short positions on the Greek economy[1], and stand to profit even more from a default that would ultimately be catastrophic for the Greek economy, and the Greek people.

[1] http://www.ft.com/cms/s/0/b27d75e6-9777-11e0-af13-00144feab49a.html?ftcamp=crm/email/2011617/nbe/Newsmine/product%20#axzz1PUauWamK

@ 6:

“There are few, if any, examples of austerity working (especially in a downturn/recovery).”

What about the 1930s? The British government adopted an austerity programme, whereas America tried to spend her way out of the Depression. The British economy recovered within a couple of years, and spent most of the 1930s growing strongly. The American economy struggled, and would have carried on struggling were it not for the outbreak of WW2.

@9 XXX

“…and would have carried on struggling were it not for the outbreak of WW2.”

Let’s follow that, shall we.

Following the outbreak of WW2, when government spending skyrocketed to pay for the war, stimulating the economy? Isn’t that what happened?

Of course, thanks to our debt payments for lend-lease, we suffered over a decade of post-war austerity while the US economy thrived.

Tyler’s right on one point. The ECB now owns (either directly, or as collateral) enough of the Greek bonds to bankrupt it in a default.

“Boris however does make one admission that the left have been making for months:

The trouble is that the Greek austerity measures are making the economy worse.

As was the case in Ireland and (on a smaller scale) in the UK.”

This needs a little unwrapping. If you are without your own currency and if you can’t print your own money, depreciate the currency or change interest rates, then you’re screwed whatever you do. Because you can’t borrow the money any more to run a fiscal expansion. As Paul Krugman has been saying about both Spain and Greece.

The UK experience is very different: we can print our own money (QE), depreciate the currency (we have) control our own interest rates. We’ve done all of those things and yes, they will indeed help the economy (Yes, Keynes would have said so too. As does Krugman today).

Now, whether further fiscal expansion will help or hinder the economy is a very different question. For we’ve already been able to use the monetary means of escaping a depression, something that Greece couldn’t.

Oh, and there’s a lovely little point that really should be understood. Fiscal expansion in countries with floating exchange rates leaks overseas. To the point that it doesn’t actually work.

‘What about the 1930s? The British government adopted an austerity programme, whereas America tried to spend her way out of the Depression. The British economy recovered within a couple of years, and spent most of the 1930s growing strongly. The American economy struggled, and would have carried on struggling were it not for the outbreak of WW2.’

This is incomplete. Both initially adopted austerity programs and both failed. Look at GDP growth:

UK http://bit.ly/l1CnD3

US http://bit.ly/iLmyVy

The UK left the gold standard (cheers, Keynes), which was a huge part of the reason we had a stronger recovery. The US started to recover very well during the New Deal period, growing at up to 7.7%, until the austerians won out in 1937 and growth tanked.

‘Oh, and there’s a lovely little point that really should be understood. Fiscal expansion in countries with floating exchange rates leaks overseas. To the point that it doesn’t actually work.’

Well, ultimately this is an empirical question, and it seemed to work in 2009-10.

But austerity will only prolong the inevitable, and Argentina had a phoenix-like recovery after they defaulted.

People advocating an Argentinian default solution should at least understand what happened to Argentina following its default. There’s a reasonably good summary here:

http://www.soundsandcolours.com/articles/argentina/argentina-lessons-learnt-from-the-aftermath-of-default/

The number of people under the poverty line more than doubled in 2002 compared with pre-default levels and violent protests that year unseated five presidents. In nominal terms, it took over seven years for the economy to recover to pre-default levels and even now GDP per capita is still below 1998 peaks. Investment in Argentina dried up over night and essentially the country lost access to international capital markets as investors fled in fear. They deemed the risk of investment too high.

After eight long years, Argentina is proof that investors usually do forgive a country for defaulting. It will provide a valuable lesson on the immediate results of default if Greece does go down this road. The obvious benefit is the saving on the debt, but judging by Argentine experience, it will be followed by swift and horrifying economic collapse, accompanied by political chaos.

Argentina could devalue the currency (by 70%), and its recovery was driven by commodity exports at a time of a global economic boom. Neither of these option is likely to be available for Greece.

Tim Worstall

Oh, and there’s a lovely little point that really should be understood. Fiscal expansion in countries with floating exchange rates leaks overseas. To the point that it doesn’t actually work.

Except that it did.

In the UK.

In 2001-2 after the telecomms and dot.com bubble turned to bust.

Well, I don’t want to go off on a tangent but I do think Greece should leave the EZ so they can devalue their currency.

You talk about the pain that was inflicted, well, what about the pain being inflicted by austerity at the moment? This is pain without purpose, at least allowing banks to fail, defaulting and leaving the EZ would have long term benefits.

@ 10:

“Following the outbreak of WW2, when government spending skyrocketed to pay for the war, stimulating the economy? Isn’t that what happened?”

American manufacturing also benefited from the war, since quite a few European factories were destroyed or converted to manufacturing military equipment. As for the war: yes, it helped give GDP a boost, but such boosts can only ever be short-term. A country can’t afford to keep spending too high for too long, and when spending comes down again, the economy takes a hit. Increasing government spending is only ever a temporary solution.

16 – if that’s directed at me, I agree. Greece should leave the Eurozone and will default. The last is only a matter of time. But it will be extremely bloody. If they leave the Euro then whatever the replacement currency is will crash through the floor – maybe an 80% devaluation? Think what that does to the cost of imports, and associated standard of living.

And they’ll still be left with a substantial budget deficit, except now there’s no way of financing it. So a default will probably lead to more austerity and not less.

As I said above, Greece is fucked.

@ 12:

“The US started to recover very well during the New Deal period, growing at up to 7.7%, until the austerians won out in 1937 and growth tanked.”

The fact that the American economy was still reliant on government spending eight years after the Crash is a point against the New Deal, not in its favour.

19. XXX

The fact that the American economy was still reliant on government spending eight years after the Crash is a point against the New Deal, not in its favour.

Er, why?

Some sort of special rule you’ve made up?

@ 6 Cahal

Clearly you don’t get it. I can’t think of a single example of spending into good long term growth (and in fact, several studies show that once you hit about 80-90% debt/GDP ratios, you dramatically reduce long term growth) whilst there are several good examples where effective spending cuts have enabled better long term growth. Canada and NZ the best two examples.

Let’s face it though, the Greeks are responsible for their plight. Massive public spending increases, low tax collection and generous and very early pensions. The average working life in Greece is about 27 years, for roughly the same time spent in retirement. It’s simply not sustainable.

I agree that Greece should leave the EZ and default, but that doesn’t make it any less painful for the Greeks, who will end up still facing austerity and a massive external devaluation. Living standards will fall. Long term though it should enable them to eventually regain some form of competative economy.

Nor will it be fun and games fror the rest of the EZ. The ECB and the greek banks will be insolvent, and need bailing out again (by taxpayers). EZ banks will take some pain, but most have got rid of the majority of their greek bonds (to the ECB). The problem comes if real contagion sets in, either from mistrust between the quality of banks credit, Lehman’s style, or if other PIGS nations decide default is also the easiest way out. That’s when banks start to fall over. Till then though it’s taxpayers who are going to take all the pain.

@ 20 BenM

So by inference you think government spending should and can drive the economy for extended periods?

21 Tyler

So by inference you think government spending should and can drive the economy for extended periods?

It can.

And does.

Health, education, Police, Firefighting, Defence even national administration.

All these things have been paid for by government for decades and our standard of living is great, thanks.

@ 20:

The New Deal wasn’t supposed to permanently increase government spending, but to begin a virtuous circle of spending, profits, investment, and so on. The fact of the matter is that the New Deal failed to do this, instead making the American economy dependent on the government spending loads.

@ 22:

The argument isn’t that the government should spend nothing at all, but that the economy shouldn’t be kept afloat solely by government spending.

@ 22 BenM

You miss the point entirely.

Government spending can and often has to provide things that an economy needs – sure.

Government spending CANNOT be the sole driver of an economy though.

What happens when government spending outstrips the private sector economy for any extended period? Oh yes, the government needs debt financing, and eventually runs out of money. See Greece for a great example.

25

Government spending CANNOT be the sole driver of an economy though.

I never said it should.

It is a critical element of any well working economy though.

@ 26 BenM

Critical sure, but not >50% of an economy.

28. Richard W

The whole EZ periphery is now such a mess that it is quite difficult to see how resolution A is any better than resolution B. The Europeans have created the no good choices situation through their denialism. Sure, the European banks and private sector bondholders will suffer pain with a default. However, it is la la land to believe that is as far as it goes. The ECB have capital of 10 billion euros, and exposure to Greek government bonds of at least 40 billion. Exposure to other Greek bank paper takes exposure to over 100 million euros. That means the taxpayers of the north are on the hook to make good the ECB losses by recapitalising the ECB.

European unity suddenly seems a less appealing prospect to taxpayer Fritz and taxpayer Pierre. Moreover, it will not stop at Greece as even more contagion will spread to the rest of the periphery as the immediate thought is who is next.

Save us from the nonsense that this has nothing to do with the ordinary Greek public. They have been living a quality of life that they did not earn funded by others. When the funding dried up the exposure to the real state that they can afford is clear. Fundamentally, there is no reason why the European South should be as rich as the European North. The euro artificially tried to create the illusion and now it is unraveling.

‘Clearly you don’t get it. I can’t think of a single example of spending into good long term growth (and in fact, several studies show that once you hit about 80-90% debt/GDP ratios, you dramatically reduce long term growth) whilst there are several good examples where effective spending cuts have enabled better long term growth. Canada and NZ the best two examples.’

If you can’t think of any then you obviously haven’t done the leg work. Historically, debt has shrunk following periods of fiscal expansion and grown following austerity: http://bit.ly/deGr3a

Canada in the 90s had a huge export boom which amounted to an effective stimulus of 6% of GDP. As for NZ, I’m not sure when you’re talking about although I can say NZ’s ‘libertarian’ prime minister was a catastrophe.

‘Let’s face it though, the Greeks are responsible for their plight. Massive public spending increases, low tax collection and generous and very early pensions. The average working life in Greece is about 27 years, for roughly the same time spent in retirement. It’s simply not sustainable.’

Incorrect. By a similar token I could hold you responsible for the ‘plight’ that the UK is in. Tax evasion is a systemic problem – I, for example, hate that businesses use tax havens in the UK, but individually I wouldn’t blame a business for minimising their tax payments, as it would be stupid of them not to. Not to mention that budget deficits aren’t solely caused by profligacy – Ireland and Spain were both running surpluses before the crisis.

No, what’s happening in Greece is systemic looting. Paint it any which way you want, but they are shifting their tax burden onto capital and labour and off of land and rent, cutting social spending and all to pay foreign creditors, rather than look out for the Greek’s living standards. We used to do this type of thing with the military, now we do it with finance.

30. Planeshift

What would the consequences for Greek citizens be of a default, at least in the next 2-3 years?

What would the consequences for Greek citizens be of a default, at least in the next 2-3 years?

If it’s not accompanied by exiting the euro and devaluing the currency, then there will have to be massive fiscal tightening, since a budget deficit of 10% will have to be reduced to balance (no access to international capital markets + no more EZ bailouts). Substantial drop in earnings, increases in unemployment, increase in poverty. Not pretty.

If it is accompanied by a euro-exit/devaluation then you’ll still have all the above (albeit with more wriggle room on the budget deficit) plus inflation and increased cost of living. At least, though, there’d be more scope for recovery afterwards.

Whatever the Greeks do, they’re up the swanny.

32. Planeshift

“Whatever the Greeks do, they’re up the swanny”

Ok, its thinking outside the box then.

Crete, Rhodes and all the islands declare independence, the smaller ones possibly in a federation. They are the tourist places so have more of a chance anyway. They then start with no debt, but understandably will probably not be able to borrow at favorable rates.

The mainland splits into city states, each making themselves a tax haven.

Lenders who lent money to the entity called ‘greece’ find themselves in the same position as people who lent money to any other insolvent business.

It is not about bailing out Greece. It is about bailing out the people who lent money too Greece.

Boris and Pip Squeak may want to change their minds, because it is their banker mates, AGAIN.

34. Charlieman

A few qualifications from the money wonks, please?

In a previous thread, I used the expression “going bust” to describe the situation in Greece. A couple of people politely pointed out that a country cannot go bust in the same way as a company; the assets cannot be sold off and the work force distributed; the Greeks are stuck with Greece. So the Greeks will “default” and suffer the consequences.

What will default mean to Greeks and loan holders? I guess that some Greek companies and banks will actually go bust, leaving international debts unpaid. So default applies to the Greek state and banks that are too big to fail?

I guess also that default means that Greeks pay back some money that is owed but not all of it. What proportion and who gets paid? If nobody loans or exchanges money with the Greeks, they will be unable to repay any debt or to redevelop. I read the comments about Argentina, but how long might Greece expect to be a banking pariah?

Who will be expected to write off Greek debt? How will Greece provide international insurance or trade guarantees during the default period?

The Greeks might as well do it, because it is only a matter of time before the US does the same with their debt.

And nobody will be able to do jack shit about it.

36. Luis enrique

http://blogs.reuters.com/felix-salmon/2011/06/17/parsing-banks-expsosure-to-greece/

That is worth reading. Which bankers would be hurt by a default? The ECB. And who owns the ECB? It’s not fat cat investment bankers being protected this time around. At least, I don’t think so.

@ Charlieman

Andrew Lilico outlined a few likely scenarios in the event of Greece defaulting. A lot depends how the default takes place, but some of this is unlikely to be far wrong. It is the spread of contagion that is the problem not Greek default per se.

http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

Although a country can’t go bankrupt in the same sense as a company in that they cease to exist. Greece being members of the EZ changes everything because their options are severely limited by monetary union. They have already been suffering from huge flows of capital flight as money is transfered out of the Greek banking system. Moreover, they have no way of replacing that money other than through the Greek banks exchanging collateral with the ECB. The ECB are effectively keeping the Greek banks alive and that funding would certainly stop if there was a disorderly default. Therefore, the Greek banking system would instantly be insolvent and illiquid.

The government could either nationalise the banks or allow them to collapse and all the depositors lose their deposits. Moreover, the deposits are in euros and the Greek government needs to borrow the euros. Why would anyone lend them the billions of euros when they have just defaulted.

Issuing a new local currency would also be carnage. Anyone with a loan or a mortgage in Greece will have the repayments in euros. However, their salary is likely to be in the new local currency and worth about 50% less. A pension that was being paid in euros, almost overnight could be worth up to 50% less being paid in the new currency. Unfortunately, it is their income that is devaluing not their debts. The government could stipulate that all local debts be redenominated to the new currency. Bound to face a legal challenge and it is still imposing large losses on the lender. Moreover, it would not apply to cross-border debts for Greek companies. They would suffer large losses on cross-border trade that had been contracted in euros for many years ahead. Pretty much all companies trading with Greek firms would insist on settlement in a hard currency. Something that they would not have so there would be huge reduction in their imports. Unless they produce the goods in Greece, they would not get them from anyone else unless they paid in euros or dollars. Oil would be a particular problem for them. Greece after default would quickly learn that they were not as wealthy as they thought they were and in fact are probably only half as wealthy as their GDP per capita suggests.

You have to have a belly laugh at the neo-liberals saying the cure for Greece is more debt, when here they and the government are saying “you can’t solve this problem by pouring debt-on-debt”.

The banks lent to Greece on a purely business basis

They thought it was good business and everyone knew about Greece’s economic situation when it entered the Euro

And those who benefitted were not the ordinary people, but the rich landowners, shipping magnates and professionals

As City credit analyst Jan Rudolph of IHS (so not a Trot) has said: “The achilles heel of the Greek economy is tax evasion. If the rich paid their taxes there wouldn’t be a problem”

39. Richard P

I agree with Sunny, and yet the headline “…no to saving Greece” is a tremendous mistake. No one who opposes the bailouts should describe the EU/IMF intervention as “saving Greece”. In fact, surely those of us who agree with Sunny would argue that a default would do more to save Greece than another set of loans?

Danial Hannan was on Today this morning adding his second-hand opinion to this bandwagon. The anti-europeans see this as the lever to break up the EZ.

39 – to be fair to Hannan, he first raised the prospect of a Greek bailout in February last year, quite a long way ahead of most of the commentariat.

@ Sally

“It is not about bailing out Greece. It is about bailing out the people who lent money too Greece.”

True, but those people are the ECB, Greek banks and Greek pension funds. Not UK banks.

UK banks are down to a very small exposure to Greece now – I’m reliably informed only about 2.5b. Painful but wouldn’t cause a crisis.

If thre was proper contagion to the rest of the PIGS, then there would be more trouble though.

43. Charlieman

@37 Richard W

Thanks.

The situation appears to be that the Greeks are doomed whatever they do, and that default is inevitable. Quick default may be more courteous to their neighbours and trading partners than pretence.

Greeks, no doubt would be offended by the idea that they are “probably only half as wealthy as their GDP per capita suggests”. But if they don’t default quickly, they’ll be 60% less wealthy?

I have a personal interest in this, because I fancy an extended arty, history study holiday in Greece. For rational reasons, I’d prefer that I pay at New Drachma rate rather than Euro. And everyone else who can suspend trade with Greece is doing the same thing.

The Bank of Greece prints Euro notes so it has the capacity to create paper currency. I do not know about coinage. If the Bank of Greece was about to print New Drachmas, it would be very difficult that secret.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Boris and Osborne say no to saving Greece http://bit.ly/k58ERr

  2. Owl

    I agree with lovable clown Boris Johnson o.O The world has gone mad. http://bit.ly/k58ERr

  3. sunny hundal

    Boris Johnson admits austerity measures worsened economic conditions than sort out debt problem http://t.co/ZsjK43O (in Greece)

  4. David Powell

    Boris Johnson admits austerity measures worsened economic conditions than sort out debt problem http://t.co/ZsjK43O (in Greece)

  5. Michael Bater

    Boris and Osborne say no to saving Greece | Liberal Conspiracy http://t.co/Ih9sY7i via @libcon

  6. Geoff White

    Boris Johnson admits austerity measures worsened economic conditions than sort out debt problem http://t.co/ZsjK43O (in Greece)

  7. andrew

    Boris and Osborne say no to saving Greece | Liberal Conspiracy: I've been saying for a while that Labour should … http://bit.ly/jv4EGb

  8. Soho Politico

    .@sunny_hundal You weren't looking hard enough… http://t.co/CoiESA5Z





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