Three perspectives on the coming Grexit

The Greek referendum and the hype leading up to it have gone exactly according to my script of 8 days ago, where I predicted a resounding ‘no’ vote and a Grexit to stop the bank-run, with the other European politicians too offended and belittled by Tsipras and Varoufakis to organise another bailout.

The Grexit is now very likely, so likely in fact that Varoufakis’ friend Jaques Delors is writing open letters to European newspapers to implore the rest of Europe not to let Greece go!

To get a good view of what has happened in the last 15 years and what is going to happen in the coming months, let us take the perspectives of three fictitious people: that of an informed Greek businessman, that of an informed Dutch politician, and that of an American commentator.

The Greek business man, February 2015

Syriza has just had its moment with a landslide victory in the elections, getting the population to believe that the Eurozone countries will indefinitely support their pensions and welfare, and allow Greece to not reform in any meaningful way. Party time!

The election after-party was great, with lots of Ouzo and olives, but I know it can’t last. The other Europeans might have seemed gullible to the extreme so far, but even they will not want to be to be hung out to dry in the media like saps, month after month. At some point, the EU countries will stop lending money to anything Greek and ask to be paid back something, whether that is a government, a bank, or a business. How to plan for this, what to do?

Let’s think about what I stand to lose if the Greek government starts issuing that awful Drachma again, worth a fraction of the current Euros.

Firstly, my bank accounts in Greece will halve in value, if not worse. So I am going to take out all the money from my deposits and park it in Northern European banks, or Northern European treasury bills. Moreover, I will give my uncle, the bank manager, a call so as to invite him for dinner and discuss the possibility of taking out a long-term loan with his bank, Euros I will then also park in Northern Europe. When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe. I am going to get rich from this!!!

Secondly, once the Drachma comes back, my holiday resort will have Greek workers paid in Drachmas and foreign guests who want to pay in Euros. That should work just fine and, since I know my workers will then be paid a lot less, I can start to withhold their pay in the months just before the reintroduction of the Drachmas. I will then pay them later in fewer Euros or perhaps not at all if the mess is big enough and I manage to go bankrupt for the fourth time this decade. All the assets are in my 2-year old son’s name anyway, so I should be able to get away with that trick again. By the same token, I can make a deal with my old school-mate who is now a tax auditor so as to delay paying my taxes until just after the reintroduction of the Drachma.

Thirdly, I am going to have to think about all that German beer I stock for the tourists and thus have to pay for in Euros. There has got to be a way I can use the coming Grexit to have my beer and not pay at all. They don’t trust me at all over there in Germany, which means they insist I pay beforehand, but perhaps I can wriggle out of that if I have to for a few months. Oh, I know what to do: I am going to set up a post-office business in the Netherlands via which I then buy lots of beer with credit, which I then transport to my resort. Those post-office businesses provide a means for American companies to hide from their tax authorities, so why shouldn’t I set one up to defraud a German beer company? By the time they find out what has happened and have traced things back to me, all the intermediary companies will be bankrupt anyway and I will have that beer but no need to pay for it.

Now, what other opportunities will open themselves up? Surely, there will be a humanitarian crisis here once the Grexit happens. How can I make money off that? Perhaps my daughter, who studies in Paris, can set up an aid agency for ailing Greek Islands like the one I live on. I should plan the aid brochure, which incidentally makes advertisements for my resort: those aid workers have to stay somewhere and they need to rent some place for those starving old ladies!

The price of particular supplies might also skyrocket at such moments. I bet the Internet can tell me what kind of goods usually increase in price, so if I start hoarding those, preferably using loans, then I will be in a great position to profit once our two political leader have taken us out of the Euro. Hmmm, this Grexit might work out beautifully for me….. hurray for Syriza ….. perhaps I should have lunch with my old mate Varoufakis and ask him just when he plans to blow the current deal with the Europeans so that I have everything in place at the right time….

The Dutch politician, June 2015

That bloody Greek crisis again, man!!! I had the main Dutch pension fund on my back when this thing went pear-shaped in 2008/2009, blabbering on about how they had hundreds of billions of Euros forthcoming from these Southern European banks and governments. Something about interest-rate swaps where they were on the right side of the bets. The mega-deal with the Greeks, Italians and Spanish secured them most of those profits, but has that been the end of it?

Not in the least. It has been one thing after the other with those damned Greeks. If only they could be like the Spanish, or better still, the Italians. With the Italians you know you are going to have a good glass of wine in the evening, talk about shit and compare mistresses, whilst you do a quiet deal that is not too bad and out of the media in the morning.

But with the Greeks? In the evening you have to read in the Greek newspapers that you are a Nazi stealing from old Greek ladies. In the morning, you get to read in your own newspaper that that peroxide-blond right-wing nutcase in your own parliament has called you a weak-kneed heroin-pusher again. And in the meantime you have to hear how undemocratic you are and how much better for the world if you simply lent all the money you were ever going to have to lend out and then keep quiet and be ashamed of how uncool you are. It’s like being at university again, infuriating, you just can’t win!

What was it this time last year? Last year, you had this great deal sown up with Samaras, a very reasonable-spoken Greek prime minister, where he agreed that they would finally start laying off some of the teachers and doctors who never actually showed up at the schools and hospital they supposedly work for and simply get salaries for no output. He would blame me for forcing him into this in his own media and I would say I finally got Greece to be responsible. Being portrayed as a Nazi again in Greece was a bit of a bugger, but I wasn’t planning on going on holidays there anyway (the mistress prefers the lakes in Finland), so that was ok.

Now, as a result of his ‘outrageous concessions to Northern European Nazis’, the Greek population, with unproductive teachers and doctors in the front row, has voted themselves a party that promises to re-hire everyone who was fired for gross incompetence. That old show-off Varoufakis now flat-out refuses to even pretend to pay back those generous new loans Greece was given not much more than a year ago. Man, the ingratitude of some people!!

Worse, I have been to college with some of those Greek jokers now in the government, and they are all the same politicians and their advisers again. They just jumped ship from the old Pasok party to this new-fanged Syriza gang. But they are all still the same people, whom Christine Lagarde has told me are individually dodging their own taxes and have large bank accounts in Switserland. I know exactly what it is they are hiding, but I don’t have the freedom to release that information to the press since Christine wants the Greeks to sort out their own tax evaders. What was she thinking of? It is like expecting the foxes to ramp up security to the chicken coop!

What do these Greeks want now? They want the ECB to keep lending their banks unlimited amounts of Euros via the ‘Emergency Loan Assistance’ scheme, presumably until all the Greek deposits have left that country and are safely in one of my own banks. And they want me to openly support their demand that they won’t ever have to pay anything back of the loans made to the Greeks over the last 15 years, even though I already agreed to halving their loans in 2010-2013 in return for reforms that they didn’t implement.

I hence am going to have to take my economic advisors seriously who have been telling me for years now that a Grexit is inevitable. Ok then, man-up and think this through, what are my risks?

First off, openly admitting that Greece is bankrupt means that the European Financial Stability Facility will come knocking on my door because we helped to guarantee the loans they gave to Greece. I remember the great party where we agreed to this, but now this is going to come back and bite me. We will have to openly admit a loss of some 10 billion Euros (if not more, hard to remember just how much it was. How much were we liable for again with the ECB? Have to ask in the morning!). This of course means budgetary pressure for years, which might cost me the next election.

I am going to have to find a way to blame the Greeks for this. To that end, I am going to have to quickly start portraying them as lazy junkies who have lied to all of us all this time. Easy peasy because the population already is prone to believing that. I know that blonded right-wing rat-bag will yell ‘I told you so’ from now till the next election, but if I just keep calling him a racist, the electoral fall-out shouldn’t be too bad.

Perhaps I can go one better though and avoid having to own up to that 10 to 20 billion Euro mistake entirely. Maybe I can get together with the other Northern European countries and argue to the EFSF and the ECB that we take on this loan onto our own books as other Eurozone countries, but that they should lend us the money to pay these loans back, with the loan tied to what Greece does. Perhaps special bonds that we will only have to pay back if Greece pays back its loans to us? Hmm, it sounds a bit too dodgy when it is put as clearly as this, but perhaps we can get the whizzes in our financial unit to think of a more complicated way to have the loss converted into something that needn’t be visible till a few elections down the road and I am safely retired, enjoying stints in the board of directors of the major Dutch banks. The media release will have to use the words ‘threat of contagion’ liberally. That always sounds scary to the population and yet is too difficult for them to understand and hence allows for a bit of discretion.

Second off, those bloody Greeks are threatening to open their borders and let in millions of Africans and Asians smuggled via Turkey into the EU. We are going to have to talk about strengthening border patrols around Greece, for which I need to talk to their neighbours – Bulgaria and Macedonia. Those politicians are a corruptible mess themselves and I know that the Schengen-neighbours just wont trust them to do our bidding, so we are going to also have to think about setting up controls in the next ring up – Hungary, Austria, and others. We are also going to have to insist with the airlines that they start checking passports again for passengers on any flight from that region. God, this is going to be messy!

Third off, even though the Greek elite has gotten super-rich from all this, it will still be a tragedy for the majority of the Greek population and I can’t be seen to be uncaring, so we are going to have to be seen to have some humanitarian plan ready. What will they need? Shelter, food, health care, and water: the basics. We are going to have to talk to the Greek ministries about ways in which we can support just those basic provisions in Greece without being seen to bail out the whole country and I know this is going to simply open up another gushing financial wound: the Greek political system is now set-up to take advantage of such outside funds, slushing it to Switserland or banks in my own country (but owned by them, not me, so that if I ever organise a bailout for my own banks, I will be bailing them out!).

Fourth, we are going to have to think about the legalities of having Greece in the Eurozone whilst they also have a drachma. With all that grand-standing that the Greek politicians have been doing the last 20 years – insisting only their cheese is called ‘feta’, blocking Turkey’s entry into the EU, and blocking Macedonia’s association with the EU just because they dare call themselves the same name some Greek province does – I just know that they are going to fight us tooth and nail if we try to kick them out of the Eurozone deliberations and structures. Those nit-picking European courts are going to agree with them as well, even if we just bar them from the ESFS and ESM system in the future. It is like walking around with a goddamned junky on your tail who won’t stop clinging to you as long as you have something to share.

Damn, what a mess!!! Why on earth didn’t we just let them go bankrupt in 2010 and simply supported our own banks and pension funds from the fall-out if that was really necessary? I need a Finnish holiday….

The American blogging economist, June 2015

My audience of econ grad students expects another juicy piece on Greece.

Of course, my audience doesn’t even know where that country is or how the Byzantine politics of Europe truly works, let alone that no-one is really in charge there. But it’s in the econ-news and you can’t be a self-respecting economist without having all your pet theories confirmed in this saga, so I gotta write something.

What am I going to go for this time? Have a go at Krugman who keeps bleating that the Europeans should print more money for Greece and not force them into austerity? He is easy to refute, simply by pointing out the massive capital flight from Greece: there has been no shortage of money going to Greece at all. It simply doesn’t get spent there as it leaves the country almost as soon as it arrives, ending up in old socks or Northern European treasury bills. It is the incredible political dysfunctionality of the political elite in that country that is the economic problem there, not a lack of money or any true austerity (an austerity which generations of Greek politicians have simply refused to actually implement). Indeed, if the Greek saga shows anything, then it is that throwing nigh unlimited funds at a small country will not help it avoid a big recession once the political and bureaucratic system has metastasised to nearly pure rent-seeking. Having loans of 180% of GDP plus extra ELA loans, and having lots written off already, it is hard to argue that not enough money has gone to Greece! So I can have a go at the old Krugger for abusing the Greek saga to score an ideological point, but the argument might not be understood by my audience because I will then be seen to pick on the poor but-oh-so-brave Greeks.

What other story important in the States can I pretend is definitely settled by the Greek saga? Perhaps how you need a fiscal union if you are going to have a monetary union? No, that wont play out so well with all the individual states here who are simply allowed to go bankrupt if they spend too much. Hard to argue that Greece should have indefinite bailouts when we allow our own states to go bankrupt. I’d have to argue it should never have been bailed out in the first place, which wont play well with pictures of starving old Greek ladies soon in the news.

How about blaming the Germans for being German then? Stories of inflexible and insensitive Germans normally go down well. I can pretend that Merkel is the one who gets to decide what happens to Greece and berate her for demanding the impossible of Greece, conveniently ignoring the other 20 governments and 10-odd institutions that have to agree and that are dominated by Southern Europeans. My audience probably won’t know all of that and many like to believe the worst of the Germans anyway, so I can shove that under the carpet. I can detail the idiotic things that the Troika has asked of the Greek government over the years, such as increasing the pension-age to near-US levels, or making it possible to actually fire Greek civil servants who previously had a constitutionally guaranteed job for life…

Ehmmm, no, skip that argument and those examples, I will clearly have to stay away from actual details. I can go for older stuff though, such as how the French and Germans didn’t hold to the Maastricht criteria either, or have ignored various experts at various times who told them how the Greeks and others were cooking the books. I guess that would work somewhat towards making them sound like meanies towards Greece, but there will still be a nagging doubt in the minds of much of my audience that someone who lends money has some right to demand good behaviour from the other side. The Germans might come off looking too sympathetic with any angle that portrays it as a simple game between a lender and a borrower.

I know what to do: I can of course go for that golden oldie and blame the European bankers for all the woes of Europe. Easy to do that, for the ECB has been guilty of printing money for them via those easy loans they offered to big banks, hidden behind the name ‘market sterilisation’. The bankers’ bonuses are huge; the boards of banks are full of ex-politicians; the ECB has refused to become a people’s bank; and the European institutions have pretended to start to monitor banks whilst there is still no institution with the actual manpower to do the monitoring. So I can point all that out and seem an informed person when I then make the leap to say the politicians have all been hoodwinked by the bankers when it came to Greece. My audience will lap it up. It is not quite fair to lots of European politicians whose first thought was their voters and their own pensioners, and it doesn’t fit the reality of how lots of rich investors have lost their shirts over Greece, but one cannot spin a good old morality tale without taking a few short-cuts.

Starving Greek ladies paying for European fat bankers and being made an example off for daring to stand up against the capitalists of Europe? Yeah, that has a nice ring to it. Even if you turn out to be wrong with a story like that, you sound sympathetic. You are almost bound to be on the right side of what ends up as the written history of this saga.

My Perspective

The Greek saga has been an unanticipated cluster f-up all round. I don’t believe for a second that the Greek politicians in 2008 saw the misery of their own country coming, nor that the main politicians doing the deciding in 2010 knew what was coming.There are too many decision makers involved in many different types of institutions for any single interest to have been decisive in the decision making. No, the prolonged Greek recession and the descent of the entire Greek political and bureaucratic system into rent-seeking apathy has caught them all out.

The main policy failure has thus been of not reading correctly how Greek politics and the Greek economy would evolve when put in a situation of almost unlimited loans and a troika that would come round and ask them to do sensible things that went against the interest of the politically powerful. They should have seen coming that the Greek politicians would start to blame the people who were feeding them the money, even though that money supported their political clients. They should have seen coming that huge loans and open conditions would make things far worse, not better.

It is thus a failure of political theory, both in economics and other social sciences, that is to blame. The European elites are steeped in historical education on politics but were nevertheless naive about the internal dynamics within Greece and stuck to that naivety for far too long after it became crystal clear round about 2011 how hopeless the situation within Greece truly was.

My take-away message: don’t lend vast amounts of money to parasitical political elites and don’t send them more once you found out you were mistaken about them earlier! It is not good for their populations, nor your own.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

5 thoughts on “Three perspectives on the coming Grexit”

  1. Again congratulations on another interesting post.

    While an awful lot has been written about Grexit, little has been written by economists about the mechanisms of how an exit “should” be executed.

    From my distant view it seems there a series of bad and even worse options. One of your straw men suggests:

    “When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe.”

    Maybe redenominating all Greek domiciled financial assets and liabilities to Drachmas is the way it will play out, but it is a terrible solution. Indeed, your straw man himself explains why.

    In a Grexit the government is going to have to say to its creditors “we cannot pay you what is owed, so you best write off your losses”. That is rather what happens in a conventional bankruptcy, only in a corporate bankruptcy the creditors seize all the assets of the borrower”. Well, unless there is to be an invasion of Greece to enforce reparation (and that does not seem likely) then it is best to think of the Greek government debt as non-recourse loans from Northern Europe.

    Having defaulted on its borrowings, Greece can no longer print (I use the term in its general sense) Euros. That does not mean that the Euros that it has previously printed cease to be good money – they remain a claim on the ECB.

    My shopping list of major challenges for Greece would at least include:

    (1) Non-military retribution by its creditors – and one can think of lots of ways Greece can be spanked both inside and outside the EU. I guess one asks for mercy.

    (2) Euro denominated debt held by the Greek domiciled banks has to be “made good”. That means the Greek government cannot default on its bonds held by domestic banks. Greek banks have liabilities in Euros. If those bonds technically default along with all other Greek government bonds, then the Greek government must immediately gift a comparable amount of new bonds to the Greek domiciled banks – a recapitalization. The Greek government must promise to meet interest payments and ultimately repay those liabilities in Euros, even if that debt is restructured in some sensible way.

    (3) The Greek government still has to pay its bills. Since it cannot print Euros, it will have to:

    (a) not have its budget in deficit (which it will be close to achieving with interest expense savings after defaulting on all government debt held outside of Greece) and pay bills in already issued Euros;
    (b) print a new currency (Drachmas) that will be new claims on the Greek central bank. This new currency would presumably start at an FX rate of par with the Euro. Greece, at least for a period, becomes a dual currency economy. If the world believes that the new post-default Greek budget will not go into deficit again, the new drachmas will maintain value, but if the budget goes into deficit the drachmas will rapidly depreciate. Maintaining the value of the drachma (and avoiding internal revolt) will be the ultimate long term discipline on the Greek government budget setting.

    As a practical matter, there is a real question of whether the Greek domestic banks are capable of running a dual currency banking platform. At least one large bank needs to be able to manage dual currency transactions. I raised this in Athens three years ago. Let’s see.

    Between Scylla and Charybdis.


    1. Hi Casey,

      thanks. I agree it is important to try and think through practicalities and am glad to see you approve of my ‘straw man’ device to do some of that practical thinking.

      A couple of further bits of information that might help here:
      – The Greek Central Bank does actually print Euro bills with particular series numbers. In principle, the amount they bring into circulation has to be agreed to by the European Central Bank, but there is the ‘nuclear option’ of printing as many Euros as the Greek government asks them to print. It is a particular form of Grexit that might be easy in terms of administration for the Greeks, but it would be burning an awful lot of bridges with the rest of Europe. However, it is not inconceivable that the Greek Central Bank prints Euro-like bills that differ enough to be recogniseably different (the Drachmas) so as to have little problems with bank machines and such.
      – Greek private banks apparently don’t own many Greek government bonds. Rather, under the ELA, the ECB directly gets to own the underlying assets backing up private bank deposits whilst, supposedly, the Greek Central Bank bears all the risks. There is also an interest rate premium on the ELA loans. This of course would create an awful lot of room for problems if the underlying assets turn out not to exist or are not worth so much anymore, or (which is the most likely outcome) if the enforcement of property rights leads to endless disputes inside the Greek legal system (which is notorious).


  2. “the Greek government must immediately gift a comparable amount of new bonds to the Greek domiciled banks – a recapitalization. The Greek government must promise to meet interest payments and ultimately repay those liabilities in Euros”

    If the Greek government had the capacity to do this, there wouldn’t be a crisis in the first place.

    “Maintaining the value of the drachma (and avoiding internal revolt) will be the ultimate long term discipline on the Greek government budget setting.”

    In the alternative, the Greek government reverts to type and does not maintain budget discipline, and the Greek central bank accommodates the budget, creating at best high inflation and a perpetually weak currency. At worst, Greece gets hyper inflation.

    One more thing. Greek businesses whose liabilities are in Euros but whose revenues will be in drachmas will soon be non-businesses. The Greek government can default on money it owes to Germans and get away with it, sort of. Greek businesses can not.


  3. Dear Uncle Milt,
    You may be correct and all is lost. I also expect many economists have sympathy for the original Uncle Milt’s views on the European currency union (see his 1997 Project Syndicate speech).

    The question for a corporate bankruptcy administrator would be this: “What must be done to save the business?” Emotion aside, the restructure must: 1. Write-off the unrecoverable debt. 2. Ensure that the continuing restructured business (read Greek government) is cash flow positive.

    If there is a sensible debate going on now between the Greek government and the ECB, it must be focused around those two issues. Whether Greece stays in the monetary union or not, the above two goals must be achieved to avoid a destructive downward spiral.

    The side issues are political resentment from the creditors, and the need to maintain disciple on the other Southern European borrowers. These are important issues, But they must be seen as second order matters.

    If there is something amusing here for local economists it must be the populist parallel between Alexis Tsipras and our own Jack Lang.


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