The Greek Non-Rescue

So Greece has been “rescued”.

Or, not.

From Robert Peston:

What we had overnight is an agreement in principle, not a final definitive rescue of Greece. Before we crack open the vintage Ouzo, let’s just see how it goes down with the relevant private-sector lenders, politicians in the only creditor country that really matters — Germany — and Greek citizens.

That “agreement in principle”?

From Zero Hedge:

  • Even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out.
  • Even in best case scenario, the country will need at least €50 billion on top of €136 billion.
  • A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance since they received the report about the advisability of allowing the second rescue to go through.

The deeper truth emerges from the BBC:

“The funds that are coming in are not staying in Greece, are not being invested in Greece, are not here to help the Greeks get out of this crisis,” Constantine Michalos, president of the Athens Chamber of Commerce and Industry, told the BBC.

“It’s simply to repay the banks, so that they can retain their balance sheets on the profit side.”

This reminds me of a comment made by Andrei Canciu yesterday:

I think that even the original (i.e. current) architecture of the Euro would have been workable if it were not for the “innovations” in the banking system during the last 10 years. That is, overindebtedness would have always been solved through defaults by punishing the the irresponsible lenders (i.e. those tight spreads between Northern and Southern European countries), while the defaulting countries would have gotten some post-default aid.

I read somewhere that a Greek default would have been totally manageable 10 years ago. That’s no longer the case with the shadow banking system and the incomprehensible web of derivatives.

And there we have our problem: this isn’t really about Greece at all. It’s about the fundamentally perverse nature of the global economic system that cannot withstand a default or liquidation without bringing down the entire system. Even if China and Japan threw all their FX reserves into bailing out the Eurozone this would merely postpone the systemic breakdown. Because, the problem is the system. The global economic system needs to be able to withstand defaults, liquidations, crises. It needs to be robust. And the Byzantine workings of the shadow banking system — where everyone owes money to everyone else, and if one falls they all fall — is a hyper-fragile juggernaut that is bound to come down eventually. If it’s not Greece it will be something else. And that will be a good thing — because we will be abe to switch to an economic system less prone to absurd bubbles, hyper-fragility, and forced bailouts.

Anyway, I am still virtually certain that this bailout is a total sham, and — even if stomached by Germany and international creditors — is doomed to abject failure.


It’s demanding even greater and deeper austerity from an already-bleeding Greek nation. As I’ve said before, austerity in a depressed economy usually results in larger budget deficits as a result of falling tax revenues. Simply, this medicine is poison. Very shortly, Greece may well be back in the hole.

18 thoughts on “The Greek Non-Rescue

  1. Joe Wiesenthal:

    Peter Spiegel at FT has obtained a confidential 10-page memo distributed to senior officials in Europe over the last week, which lays out the truth:
    It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

    “Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.

    This is a disaster.

    • It’s just basic logic. Spending goes down in a depressed eocnomy, taxes remain the same or rise, therefore people spend less, therefore tax revenues fall.

      Is that really so hard? Is the reflex action to cut at the worst time really that strong?

      • Whatever happened to Keynesian economics? In Australia, treasurer Wayne Swan claimed Keynesian spending as necessary for GFC I, yet continued to spend after the recovery. They will keep spending until we go broke (unless they get voted out first, quite likely), forcing austerity on us at the worst possible time, and still blame everyone else for our predicament.

        • Two Dog. I have been writing to Mr Swann about this. I actually congratulated him for his $900 ATO cheques in the mail payment, but chastised him for not reigning in the budget after the event. I also wrote about our IMF contribution, and after the response from a Junio Staffer, I have not received a reply to my question about how much profit we have actually made by contributing to the IMF all these years. Go figure! If I pay taxes I want a response to a legitimate question. If I asked about a Baby Bonus question I am sure I would get a response!

  2. Either the principal financial players have a deeper plan that the rest of us are not privy to…crisis creates a new financial global architecture which gives them more power and control…or there is no plan and the collapse is coming.

    I notice talk of IMF SDRs functioning as the global reserve currency is not so prevalent in this moment, but that is one possibility that the elites would want.

    I also notice you mentioned Eugenics in your last post, and we know it was widely accepted as a science by both left and right wing ideologies and it only became discredited after WW2 and the Nazi experiments. However the elites still believe in this and they think there are too many of us, they therefore may want to cull the human population and manufacturing a economic crisis may be part of the plan, it of course cannot be fully controlled by the elites and can go wrong (from their point of view). We are living through interesting times, let us hope that we can pull ourselves out of this mess and build a better world. A world where we do not have the obscenely rich and the obscenely poor, rather we have the rich who practice noblesse oblige and who take responsibility and are accountable for their own actions.

    • Well with Greece it’s obvious that this is just rank stupidity. The view is that debt reduction is necessary, and therefore spending cuts are necessary when it just doesn’t work like that at all, and when it will in fact make the situation worse.

      I don’t buy the conspiracy-theory world view, either. Instead, I buy the view that the world is mostly ruled by unintended consequences and black swans. Certainly there may be groups that like to fantasise about world domination, and imposing a scheme of global central planning (there have been such groups for hundreds of years) but there is no evidence whatever that such a thing can work, or is working.

      And more to the point, certainly, if there is a plan to “reduce the population” it has dramatically and spectacularly failed. And certainly, no population-related Malthusian prediction (neither Ehrlich, nor the Club of Rome, nor Malthus, etc) has ever been right about anything.

      Above all, I don’t want to claim something that I can’t prove. I think it’s very unfair to say the “elites” want to murder lots of people. There are good elites and bad elites, just as there are good and bad economists, good and bad scientists, good and bad writers. Most of the “reduce the population” rhetoric is just about abortions and birth control. Certainly it’s important to have a debate about global population levels, and certainly I am of the view that population levels are not really a threat, and certainly I am of the view that the real “threat” is curtailing freedom, but I don’t want to tarnish the debate by accusing those who disagree with me of conspiracy to murder.

      • @rom

        If “they” killed all the serfs, who would mow the lawns, change the oil on the cars and wash the bathrooms?

        No, no, this all has to do with greed. Its really the same story told over and over for the last 10,000 years.

  3. Krugman (yes, Krugman) sums this up quite nicely:

    What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative.

    So Greece will be strung along some more.

    • Krugman is no idiot. He just just wrong most of the time.

      But, he hit the nail on the head with that one.

      Now where did I leave my keys to the flying saucer…..

      • Yeah Krugman is a smart guy. That Nobel wasn’t for nothing (unlike Obama’s, which kind of was). I enjoy seeing him get things right. But when he’s wrong I enjoy ripping his arguments apart even more. I’m mentally preparing an anti-Krugman post on the causes of and cures for the Great Depression…

    • I agree with Krugman on this. Bureaucrats are fumbling in the dark. No one knows what is going to happen. They just have the headlines to keep the masses secure and going about their daily routine. Most people are tired of hearing about Greece.

      Aziz, I too believe there is no conspiracy theory. The world had a chance to wipe out the world’s population in WW2 by letting Hitler off the hook.

      I am convined they will control this, but there will be pain for a long time. Like Japans lost 20 years.

      I think the elites will move to the USA, to keep away from the carnage that may ensue, if the population gets testy. It is like WW2 all over again. How many wealthy elites fled German and Europe before WW2 to settle in the USA. This will happen again.

  4. Should not the Greeks refuse austerity without default? If debt reduction is the problem, deficit reduction isn’t the solution. Default should be followed by lowered public sector spending to prevent the recreation of the debt. And as PK has said, exiting the Euro should be the punishment (or is that a reward?) for defaulting. Lots of people will be massively hurt, but this is going to happen either way now. However with the debt vanquished, spending reigned in, Greece at least has a chance. cf. Iceland.

    • Well it looked like Papandreou was about to do just that when he proposed a Greek referendum. And guess what? The troika ousted the democratically elected government and replaced them with “technocrats”. As the austerity cuts deeper I wouldn’t be surprised to see more changes of Greek government as the people try to throw out the technocrats and get out of the Euro.

      To the troika, default just isn’t possible because it will bring the entire system down, just as it did in 2008 with AIG. That’s why Andrei Canciu’s comment is so crucial — shadow banking and the web of derivatives really are the problem. Krugman doesn’t really cover it in his post, and frankly he seems naive to it. I think most economists — and certainly most economics students — don’t understand the shadow banking sector and all the huge credit expansion that has taken place there. The Fed themselves have tried to bury the evidence under the carpet by banishing M3. Whether that is a conspiracy to hide just how bad things are, or simply blinkered economists who have read too much Keynes and Friedman and not enough von Mises is a matter for debate.

      Turd Ferguson has a great post I just read and really enjoyed on this that gets down into nitty-gritty of why a default — as much as Krugman and I might encourage it — cannot and will not be allowed:

      Turd’s conclusion? Keep stackin’ metals.

      • I only discovered Von Mises a couple of years ago. Before that I only knew of Keynes. Goes to show my economics classes were held by Keynesians. Perhaps they were ignorant as well?

        Perhaps the Economists are really flying blind!

        • Von Misis correctly predicted the Great Depression, Keynes did not.

          You would think “they” would teach that in school.

        • In fact it is Fisher, and not Keynes who I think is the more influential economist in central banks today. Keynes believed that the bubble would eventually burst. Fisher believed they were going to a new plateau.

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