Greece and the ECB

The enforcer

How the European Central Bank can dictate terms to the Greek government

The Economist

AS PART of his campaign to present a more conciliatory face to Greece’s European creditors, Yanis Varoufakis, the new Greek finance minister, dropped by the European Central Bank (ECB) in Frankfurt on February 4th. He met Mario Draghi, its president, in an encounter Mr Varoufakis described as “fruitful”. But there are sweet fruits and bitter ones. After his visit, the ECB’s governing council served up a bitter variety by deciding to make life tougher for Greek banks, already beset by big outflows of deposits. The decision was a warning shot to the new government over its unwillingness to abide by Greece’s bail-out arrangements.

ECB cancels soft treatment of Greek debt in warning to Athens

BY JOHN O'DONNELL AND JAN STRUPCZEWSKI

FRANKFURT/BRUSSELS Thu Feb 5, 2015 5:03am EST

(Reuters) - The European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding on Wednesday, shifting the burden onto Athens' central bank to finance its lenders and isolating Greece unless it strikes a new reform deal.

The move, which means the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt see as the Greek government's abandoning of its aid-for-reform program.

Europe’s Greek Test

JAN. 30, 2015

Paul Krugman

The New York Times

In the five years (!) that have passed since the euro crisis began, clear thinking has been in notably short supply. But that fuzziness must now end. Recent events in Greece pose a fundamental challenge for Europe: Can it get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project — the attempt to build peace and democracy through shared prosperity — will suffer a terrible, perhaps mortal blow.

A major step towards a Greek compromise

- Finance Minister Varoufakis’s proposal provides a good basis to start discussions

by Zsolt Darvas on 3rd February 2015

 Bruegel.org

Following a week of fright after the Greek elections, during which various statements by the new Greek government have raised the spectre of Grexit, Finance Minister Varoufakis made a surprising proposal yesterday: the government will no longer call for a headline write-off of Greece’s public debt, but instead proposes to change the terms of current European loans to Greece, to aim for a primary surplus (much) smaller than the Trokia target and fight against tax evasion.

Greek Finance Minister Heads to Germany After Retreating From Tough Stance

By James Hertling

 (Bloomberg) -- Greek Finance Minister Yanis Varoufakis arrives in Germany with the wind at his back: the biggest rally in stocks since the days of the drachma and a plunge in the week-old government’s borrowing costs.

All he had to do was drop a demand for a debt writedown, retreating from a central campaign promise.

How Greece could accidentally stumble out of the euro

CNN Money

In less than four weeks the international lifeline that has kept Greece afloat for five years is due to expire. Debt repayments are looming and the country is running out of funds.

Lenders won't forgive Greece's huge debts so Prime Minister Alex Tsipras must negotiate a compromise, or put Greece's future in the eurozone at risk.

After a shaky start, his government has begun to suggest solutions. But the standoff with creditors is fueling uncertainty, shaking Greece's fragile banking system, and could tip the economy back into recession.

Syriza Shouldn't Underestimate Merkel

18 FEB 2, 2015 10:52 AM EST

By Leonid Bershidsky

Bloomberg 

It's widely assumed that the European Union will cave to Greek demands to write off some of Greece's debt. What, however, if it doesn't? A Greek exit from the euro and even the European Union is not the only alternative: The fall of the far-left Syriza government in Greece is another distinct possibility. The EU's ponderous, compromise-prone decision-making machine can be tough when challenged by mavericks -- just ask David Cameron or Plamen Oresharski.

What Is Plan B for Greece?

Kenneth Rogoff

http://www.project-syndicate.org/columnist/kenneth-rogoff

TOKYO – Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish ten-year bonds, for example, are still trading at interest rates below US Treasuries. The question is how long this relative calm will prevail.

Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity. Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere.

France Offers Support, but No Debt Relief, to Greece

By LIZ ALDERMANFEB. 1, 2015

The New York Times

PARIS — French officials said Sunday they would support the new Greek government’s efforts to get the country back on its feet after five years of crushing austerity, but warned that there would be no write-down of Greece’s debt and pressed Athens to continue with reforms that are still needed to help mend the country’s economy.

“France is more than prepared to support Greece,” Michel Sapin, the French finance minister, said during a news conference after a two-day visit by Yanis Varoufakis, his new Greek counterpart. “Greece needs time to put things to work,” he said. But he added, there was “no question” of forgiving Greek debt.

Closed businesses in Athens. The European Central Bank will meet this week to discuss emergency loans for some Greek banks.For Greece, Bank Trouble Looms Again as New Government Takes ShapeFEB. 1, 2015

Mr. Varoufakis was beginning the first of a series of visits to European capitals this week after the leftist Syriza party won power in elections last month in a populist backlash against austerity. He said that although Athens was “desperate” for money, it would not seek a 7 billion euro installment on its 240 billion euro international bailout package because that would require the nation to adhere to austerity terms.

Economists say Greece needs the money to cover looming funding needs and debt obligations, and to help a recovery after the economy contracted around 25 percent in five years.

“We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction,” Mr. Varoufakis said, adding it was time to go “cold turkey.”

President Barack Obama, in his first remarks on the situation since the Syriza government came to power, cast doubt on the soundness of Europe’s austerity policies during an interview with CNN that aired on Sunday.

“You cannot keep squeezing countries that are in the midst of a depression,” he said of Greece. “At some point, there has to be a growth strategy in order to pay off their debts and eliminate some of their deficits.”

Mr. Obama added: “More broadly I’m concerned about growth in Europe. Fiscal prudence is important, structural reforms are necessary in many of these countries. But what we’ve learnt in the U.S. experience is that the best way to reduce deficits and restore fiscal soundness is to grow.”

Europe Should Call Greece's Bluff

FEB 2, 2015 2:00 AM EST

By Guy Hands

Bloomberg

In November 2011, I hosted a dinner for senior German bankers that was dominated by heated debate over the continuing Greek financial crisis. They were adamant that Greece should not again be rescued by Germany and its European partners or the International Monetary Fund. I argued that a further bailout was the only option.

France Supports Greece in EU Debt Battle

Sympathy in Paris for Athens Adds to Pressure on Berlin

The Wall Street Journal

By MARCUS WALKER,  INTI LANDAURO and  ANDREW ACKERMAN

Updated Feb. 1, 2015 4:42 p.m. ET

8 COMMENTS

PARIS—France expressed sympathy for the new Greek government’s hope of renegotiating the tough terms of its bailout, amid growing international calls for Germany to rethink its austerity-heavy approach to the debt crises in Greece and Europe.

As Greece and EU Clash, Clues on Deal Emerge

Despite Finance Ministers’ Frosty Exchanges, Prospects Seen for Sharing Pain Between Athens and Creditors

The Wall Street Journal

By MARCUS WALKER,  STELIOS BOURAS and NEKTARIA STAMOULI

Jan. 30, 2015 7:10 p.m. ET

41 COMMENTS

ATHENS—Greece’s finance minister and a representative of its European creditors exchanged grimaces, tough rhetoric and a frosty farewell on Friday, capping a week in which Athens’s new antiausterity government roiled its eurozone paymasters almost daily.

Greece really might leave the euro

By Matt O'Brien January 30 at 7:41 AM

The Washington Post

The world's worst portmanteau is back: Grexit.

That's short for "Greek exit," as in Greece leaving the euro. And it's once again a possibility now that the left-wing, anti-austerity party Syriza has won power in the latest elections. The risk, as I've said before, is that the rest of Europe is in good enough shape that Germany finally thinks it can let Greece leave, and Greece's budget is in good enough shape that it finally thinks it can leave too. Neither of them wants that, but neither of them doesn't want it so much that they'd do anything to avoid it—so both might call each other's, as it turns out, non-bluffs if Syriza tries to force Germany to renegotiate Greece's gargantuan debt.

Cue the market freakout in three, two, oh, it's already here? Why yes, yes it is. Greek stocks fell 11 percent on Tuesday, another 9.2 percent on Wednesday, before stabilizing up 3.2 percent on Thursday. Three-year borrowing costs shot up to 16.9 percent. And worst of all, Greek banks collapsed between 30 and 45 percent in just the last week. That's enough, as we'll see in a minute, to make it much more likely that Greece leaves the euro.

Now, as far as panics go, this one is pretty well-justified. That's because Syriza hasn't just taken a hard line against austerity, but picked the equally hard line, though right-wing, Independent Greeks as its coalition partner, ahead of less confrontational but more ideologically simpatico alternatives. The game of debt chicken, in other words, is very much on.

But the weird thing about Greece's debt, as Dan Davies points out, is that it doesn't really matter. Greece, you see, owes €317 billion, or 175 percent of its GDP, but that might as well be eleventy billion kajillion euros—it's about as meaningful and likely to be paid back. Why? Well, the first thing you should know about Greece's debt is that 75 percent of it is held by the "official sector." That's an alphabet soup of lenders that includes the IMF, ECB, EFSF, and European governments. And unlike private sector lenders, they don't care about maximizing their returns, but rather looking like they're maximizing their returns. That means that under no circumstance will they reduce the face value of what they're owed ... but they will reduce interest rates to almost zero and extend maturities to infinity and beyond. So suppose, for example, that you lent me $100 for 10 years at a 5 percent interest rate. If you were Germany, you wouldn't take anything less than that $100 back, but you might give me 30 years at just a 1 percent interest rate to repay it instead. That's still a big help.

The good news is that Greece's debt payments have already been cut a lot. The bad news, though, is that Greece's debt payments have already been cut a lot—so there's not much left to do. Greece, economist Zsolt Darvas explains, only owes 0.56 percent interest on a big chunk of its debt, doesn't owe any on another for 10 years, and gets paid back all the interest it sends to the ECB. Not only that, but most of its debt is already pretty long-term. That's why, despite its 175 percent of GDP of debt, Greece only has 2.6 percent of GDP of debt payments.

So all they can do now is fiddle some more with the interest rates and maturities. Maybe turn 0.5 percent rates into 0.2 percent rates, and 30-year bonds into 50-year bonds. That's not going to free up a lot of cash, though. Maybe 1 percent of GDP. Maybe a little more if the ECB starts buying more Greek bonds as part of QE. This last part is actually pretty clever. The ECB can only buy a country's bonds if it owns less than 33 percent of them, but it owns 34 percent of Greece's right now. That means Greece should want to pay the ECB back right now, so that the ECB can buy more of its debt. After all, when the ECB buys Greek bonds from Greek banks, that turns debt that Greece had to pay interest on into debt that it doesn't have to. So, in Greece's case, QE trades debt payment for debt relief.

This is a deal Europe could, and probably would, support. Indeed, even Finland's Prime Minister, who's been more opposed than most to debt forgiveness, has said he'd be okay with giving Greece more time to pay back what it owes. Europe's dirty little secret, though, is that more time will eventually become all the time in the world. Today's 30-year bonds with 0.5 percent rates will become tomorrow's 50-year bonds with 0.2 percent rates, and then, at some point, zero-interest perpetual bonds, aka debt that you don't have to pay interest or principal on, aka not debt at all. Everybody knows this, but nobody can say it, because German taxpayers wouldn't like hearing that Greece will never pay back what it owes, that everyone's debts will be thrown together when there's a United States of Europe. (Oops, pretend you didn't hear that). And that's why Greece's debt is pretty irrelevant. It's a big number that Greece can't pay back, so who cares how big we're pretending it is?

Well, Syriza does. They say they want to cut Greece's debt in half. The only problem is that's not going to happen, and even if it did, it wouldn't help much. The question, then, is whether a deal that just cuts interest rates and extends maturities would be enough for them. Another 1 percent of GDP of spending wouldn't save the Greek economy, but it would save a lot of Greek people from extreme poverty. Syriza would have enough money to give food stamps to the hungry, healthcare to the sick, and electricity to people who can't afford theirs anymore, just like it campaigned on. So would this be enough? Maybe not. Greece's austerity is bigger than its debt payments, so just reducing those payments might not reduce its austerity as much as Syriza wants. That leaves one last question. Why is Greece, with 25 percent unemployment, cutting more spending than is absolutely necessary? Easy: Because Europe is making it.

Greece, you might be surprised to learn, doesn't need Europe's money to keep its budget afloat anymore. But it does need Europe's money to keep its banks afloat. And that, as Paul Krugman explains, is where Europe's leverage comes from. It goes something like this: Not-so-nice banks you got here, be a shame if something even worse happened to them, if, you know, you don't do all the austerity we tell you to. It's an offer Greece hasn't been able to refuse, because if the ECB pulls the plug on the emergency lending its banks need, the only way Greece could keep its people from losing their money would be to print it. And the only way Greece could do that would be to leave the euro.

But it's an offer Syriza thinks it can refuse. It just doesn't believe the ECB would really kick them out of the euro and risk contagion in, say, Spain, where a one-year-old anti-austerity party has surged to the top of the polls. Markets, though, aren't so sure. That's why, as you can see above, Greece's banks started falling right after it became clear there would be early elections that Syriza would probably win, and started free-falling after Syriza did, in fact, do so. And why Greek depositors are pulling their money out of banks at a record pace right now. Better to get your money out now, while you'd still get euros, than to wait and maybe get drachmas that wouldn't be worth as much.

This is how the euro ends. Yes, with a bang, actually, and a bank run. This isn't how it was supposed to, though. It wasn't supposed to end at all. The euro, Barry Eichengreen argues, is irreversible, because even talking about leaving it would set off the "mother-of-all financial crises," stopping you from doing so. But what if, Krugman asks, you're already having the mother-of-all financial crises? Maybe it's because, even though you say you want to stay in the euro, markets think your policies will force you out of it. Well, then there's nothing keeping you in, because you're already on the way out. (Freedom's just another word for no banks left to lose). So what we might get here is a failure to communicate. Europe might say, look, you can't afford to leave the euro because your banks would collapse even more than they already have. And Greece might say, look, we can afford to leave the euro because our banks have already collapsed. In the worst case, this brinkmanship could get us what nobody wants: a euro that is very much reversible.

Saving Greece is a Herculean, but not a Sisyphean, task. Difficult, but doable. First, Europe should lower the interest rates and extend the maturities on Greece's debt. Then, it should give Greece more time to hit its budget targets, like France has given itself, as a way to discreetly divert austerity into a future that never comes. Taken together, this could cut Greece's surplus, before debt payments, from the 4.5 percent of GDP it's supposed to be down to, say, 2.5 percent. That wouldn't make a difference to Europe, since it still wouldn't have to put any more money in, but it would make a big one to Greece. Indeed, Krugman's back-of-the-envelope calculations show it could boost Greece's economy by something like 5.2 percent.

Europe could live with this, because Greece would at least be reciting the austerians' favorite chant. Specifically, Greece would be agreeing to play fiscal make-believe about paying the full face value of its debt, and not to renounce its austerity program. Still, Europe would need more than this. It would need Greece to cut more regulations if it's going to cut less spending. There should be no shortage of things to do, since Greece's markets are the reason the word "sclerotic" exists. It could mean going ahead with the privatizations it's stopped. Or turning the state's procurement system into something other than an excuse for graft. Or, as the new finance minister ambitiously put it, trying to "destroy the Greek oligarchy system." (As Alan Beattie points out, that's just as much a "structural reform" as making it easier to fire people). It just has to be something. That way, Europe can say it let Greece spend more because it's reforming more.

The point is that Europe should do whatever it takes to keep the Pandora's Box that is Grexit closed. You just never know what other portmanteaus might come out, like "Spanic." (That's short for Spanish panic). Real ugly stuff.

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.

Greece says will not cooperate with troika or seek aid extension

ATHENS Fri Jan 30, 2015 10:05am EST

Jan 30 (Reuters) - Greece's government will not cooperate with the EU and IMF mission bankrolling the country and will not seek an extension to the bailout programme, its finance minister said on Friday.

Jeroen Dijsselbloem, head of the euro zone finance ministers' group who is in Athens for talks with the new government, said the two sides would decide what would happen next before the programme ends on Feb. 28.

Syriza Is Limited in the Promises It Will Be Able to Keep

Desmond Lachman 

The New York Times

JANUARY 27, 2015

Greece’s New Leaders Act Swiftly to Reverse Austerity

Measures to Halt Privatizations, Rehire Public Workers Trigger Greek Market Selloff

The Wall Street Journal

By MATTHEW KARNITSCHNIG and  STELIOS BOURAS

Jan. 28, 2015 5:46 p.m. ET

Greece’s new leaders moved swiftly to reverse the reform course imposed on the country by its creditors, dashing hopes in Europe that the leftist government would soften its approach and triggering a steep selloff in Greek stock and debt markets.

Sanctions Are Now Syriza's Bargaining Chip

JAN 28, 2015 8:47 AM EST

By Leonid Bershidsky

Bloomberg

“…I predict the Greek government will ultimately trade its sanctions vote for debt relief. If so, it will be revealed to be another bunch of cynical horse-trading politicians rather than a force for change, even as Greeks rejoice at seeing their national debt shrink…”

Greece's Crazy Leftists Have a Good Idea

172 JAN 27, 2015 12:01 AM EST

By The Editors

 Bloomberg

Amid the populist rhetoric that propelled the far-left Syriza party to victory in Greece's parliamentary elections, there's one idea that Germany in particular should take to heart: revive growth in the euro area by giving the hardest-hit countries a break on their debts.

Greece Puts Mind Over Money

6 JAN 28, 2015 12:01 AM EST

By Justin Fox

Bloomberg

“…More often than not, though, what makes a person an interesting thinker isn't what makes a good political leader…”

“…To make those things happen, though, he would need to be finance minister of Germany, not Greece…”

Why Europe Will Cave to Greece

45 JAN 28, 2015 1:00 AM EST

By Clive Crook

Bloomberg

A prediction for you: Greece and the European Union will split the difference in their quarrel over debt relief. What's uncertain is how their respective governments will justify the new deal, and how much damage they'll inflict on each other before accepting the inevitable.

EU governments, with Germany in the lead, are saying that debt writedowns are out of the question. Debts are debts. Greece's newly elected leader, Alexis Tsipras, calls the current settlement "fiscal waterboarding" and says his country faces a humanitarian crisis. His government won't pay and wants much of the debt written off. Neither side is willing to give way.