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Wednesday, 9 March 2011

ITTY BITTY HAIRCUT COMMITTEE - THE REAL END OF THE LOL

This is the final call for holders of Greek debt. I am tempted to wake my folks up and tell them but I'm sure we have one more day. I won't hold out for much longer though. I am happy now to call the Greek default, which will at the very least have been structured by the end of this year; probably much earlier. I am already thinking of folding LOLGreece (or passing it on to willing readers) and writing a nice little book instead.

Here's why:

A few days ago the call went up for a thorough investigation of why Greece came to be so indebted. It was signed by numerous notable economists and should not be dimissed as a pinko liberal pamphlet about freeing Palestine and ending hunger. Sh*t just got real.

Here is what I believe. The sole purpose of the debt audit people are demanding for Greece is to come up with an estimate of the debt Greeks should not have to pay back by estimating what share of Greek debt is down to graft, corruption, fraud etc. This is meant to be our bargaining chip in the great default haggling match and whoever came up with it is a genius. If it's Yorgo I'll offer him all of my bum hair for a transplant.

You see as I've explained before, Greece can't concede even the possibility of default until t-1s, when we're actually just about to default. We do however need to be able to signal to interested parties that it's haircut time so they can gather round the negotiating table and work out a deal that they can survive, capital-wise. We also need to still be able to control the timing of this process so as to ensure that reforms are well underway, our current account is balanced and our politics is stable. That way, when we're cast off into the cold, dark void that is unbankability, we can survive the 6-9 months it will take for some brave lenders to take a punt on our debt.

The Audit is our signal. It distinguishes between sophisticated lenders and retail investors as well as our own pension funds, as many will dimiss it as a call for justice; it isn't. We can tamper with procedures to slow it down or speed it up at will, depending on how reforms go. Then at the crucial moment we strike. We cannot be stopped (since it's not a government initiative) and no one will be paying attention until it's too late.

Keynesians and people naturally inclined to the default agenda (unlike myself) have of course instantly caught on to the Audit's use as a default mechanism.So have many populists on the Radical Left at home.

They are all silent, however, on what the day after our default will look like and thus fostering unrealistic expectations.

MAKE NO MISTAKE. The majority of the Greek people would expect the entire package of Memorandum measures to be rolled back in the aftermath of a default. There will be days of partying in the streets until the realisation hits that we're virtually out of cash. The defaultniks will become disappointed, then murderously angy; their pimps, the Naomi Kleins and Krugmans of this world, will call for temporary assistance and other such rubbish terms. More importantly, in the aftermath of a default austerity will redouble, to ensure that Greece can run a balanced budget. With spirits already running high, this could trigger unprecedented levels of civil unrest.

Sleep tight. Unless you are an ambitious man with a fierce admiration for Hugo Chavez, in which case you should start preparing for a shot at Government.

UPDATE: Still not convinced? Then read up on our latest efforts to set up a stall for 'diaspora bonds' in the States. I hope they come knocking on my door too here in London. I promise to buy and promote diaspora bonds if Greece's creditors first take a minimum 30% haircut.

2 comments:

  1. The real question is not the default but the realization that if if was inevitable anyway, then why the hell was is not done on day one to save the hard ache? --> remember when i called default invetable about 10 months ago? people though i was crazy... but i just knew some Greek economic history

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  2. Two answers @Alex,

    Those who always thought a default was our only option (which does not include myself) also knew on some level that a country with a large fiscal and current account deficit cannot default overnight without incredible pain all around. We'd have to cut spending and ration imports (and impose capital controls) overnight, which would be much more traumatic than the last year has been. Good defaults take time and we were caught by surprise. So you might say that the IMF period was just a matter of buying time so we could prepare ourselves for default.

    Those like myself who did not want a default at first had got two things wrong: first, we didn't realise how difficult it is to reform functions of the Greek state such as tax collection or regulation; we assumed that extreme pressure would make things happen but of course it didn't. Fast reform was crucial to my assumptions. Second, we didn't expect how strong the reaction was going to be to the comparably mild austerity measures proposed in mid- to late 2009. I thought that G-PAP would use his new mandate to introduce at least some of what Karamanlis Jr. had campaigned on. Instead everyone including Stiglitz waded into the debate saying no, you don't need this. And finally, I think we (certainly I) were just plain wrong in our mindsets. Default is a tough choice and I certainly wouldn't pick it if fiscal adjustment was in any way possible.

    Mind you, it still terrifies me that our best hope now is to carry out a smooth default. But do we know how? Some lessons from your discipline would be useful.

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