Thursday, 2 July 2015


This post needs no introduction, other than for me to say that it is the first of a few on the subject, in which I hope to show how five key elements of the NO side's rhetoric, both within and outside Greece, are fatally flawed.

Due to the density of Greece's political time at the moment, I will have to update and provide references as I go along. If any readers are willing to translate, please get in touch via Twitter.

Myth no.1: Greece is being denied debt relief

As we've known since 2012, debt relief is on the table. What is not on the table is up-front, unconditional debt relief. Debt relief that very explicitly reduces the nominal Euro amount of our debt will be politically difficult, but options exist for reducing the actual value of our debt and our interest burden, and for improving the sustainability of our debt.

The Eurogroup explicitly, unambiguously promised in black and white to discuss debt relief once again on the successful conclusion of our latest programme review. Quoting Jens Bastian's post on Macropolis:
The November 2012 Eurogroup conclusions on Greece agreed that member states would consider “measures … for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio”. Two conditions were stipulated for such a process to be initiated by Greece’s European creditors: 
I. Achieving an annual primary surplus. The emphasis here is on the term “annual”. The conditionality implies recurring primary surpluses, but it does not specify a certain number or volume to be attained over time. 
II. Full implementation of all [my emphasis] conditions contained in the programme (i.e. the second macro economic adjustment programme) between Greece and the troika.  
The aforementioned “full” implementation conditionality critically rests on the conclusion of the sixth review of the ongoing programme between Greece and the troika. The review mission started back in September 2014 in Paris and had already stalled before the election campaign.
Unfortunately, the new Greek government dismissed the Troika in February, refusing to negotiate with them or indeed conclude the sixth review. It seems like centuries ago, but back then they also dismissed the Eurogroup as lacking legitimacy - they would only deal with a European Debt Conference of dubious provenance and legitimacy. This won them tons of credit with the Greek electorate. It also killed the prospect of debt relief, unless a new memorandum could be negotiated from scratch. Which is what we set about doing for the last six months.

By the way, those who claim that Greece has not been offered debt relief forget we've had two restructurings already, one of which delivered very substantial day-to-day interest savings even after accounting for a depressed economy (see graph, raw data here). There is no dogma against debt relief; there are a lot of politicians trying not to get slammed by their electorates. But that is democracy, whether you like it or not. There are no excuses for not factoring other people's politics into our strategy.

Bottom line - we will get debt relief one way or another. It will have to be packaged nicely for other countries to accept. And it will be conditional. Failing this, only two other options are open to us, both of which end with debt relief: 1. we default 2. negotiations remain stay in limbo but the economy collapses to the point where even the most committed extender-and-pretenders can no longer pretend we're solvent.

Myth 2: The case for debt relief can be divorced from the case for reform.

But why do creditors insist on reforms before debt relief? Because, as Greek voters found when the question of our referendum was announced, debt relief relies on debt sustainability analysis, and DSA relies on assumptions about long term growth. The creditors assume that Greece's long-term growth and revenue raising potential is currently constrained by inefficient government and competitive distortions. Even our own government agrees. The creditors also assume that much of our welfare spending (eg on pensions) is inefficient, which keeps our spending artificially high, and therefore our ability to repay debt articifially low.

If you follow this logic, it follows that more debt is sustainable long-term with reform than without reform. Giving debt relief with reform is good lending. Giving debt without proof of reform is financing the lifestyle choices of the few Greeks who benefit from distortion. Our own government should likewise insist on no debt relief without a credible long-term investment plan - since our growth is currently artificially contrained by Greek businesses not having access to finance and possibly by underinvestment in education and healthcare. Without this, we would get a bad deal.

Within this framework, there is a lot the creditors are getting wrong - not least on pensions and investment. But if our government and the Greek people could agree on the principle that reforms and debt relief are linked, a programme could be built that offers debt relief in exchange for reform, as opposed to just credit on policy conditions.

And because our debt is now super-long in maturity, our creditors should be willing to listen to arguments about the growth enhancing powers of health or education spending - which in the long run make a huge difference to growth.

This is where our government has talked itself, and the country into a corner. There is literally no major reform carried out in the last 6 years that they actually welcomed - even the primary surplus that has allowed then to fight on for six months is an aim they bitterly opposed right up until February. Some of their core voters are still reeling from this change in policy.

Greece has made a staggering fiscal and regulatory adjustment that would win us the respect of any informed observer. A government out to get debt relief would speak of it with pride - "our people sacrificed to make us the only European country that pays its way." but not this government, which must forever play to a gallery back home that wishes said adjustment had never happened, that believes our pre crisis debt was odious, our deficit figures inflated, and Greece the victim of an evil conspiracy.

It is this attitude among the government and its voters that makes it so hard to get any up front concessions. The Greek government, it is clear to all, sees it as its mandate to roll back reform. It offers anything less grudgingly, or with barely a moment's planning. This was not yet the consensus in January. Syriza had the advantage of being clean and owing nothing to established interests. But It was built up through unilateralism and amateurism. Even small things, such as the unbelievably stupid volunteer tax inspector brainwave, add to this image.

Myth 3: appeals to moral hazard have always been just a front for ideological austerity.

To understand how the moral hazard argument works, you need to imagine the preferred scenario of the Debt Jubilee Crowd: back in 2010, Greece defaults to a substantial extent (say 50-70pc) on private creditors and is given a few- or no-strings credit line from Europe and the IMF until it can return to the markets. Ignore for now the question of how European sovereigns would get their parliaments to back such a rescue while having to bail out the entire European banking system at the same time, or whether Europe would indeed survive the ensuing contagion with resource enough to fund continent wide stimulus.

George Papandreou would return from the hypothetical 2010 debt jubilee to a hero's welcome, bringing both fresh, cheap money and debt relief. Elected on a promise that 'money can be found' to pay for government spending, he has been vindicated. He'd stay in power until late 2014, then easily win another term. PASOK would "live and reign," as we say in Greece, while Syriza would forever remain the 5-8% party it was pre-crisis. Today, instead, PASOK is dead, ND is bankrupt. Their old deputies are toxic to any new party. Syriza is miles ahead of everyone else in the polls. 

Jubileans who claim that oligarchs drained the Greek coffers and built the crooked state around their rent-seeking would have got one wish (debt relief) at the expense of the other (fighting corruption and cronyism). If they are right and Greece’s 2009 woes are in no major way related to our spending choices, if indeed Greece's problems were political rather than economic, this would do us no good. The ship would keep speeding into the next iceberg. That's what moral hazard means: by appearing to reward wrongdoing, the creditors would ensure the same system that created the debt would survive. The Greeks benefit from the insistence on moral hazard arguments as much as our creditors - and none more so than Tsipras himself.

Myth 4: This is regime change - Europe versus democracy

The argument above brings us to accusations of regime change orchestrated by Brussels and Frankfurt. Note that the people who make such claims do not denounce the failure of Europe to give us debt relief in 2010 as regime change, though it caused PASOK to politically assassinate g-pap. They don't denounce the rebuff of Samaras' debt relief demands in 2012 as regime change, even though it ensured ND would lose the next election and not see power again for decades, if ever. Only now, with a favoured party at the receiving end, do they cry 'regime change.' And even now, creditors are only risking losing a partner in Syriza because Syriza cannot square up to its niche internal opposition. An actual election today, after all, would give Syriza a bigger lead over ND than it got in the last election and make them all powerful, with a straight majority that would not depend on the disgusting company of the Independent Greeks. 

I am always exasperated by people who make the Greek debt stand-off out to be a battle for democracy. It is far from. To understand why, you have to understand a) what Syriza's mandate was, b) what the Greek people want, c) what's really keeping Syriza from a deal and d) that there are other democracies at play.

First, Tsipras' mandate. Syriza came to power claiming that it could reverse austerity 'with one law, one edict', and that it would make Merkel an offer she would have 'not one in a million' chances of rejecting. It promised a tough renegotiation of our debt , and a gradual reversal of benefits and minimum wage cuts, to be financed by the ECB, a crackdown on tax avoidance and a rebalancing of tax revenues so that the rich pay a greater share than they currently do. No one believed all of this was truly possible. Repeatedly, Syriza supporters said that 'if they do 10% of what they promised, they'll be better than the previous bunch'. The subtext to the people's mandate (which became evident once the negotiations began) was therefore that they wanted someone to restore their dignity, fight their corner, and turn them from passive observers of austerity back into authors of their own fate.

Yet the majority of Greek people are also unwavering in their support for the Euro; not because they all think it was a good idea to join the common currency but because they think it will be a messy divorce right now and would rather not do it while our economy is reeling from the worst recession in history. It may be that, given the option to leave the Euro in an orderly fashion somewhere down the line, a majority of Greeks would take it. They should have this chance. But for now this is not a good option (I am unsure how it would ever be), and voters have been clear in surveys since May that they'd rather take a bad deal than risk Grexit. A majority of Greeks have also, since June, believed that negotiations are not going well.

It is in fact only a small left-wing faction within Syriza that Tsipras is unable to sell a deal to and that is additionally comfortable with Grexit. These may be close to the heart of 2009 Syriza, but they have had almost nothing to do with its electoral success since. A new 30% of the electorate has swelled their ranks which has little in common with the left wing of the party. Unfortunately, as a result of Syriza's history as a coalition, Tsipras would be counting on the votes of its left wing to see any deal through parliament, because this group is over-represented relative to their share of the party's actual popular vote.

It's bad enough that a faction representing some 4-5% of the Greek electorate can hold another 30% that support the government to ransom; but it takes a special kind of cynicism or cluelessness for an outside observer to claim that it actually represents the will of the people.

Finally, Greece has no monopoly on elected governments. Our popular mandate dictates on what terms we're willing to borrow. The creditors' popular mandate dictates on what terms they're willing to lend. If the Venn diagram of the two is null, as it very likely is, then the honest and respectful thing to do is turn to the people and say - I'm sorry, we can't borrow from these people. And stop wasting time.

Myth 5: The Troika has imposed capital controls

I need to make a special point here about the role of the troika in the institution of capital controls in Greece. As was repeated ad nauseam in the last few months, only our own government has ever had the power to introduce capital controls in Greece; it is legally and practically impossible to do in any other way. The ECB does have influence on this process, but only because Greek banks are illiquid and depend on it (via ELA) for funding.

Why are Greek banks illiquid? Because of a massive bank run, which started in December and peaked in January.

Why was there a bank run in the first place? Because a) Syriza's leadership repeated in its pre-election campaign that it was planning to tax deposits and b) because Greece was left without a credit line when the Troika were sent packing, raising fears that Greece may default - which would kill our banks. Yes the press reported on this - after December - and yes fears of a bank run can help cause a bank run; but the alternative is to muzzle the press on an issue that frankly is quite important (and on which they were reporting broadly accurately).

What did the ECB do in response? A coup-minded ECB could have shut off ELA back in February and shocked the Greek government into submission while they were still unsure of how government works. Instead, they kept increasing the amount Greek banks could borrow from them. Banks borrow ELA money against collateral - in many cases Greek bonds. With our own Finance Minister saying publicly that a) we are insolvent and b) we will seek debt relief, the ECB was left in the position of accepting bonds as collateral that it knew were very likely to be defaulted on. It should have stopped the moment Varoufakis uttered the words. Instead, it simply reviewed the haircut it applied on said bonds, throughout the negotiation. It stopped only when it became clear Greece was going to default on the IMF; a situation that was highly relevant to the value of our bonds and which was too public to (pretend to) ignore.

The ECB is far from angelic of course. But its greatest mistake is to continue to sign-off on Greek banks' solvency. Both the ECB and the Greek government have continued throughout this crisis to hide between the ECB's assessment, which is, frankly, BS. Solvency depends on asset prices and these are contingent on policy. Greek NPLs were not really pointing downwards yet in January and they sure as hell aren't falling now. Insolvencies are up. To add to this, the new government has taken a very dim view of foreclosures, effectively making a great deal of debt unsecured, and the value of whatever bonds the banks are still holding must have taken a beating.

Why is the ECB's solvency assessment being manipulated in this way? A critic on Twitter helped me clarify this in my head. Because it allows the ECB to provide ELA, which only solvent banks may receive. Without this pretense, the ECB would have to pull the plug - not stop raising the ceiling; stop providing ELA at all. It still hasn't to this date. This is wrong of course, but does it speak of a militant central bank out to get the new government? No. It speaks of one bending the rules in order to avoid having to do the nasty part of its job - resolution. I am not pretending the motivation here is humanitarian, but the outcome actually is.


  1. Dear Manos,
    A friend of mine posted on his social media account a link for this article of yours. I thoroughly read your text and I regret to say that is inadequate to be considered a comprehensive investigation, as you wish to present it. The piece not only lacks the required depth but also you have seriously skewed the findings which you represent, in order to support through them a subjective opinion disguised as an objective outcome. I also came into two conclusions, first that your job is relevant to research, that has been extracted from the way you present the results and from the effort you put to include any relevant sources. The second conclusion is that you are a pure supporter of neoliberalism which has been stigmatised by many Nobel laureate economists as a disease for the growth and the health of an efficient state (P. Krugman, C. Pissarides, and J. Stiglitz are few examples). Historical data also support their arguments, as you can check by yourself statistics regarding the competitiveness, the growth, the unemployment, and the inequality in UK between Thatcher’s and Blair’s era.
    But let’s put the introductions aside and focus on the reason I wrote you, which is the way you interpret the data.
    Myth no.1: Greece is being denied debt relief
    Yes indeed the Troika in the Eurogroup summit which took place on 27th of November agreed for a possible debt relief if Greece was able to produce a primary surplus, implement all the conditions, in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%.
    Someone who reads the first two conditions will think that while Greece succeeded in producing a primary surplus (especially under Syriza’s government the surplus during January – May reached a record of €1.5 billion, failed to implement any reforms required, as you cunningly emphasize by linking the failed talks to Varoufakis’ actions of diminishing the Troika. “Dismissed the Eurogroup as lacking legitimacy” you actually said which is a lie, Syriza clearly rejected the Troika’s representatives in Athens and not the Eurogroup, where the negations continued. (
    The last condition, which you failed to include in your text, is what changes the whole interpretation though. Because the principal objective of the debt relief is to be the tool which will enable Greece to get a sustainable debt by 2022 as has been set by Troika, and it is not just a Greek government’s request. Now the tricky part is that you portrayed the Europeans as the Good Samaritan. Which quite frankly is more delusional than two people suffering from folie à deux syndrome. I will not go into details to list you all the shenanigans the European leaders have fallen after Syriza’s government came to power (and even before that) but I will focus in the most important ones. First is the constant inability of IMF to make any reasonable predictions. Not even once has managed to be within an acceptable statistical error regarding growth, debt/gdp, and unemployment estimates, also Greece is not the only case where IMF failed miserably to predict an economic trend. ( Even though successive Greek governments have implemented most of the fiscal adjustments that have been requested in the original MoU/MEFP (, especially in regards of social security, and even after we did everything Troika asked (please check page 17 and onwards from MEFP document) the results were miles away from IMF’s forecasts. As prof. Stiglitz has pointed out “Troika has 'kind of criminal responsibility'”.

  2. (2/2) The second biggest mistake happened when European leaders tried unsuccessfully to postpone the publication of IMF’s findings (, where in the specific report for the nth time: “the IMF argues that Greece's debt burden of nearly 185 percent of gross domestic product can only be made sustainable if the euro zone provides considerable extra financing through a mixture of new loans and a debt restructuring.
    This is politically anathema in Germany, the biggest creditor country, and most other euro zone states, where no leader wants to explain to taxpayers that the money they lent to Athens will never be coming back.” as Reuters stated (the news about the leaked document
    Thus by quoting your exact words sir, “But that is democracy, whether you like it or not. There are no excuses for not factoring other people's politics into our strategy.” So you actually legitimise the European leaders even though they tried to manipulate the public opinion by concealing important information, but at the same time you criticise Syriza for requesting a debt relief while proposed an €8 billion program during February ( I think that is a fault in your logic, and considering other people’s politics should be mutual in a union and not one-sided.
    Finally in regards of the debt restructuring which includes the PSI and the Securities Markets Programme, is a common secret amongst the asset and fund managers that ECB benefited greatly from the purchase of the Greek bonds. When the SMP program was initiated ECB purchased the bonds at their market price, which in May 2010 was at €88.32 (10yr GGB - Furthermore the total nominal value of the purchased Greek bonds accounts at €34 billion ( according to official statements. That means that the ECB bought approximately 340 million bonds by paying only €30 billion at their 2010 market price, resulting in an estimated profit of €4 billion. This move of course caused an uproar amongst us, as the asset managers where the ones who got hit harder (
    Because of lack of time I will postpone for later my analysis of the rest of your myth baster claims.



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