Krugman on the "Troika"

[Hazir]

Current interest payments on Greek debts are running, I believe, about 3% of GDP a year. That's far less than they should be paying on the open market, given the size of their debt, but it ain't free. Furthermore, even if interest is low, they still have periodic principal repayments or rollovers - they need financing and/or a hefty real surplus (NOT just a primary surplus) to make those payments. Default and devaluation would have been a much better approach years ago at the beginning of the crisis than now, but even now it would benefit - this massive overhang of debt sharply constrains their fiscal options.

I fully agree that the Greek economy is a basket case, and that I have yet to see a truly responsible politician running things there. I have no doubt that current private owners of Greek debt are playing with fire. But the only reason they currently have any access to capital markets (small as it is) is because of an implicit guarantee by the troika that Greece will stay on the straight and narrow. That's an iffy assumption, but there you have it - and as that assumption looks worse and worse with the election of Syriza, we're likely to see Greek bond prices continue to freefall.

According to the FT of january 25th this year, Greece does not pay interest on the €240 bn held by the other EU states untill 2022. This is the debt people like Krugman and others want to see written down.

[wiggin]

I'm not interested in a write-down - I think they should never have been bailed out, and should instead have defaulted and devalued (outside of the euro). I don't see why you think I agree with Krugman here; I just don't think his analysis is entirely incorrect.

[Khendraja'aro]

Just read that they have a much bigger, immediate problem: They have to repay T-Bills - and those are held by private investors, to the tune of 9 billion € till the end of March.

[Hazir]

I'm not interested in a write-down - I think they should never have been bailed out, and should instead have defaulted and devalued (outside of the euro). I don't see why you think I agree with Krugman here; I just don't think his analysis is entirely incorrect.

His analysis is irrelevant because it's addressing issues that are not at the core of the Greek problem.

The problem is not their debt mountain or austerity; their problem is a dysfunctional state. Both Portugal and Ireland went through some pretty savage austerity of their own but they seem to be on the way up and even Spain has returned to real growth. That is not to say that austerity is the best policy for all of Europe, but it sure as hell gives us a reason to ask whether or not we want to pay for the upkeep for Greece.

[RandBlade]

To be fair the situation in Portugal, Ireland and Spain was never as serious or terminal as that in Greece.

Default years ago may have been the right idea, in a semi-related position Iceland let the banks go bust and walked away from the debt which was the right decision. To be fair those were private banks and the government had no obligation to bail them out, private companies ought to go bust and private investors be damned. But now Iceland is in a very healthy position relative to Greece and others.

The irony now though is that after 5 years of austerity Greece is actually growing and running a surplus. The issue now is one of timings which can be resolved, default now will have made the pain and hard work of the last few years relatively pointless.

[Loki]

Latvia's GDP fell as much as Greece's. Do you hear the same kind of bullshit from that country?

[Hazir]

To be fair the situation in Portugal, Ireland and Spain was never as serious or terminal as that in Greece.

Default years ago may have been the right idea, in a semi-related position Iceland let the banks go bust and walked away from the debt which was the right decision. To be fair those were private banks and the government had no obligation to bail them out, private companies ought to go bust and private investors be damned. But now Iceland is in a very healthy position relative to Greece and others.

The irony now though is that after 5 years of austerity Greece is actually growing and running a surplus. The issue now is one of timings which can be resolved, default now will have made the pain and hard work of the last few years relatively pointless.

But is Greece really running a surplus with Greeks holding out on paying taxes hoping there will be an amnesty? An amnesty that would cause a situation that other countries would have to save Greece from the effects of its own profligacy and unwillingness to reform. And this time round there is no way you can blame bankers for lending them too much.

[wiggin]

His analysis is irrelevant because it's addressing issues that are not at the core of the Greek problem.

The problem is not their debt mountain or austerity; their problem is a dysfunctional state. Both Portugal and Ireland went through some pretty savage austerity of their own but they seem to be on the way up and even Spain has returned to real growth. That is not to say that austerity is the best policy for all of Europe, but it sure as hell gives us a reason to ask whether or not we want to pay for the upkeep for Greece.

I'm not sure what your point is - yes, Greece has problems before austerity and the eurozone crisis, and they will continue to have dysfunctional institutions afterwards. But in theory, austerity and this bailout package is supposed to overhaul Greek governance and set the country on the right path for growth and jobs in the future. If that actually happened, it might be good - but instead it's clear that Greece is being strung along by its own leaders and those in the eurozone for politics, with little attention paid to real institution building. Given that reality, default 5 years ago might have been preferred.

To be fair the situation in Portugal, Ireland and Spain was never as serious or terminal as that in Greece.

Default years ago may have been the right idea, in a semi-related position Iceland let the banks go bust and walked away from the debt which was the right decision. To be fair those were private banks and the government had no obligation to bail them out, private companies ought to go bust and private investors be damned. But now Iceland is in a very healthy position relative to Greece and others.

The irony now though is that after 5 years of austerity Greece is actually growing and running a surplus. The issue now is one of timings which can be resolved, default now will have made the pain and hard work of the last few years relatively pointless.

Greece does not have a surplus; it only has a primary budget surplus for 2015 - maybe, if you take their numbers and projections at face value and don't think circumstances have changed now that Syriza is in town. By those numbers they would have a real but small deficit, though other numbers suggested a real deficit several times larger; however, with the changed political circumstances I think it's likely that they will continue to run large deficits... and anyways given the scale of their debts, a small primary surplus doesn't help you that much.

In terms of growth, they may have recorded miniscule growth for 2014; hard to tell until all of the data is final. There are increasingly rosy forecasts for 2015 and 2016 being put out by the EC et al, but I don't believe them - turnaround for Greece is always just around the corner but we never seem to really see it.

Irrespective of that, I agree that default wouldn't help much now (though it probably beats crushing austerity and policy fudges of the last 5 years, had it been enacted then). My reasoning, though, has more to do with the fact that Greece's debt is largely in the hands of official creditors rather than the market, and defaulting on those loans is a hell of a lot more difficult.

Latvia's GDP fell as much as Greece's. Do you hear the same kind of bullshit from that country?

I think Latvia, however, had a somewhat different problem. They were more or less doing well but got totally trashed by the recession - not because of awful government policies or huge debts, but just because they're a tiny economy having trouble being competitive. They had a swift, sharp correction, yes, but then quickly began growing again. Greece's pain is prolonged indefinitely without any prospect of a real recovery - they STILL have a massive debt overhang that simply isn't going to go away. They won't get back to rapid growth for decades, if ever.

Obviously I think the whining coming out of Greece (especially their public sector workers and the masses of people who don't pay a dime in taxes) is ridiculous. But to compare the two is missing the point - a short, sharp correction is almost always preferable to a deep, interminable stagnation. Grexit followed by devaluation and default years ago would likely have looked a lot better.

[Hazir]

Only in the most technical of ways default didn't happen 5 years ago. Private investors may see it a bit different though. Those cuts didn't make Greece change its ways, it is sheer nonsense to claim now that more cuts will put Greece on the right track.

[Loki]

I think Latvia, however, had a somewhat different problem. They were more or less doing well but got totally trashed by the recession - not because of awful government policies or huge debts, but just because they're a tiny economy having trouble being competitive. They had a swift, sharp correction, yes, but then quickly began growing again. Greece's pain is prolonged indefinitely without any prospect of a real recovery - they STILL have a massive debt overhang that simply isn't going to go away. They won't get back to rapid growth for decades, if ever.

Latvia's GDP fell as much as Greece's. The reason Latvia had a quick recovery is because it actually implemented policies that promote growth, instead of whining about things outside of its control. This whole Greek conflict is a massive non-sequitur. If the Greeks implement actual market/labor reforms, no one would give a damn about the debt.

[Hazir]

Latvia's GDP fell as much as Greece's. The reason Latvia had a quick recovery is because it actually implemented policies that promote growth, instead of whining about things outside of its control. This whole Greek conflict is a massive non-sequitur. If the Greeks implement actual market/labor reforms, no one would give a damn about the debt.

Exactly, there would be willingness to help Greece IF it showed any inclination of wanting to stand on its own feet. But they don't; all they do is demanding more of our money so that they can go on spending way beyond their means.

[Dreadnaught]

I think Krugman is subtly emphasizing the "spending cut" side of this, but what he's really hoping to prove is that the labor/economic market reforms that were part of the "package" were ineffective. Maybe I'm overthinking his words a bit.

[Hazir]

Krugman tries to use Greece as an example why austerity doesn't work where it's really an example of how cronyism isn't a sustainable economic model.

[Khendraja'aro]

I think Krugman is subtly emphasizing the "spending cut" side of this, but what he's really hoping to prove is that the labor/economic market reforms that were part of the "package" were ineffective. Maybe I'm overthinking his words a bit.

Well, they were ineffective because they were half-assed.

I mean, just look at the fact that a big amount of Greek people didn't pay their taxes because they thought that the new government would give them monetary gifts.

That says enough about the Greek mentality.

[Loki]

And now Tsipras wants to make the first 12k euros of income tax-free. This might not sound so bad until you realize that the average wage in Greece is 12k euros a year...

[Khendraja'aro]

I think for that one, the median is probably better suited.

http://appsso.eurostat.ec.europa.eu/...c_di04&lang=en

According to this (if I read it correctly) the median net income was only 8377€ in 2013 which would make this move even worse.

[RandBlade]

Is there anyone left who still thinks that the Germans/Dutch etc on one hand and the Greeks sharing a currency was a good idea?

Grexit isn't inevitable yet because the costs of it are so high, but had we not been here already then I can't imagine surely anyone seriously suggesting unifying those currencies and economies now?

I despised him at the time but I have to acknowledge I was wrong at the time and give credit to William Hague who foresaw this kind of problem and warned that a crisis in the eurozone could be like being "trapped in a burning building with no exit" - which is about precisely where Greece finds itself today.

[Hazir]

You mean that it's a bad idea to do business with cheats? I think that anybody who says he predicted this is a big fat liar.

[earthJoker]

Exactly, we should all remember if Greece played by the rules, it would have never been in the Euro in the first place.

But it always needs two to cheat, one that cheats and one that let's himself be cheated.

[RandBlade]

Exactly, we should all remember if Greece played by the rules, it would have never been in the Euro in the first place.

But it always needs two to cheat, one that cheats and one that let's himself be cheated.

Its a total shock that the Greeks are cheats?

You mean that it's a bad idea to do business with cheats? I think that anybody who says he predicted this is a big fat liar.

He didn't predict this exact scenario of course, he predicted that, in the context of the UK having exited ERM that in the event of a future crisis there would be no exit. Hence the "burning building without an exit" metaphore. Which is what has happened.

Of course if I recall correctly years ago you were saying the same thing in inverse, that the lack of an exit would in itself prevent problems. Guess that hasn't transpired.

[earthJoker]

Its a total shock that the Greeks are cheats?

No, hence my second paragraph.

[Hazir]

Its a total shock that the Greeks are cheats?

He didn't predict this exact scenario of course, he predicted that, in the context of the UK having exited ERM that in the event of a future crisis there would be no exit. Hence the "burning building without an exit" metaphore. Which is what has happened.

Of course if I recall correctly years ago you were saying the same thing in inverse, that the lack of an exit would in itself prevent problems. Guess that hasn't transpired.

The lack of an exit wasn't the problem. The problem was that the Greeks played with fire and were too stupid to realise what they were doing.

[Loki]

Or the people playing with fire figured they wouldn't be around when the fire got out of control.

[Hazir]

I'm quite satisfied there was no agreement today about the Greek debt. I seriously hope Greece will crash out of the eurozone.

[RandBlade]

The lack of an exit wasn't the problem. The problem was that the Greeks played with fire and were too stupid to realise what they were doing.

Its a problem when you're trapped in the same building as a pyromaniac with matches. The Greeks aren't the only ones at risk of getting burnt now.

If Greece does crash out of the eurozone as you hope then Germany alone will stand to lose upto €80 billion. That's a pretty expensive hangover, even assuming it ends there.

[EyeKhan]

If Greece does crash out of the eurozone as you hope then Germany alone will stand to lose upto €80 billion. That's a pretty expensive hangover, even assuming it ends there.

"...will...lose...." or already lost? Will Greece be able to pay that back?

[earthJoker]

If Greece does crash out of the eurozone as you hope then Germany alone will stand to lose upto €80 billion. That's a pretty expensive hangover, even assuming it ends there.

Chances are that Greece would have had to default in 2009/2010 if they haven't been in the Euro. Which would mean they would have went the Iceland/Argentina way already back then. Which also resulted in billions written off.

[RandBlade]

Hence the risk of throwing good money after bad.

Germany alone is directly and indirectly on the hook for ~€80bn in losses if Greece goes bust. That's before any knock on contagion if banks exposed to Greece etc also end up needing help. If Greece doesn't go bust then of course they'd never pay that money back in one go, but then they don't need to they'd only need to be able to pay interest etc

Chances are that Greece would have had to default in 2009/2010 if they haven't been in the Euro. Which would mean they would have went the Iceland/Argentina way already back then. Which also resulted in billions written off.

Only a fraction of the right-off that would happen if Greece goes bust now. Plus the right-off now would be by the taxpayer primarily while when Iceland went bust much of the right-off happened in the private sector by those who'd chosen to invest in Iceland.

[Hazir]

The fall out in economical terms will actually be quite limited. The political fall out may not be so pretty. What a lot of people don't get is that the Greek bubble has still not been deflated yet; what you can hold against EMU politicians is that they have enabled the Greeks by not letting it fall in 2008 and simply prop up their banks.

[Hazir]

Looks like the Greeks surrendered unconditionally; I wonder what they are going to do the next few months to turn Greece around within the parameters of the Memorandum.