Greece cannot be rescued unless the eurozone is redesigned: Interviewed on ABC LATELINE

25/07/2011 by

Here is the transcript and video of my ABC TVextended  intrerview on LATELINE regarding the recent Greek ‘rescue’ plan. Any comments?


ALI MOORE, PRESENTER: Well just a short time ago I spoke to Yanis Varoufakis, an economist at Athens University.

Yanis Varoufakis many thanks for talking to Lateline tonight.


ALI MOORE: Another rescue package for Greece, this one includes the private sector, interest rates on its loans have been cut and it’s been given double the time to pay back those loans, is this it, is this going to fix Greece’s problems?

YANIS VAROUFAKIS: No it won’t because Greece’s problems are not Greece’s any more.

Had this package been implemented about a year a year and a half ago, perhaps it would have done the trick. But it’s a year and a half too late, the horses have bolted and now we are reconfiguring new locks for the gates.

It’s a crisis that has spread well without the limits of Greece. It has, as of course you all know, moved to Ireland and from there south to Portugal; recently it has contaminated Italy and Spain. Currently it’s spreading its wings over Belgium, the French banks and so on.

So trying to deal with a Greek problem, as if this is a problem, is effectively seriously to misunderstand the very structure of the crisis.

ALI MOORE: At the same time though, this is 150 billion euro, it’s a sort of reshuffling, if you like, of the debt repayment, it has the private sector involved, as I said, is this not going to make it a bit easier for Greece to start repaying its debts without killing the economy?

YANIS VAROUFAKIS: Absolutely. But the problem is that Greece cannot survive if the Euro system collapses all around it.

So, this is precisely what I said earlier, that had this package been implemented a year and a half ago when the problem was well contained in Greece, then perhaps that would have been the solution, or at least we would have given Europe a very long period of time during which to fix the architecture of the Eurosystem.

But given that the crisis now is well without the limits of Greece there’s not much sense in allowing Greece more leeway for repaying its debts if the Euro, as a currency, as a common currency area is on the brink of catastrophe.

If Italy and Spain explode, and there is nothing in this package for Italy and Spain, if Ireland buckles under and demands too a restructure of its debts similar to the restructuring that was granted Greece yesterday, there’s nothing in this package to help.

And the moment that these developments happen, and I think they will within the next two or three months, then there will be another summit and another long debate about how the problem will be fixed. And, you know, time waits for no-one and a general disintegration of the Euro area would do no-one any good and, of course, it will do Greece no good.

ALI MOORE: That said though of course, there was a real fear that with this package and with Greece’s private lenders having to take a hair cut that there’d be contagion, that we’d see other Eurozone borrowers like Spain and Italy, would face sharply higher rates; but in fact in the short period since this package has been announced that hasn’t happened has it? Why is the market feeling more confident then, if the situation is as dire as you paint it?

YANIS VAROUFAKIS: I shall suggest that you look back to the previous 18 months of summit after summit after summit and plan and package after plan and package that has been announced.

Every time the summit of the European leaders announces a new deal, a new bailout, a new stability package, the market’s nerves steady for a couple of weeks and then when everybody realises that this suggested solution is simply part of the problem, then the market reacting negatively again.

I think we’re seeing exactly the same pattern being repeated here. Everybody now in the market place expects and bets, that everybody else will expect that somebody will be optimistic having heard the new, quite radical, package for Greece yesterday, and for the next few days they are taking bets that things will improve.

But for the next two or three days, given that the fundamentals have not been addressed we’re going to have the same old pattern of deterioration, of editorials being written that the problem has not been fixed, that the can has been kicked up, not down the road anymore. We’re kicking it up the road and with every kick it’s getting heavier, and in two or three months time you and I might be having exactly the same conversation.

ALI MOORE: And indeed, with this package, is it effectively a restructuring that amounts to a default by Greece because those private lenders are going to end up taking a haircut no matter which way they slice it?

YANIS VAROUFAKIS: Absolutely. Look, Europe has been in denial now for a year and a half about the fact that Greece is bankrupt. So they’ve been throwing good money after bad to prevent a formal acknowledgement of the bankruptcy of Greece, of the default of Greece. Well now they have given up on that.

They have tried to do it in such a way as to present it in a kind of an orderly way, they’re talking of a haircut of around 20-21 per cent, I think that is highly inadequate. Very soon we’re going to be talking about 30, 45, 50 perhaps 60 and 70 per cent haircut. This is how Europe works, it dithers, it delays, it makes cowardly small steps towards the truth and at some point that which it has admonished as impossible it embraces as inevitable.

This is typical European way of delaying decision making. The question is whether Europe has run out of time and whether the Euro is going to collapse before the European leaders face up to reality.

ALI MOORE: Well indeed, if Greece is bankrupt as you say, if the system itself, if there is a systemic problem with the system as severe as you say, even if Europe woke up today and acknowledged all of this, what could be done?

YANIS VAROUFAKIS: I think Europe is a quite rich common currency area, it’s got very deep pockets. And it still has time, and the resources, to deal with the task in hand. Which should be, ought to be, it is not at the moment, the redesign of the architecture of the Eurosystem. There is still time to do it.

At some point the point of no return will have been exceeded. I don’t think we’re there yet, but we’re not too far off and the longer our leaders pretend that this is a debt crisis for one or two countries, the longer that they pretend that there is problem with the banking system and the banking system in reality of the Eurozone is bankrupt, or quasi-bankrupt, the closer we are coming to this point of no return.

ALI MOORE: But how do you redesign the system and at the same time resolve that. I mean if you look at a map of the various interrelated debt in the countries in the Eurozone, it’s extraordinary, everyone owes everyone else; how do you redesign the system and resolve those deep seated financial problems?

YANIS VAROUFAKIS: Very simply, within a few days. Let me outline three steps that we could take in Europe and solve the problem very, very quickly.

The first thing we need to do is unify the banking sector. It is preposterous to have European banks, global banks, that are subject to supervision by member states that don’t have their own currencies. It’s preposterous to have France responsible for the French banks, it’s like having Tasmania responsible for the banks that operate in Tasmania or having Wall Street supervised and recapitalised in times of crisis by the state of New York. You can imagine what catastrophe would befall Australia or the United States if that happened. So, the first thing we could do is unify the banking system, supervision and recapitalisation.

The second thing we need to do is we need a common bond. Something like the US Treasury Bills, something like the Australian Government Bond, Federal Government Bonds; Eurobonds in other words. Eurobonds would allow us to unify part of the debt of each member state and therefore to restructure it in its entirety and make it manageable.

And the third thing we need is an investment policy which is European wide. Something like a Marshall Plan, not for Greece, that they agreed to yesterday, but it is ridiculous to have a Marshall Plan of Greece which is unfunded, which means effectively that monies will be taken out of Ireland, restructure of funds for Ireland and Portugal and Italy, to be redirected and reach out towards Greece.

If you have a Eurobond, at the European level, you could co-finance a Marshal Plan for the whole of Europe using the European Investment Bank, which is twice the size of the World Bank, and thus create a growth drive, spurt, that drives the whole of the Eurozone out of the mire of the present crisis.

Those three steps could be implemented in a week. And our leaders know it but there are political reasons why they do not implement it.

ALI MOORE: Well indeed you make it sound so simple, we are out of time. But I have to ask, if you were a betting man, would you bet this will happen, or do you truly believe the system is that close to collapse?

YANIS VAROUFAKIS: There is a fundamental difference between the bet that I would place as a rational agent and the bet I would place as a sentimental agent. My sentimental bet is that it will work, because I can’t even imagine what kind of postmodern 1930s we’re going to end up with in Europe if the Eurosystem breaks up.

ALI MOORE: Well Yanis Varoufakis, if only it was all so simple to resolve. Thank you so much for joining us tonight from Athens.


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