Hour long radio interview (91.5FM WNYE New York) on the eurozone crisis and the Modest Proposal

Hour long radio interview (91.5FM WNYE New York, broadcasting across NY, NJ, CT, and PA) in which I discussed the euro crisis, explained  why eurobonds are essential as long as they are not guaranteed by the eurozone’s member-states, and argued in favour of the continuing appeal of the Modest Proposal (click here for the Levy Institute version): CLICK HERE FOR THE RADIO PODCAST.


  • Great interview Yanis. Very clear ,very understandable. One of the best.
    Nice interaction with Demetri Kofinas.

    They created clones of their fat cows but they do not want to handle the excrements themselves.
    What part of the word recycling don’t they understand? But they do. And that’s the biggest bad of all.

    Surplus Recycling Mechanism ,Debt Management Mechanism or whatever other mechanism needed. The exact same thing in different situations. But because of even slight differrences ,the perception can be manipulated and the opportunities for them become great. Especially when “educated” politicians are just mobile units of data and financiers are the mainframes.

    In real life ,math can prove what we want it to prove.

    Now we the people are to blame ,because we didn’t have the knowledge and foresight to understand that their services (loans ,mortgages ,financial instruments of mass financial destruction etc.) ,were problematic intestine workings disguised as good bacteria. And the parasite is being passed on to the public.

    I guess we eat s— afterall.

    The percolation isn’t successfull and now we may have to blow up the lab.
    May the illusive particle of God ,transform and stabilise as necessary.
    To something MODEST i guess.
    God is in the details and the details are few and accurate and moral.

    Everything happens for better times ,right? And wise men make marginal changes?
    I hope not too marginal to the point where everything stalls eternally.

    Someone should practically teach us this mantra:
    “You are what you do; so do the right thing; do it well and do it NOW”.

    Two pills of “aspirin” [Merkel and Sarkozy – Bernanke and Trichet – Venizelos and Lagarde – America and China etc.] ,were rolling down the road.
    One got dizzy (appeared to be) and swallowed the other.

  • Mr. Varoufakis do you think a return to the gold standar is the solution for global stability?

    Republican canditate Ron Paul might be the next President of USA and he is a big supporter of the gold standar.

    • Under no circumstances. The Gold Standard appeals only to those, like Ron Paul, who choose to remain ignorant of the role of money in the modern world. Do not forget that the Gold Standard was operational in the 20s but did nothing to prevent the bubble that eventually burst in 1929. What we need is not some new fetishism (for this is precisely what the fixation on some metal represents) but a new global mechanism for ensuring that the world’s surpluses are recycled efficiently in the form of productive investments in the deficit areas.

  • This was a fantastic interview. I understand why your proposal is ‘modest’: it is so rational, and relatively simple, and makes sense. The question that kept recurring to me throughout was this: Why isn’t the Modest Proposal, or some equivalent, adopted by the ruling powers that be? This answer to me becomes even more pressing since the collapse of the euro, as you point out in this interview, would be nothing short of a major catastrophe world-wide. Plus, it seems it would be in their economic/profit interests to have the Proposal implemented. (The lack of implementation is especially perplexing in regard to your proposals concerning the European Investment Bank.)
    Is the answer just something as simple as the ruling elite would rather ignite economic armageddon than admit that the Reagan-Thatcher/neoliberal model doesn’t work?

    • It is what all inventors are very familiar with; Not Invented here.

      They simply cannot entertain the idea that someone else has a better idea; so they automatically assume the Moderate Proposal is inadequate regardless of the reality.

    • I believe your answer to the reason ‘why’ posted in your 2011/01/19 post is correct. Part of my problem is that I’m stuck behind the lens of US politics (where indeed most of the political elite would rather bring the temple down on everyone’s heads than admit the Reagan-Thatcher economic model is wrong). As I was thinking about the Buridan dilemma, and Germany’s reluctance to go with option 1 (or with the Modest Proposal), the analogue of the US nuclear arsenal came to mind–it really serves no deterrent purpose (as there’s no one really needing deterring) so why do they keep it, despite the real risks of ending human civilization? They want to have that final trump card to play no matter what the costs. It seems like Germany et al. want the same –if things get desperate, they can threaten to play that final card, that nuclear option (‘do as we say or we’ll blow up the euro’).
      It really looks like European leaders have chosen your option 2, with the citizens of the periphery (and the IMF) bailing out the banks, giving the banks time to get ‘redressed’ in the dark (so people/markets never see they have no clothes) and hoping for the best.

  • Dear Yanis, thanks for the interview it was absolutely worth the time spent listening to it! May I please ask you to clarify something for me? You say initially that in your proposal it is not suggested that the ECB buys the EU-compliant part of the debt of member states but rather that it writes it on its own books and assumes it as its own liability and then go ahead to create a debit account with its national government for the corresponding coupon and interest payments (right?). But then you say that this debt will not be rated by credit rating agencies as it will not be in the secondary market. And this is what confuses me, how will the debt not be in the market if the ECB does not become the owner of this debt by directly purchasing it? Please clarify this point for me. Many thanks.

    • Excellent question: Take an Italian, for argument’s sake, bond that will mature on 1/3/2013, at which time Italy must pay the bond holder 1 million euros. If this bond has been transferred to the ECB today, this means that the ECB does not pay anything now (since it is not buying the said bond). It simply takes it on its books. When the bond matures, the ECB does two things at once. (A) It borrows in the international markets 1 million which it uses to pay the bondholder. How does it borrow? By issuing its own bond (ECB-bond, or e’bond), with a, say, twenty year maturity and a face value equal to X million (with X>1 to account for the r rate of interest that it secures for its e’bond) which it sells to, say, a Chinese sovereign wealth fund. (B) It opens a debit account for Italy which must repay the X million within twenty years, so that when the time comes for the e’bond to be repaid, the whole transaction costs the ECB precisely nonthing. Notice how this way: (1) Italy’s debt is extended by 20 years at an interest rate much lower than that which Italy can secure in the markets – effectively Italy’s debt is restructured significantly. (2) This restructure does not involve anyt haircuts – i.e. no one loses. (3) No member-state has guaranteed either Italy’s new loan or the ECB’s. QED

  • From the WSJ:

    Any default would hit the Greek economy more generally and banks have considerably more exposure to Greece than simply to its sovereign debt. According to the Bank for International Settlements, European banks have a total exposure of €94 billion to the Greek economy, with French institutions on the hook for €40 billion and Germany’s €24 billion.

    Given that in mid-August, the 32 members of the Stoxx euro-zone banks index had a total market capitalization of some €240 billion, Greece has the potential to put a huge dent in their balance sheets. What’s more, the International Accounting Standards Board is worried that European financial institutions have been fudging their exposure to Greece in their recent results by underproviding against potential losses on these assets. When the default finally hits and banks are forced to recognize their true positions, the results could look very ugly indeed.

    But that’s not where it ends. These estimates don’t include the exposure to Greece by non-banking institutions such as insurers. As they’re damaged by the Greek fallout, domestic banks will be affected further still.

    Ms. Lagarde argued that the “most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary.”

    Unfortunately, the time for private-sector recapitalization has probably passed. European banks might have raised sufficient funds a year ago when the first round of stress tests left investors feeling a warm glow, but there’s much less enthusiasm about the banking sector these days.

    And if investors are likely to be reluctant to pump more capital into banks, governments will be equally nervous.

    It’s unlikely any will have forgotten the painful lesson Ireland learned when it offered its banking sector a blanket guarantee in the midst of the financial crisis. Not only did it fail to shore up the banks but they dragged the Irish economy down with them when they sank.

    European politicians have been weighing the unpalatability of rescuing their banks relative to that of rescuing peripheral European economies. The advantage of the Greek rescue has been that it mostly involved promises and guarantees rather than actual taxpayer money. Bank recapitalizations, on the other hand, are likely to go straight onto the national balance sheets.

    Of course, banks unable to recapitalize either through the private or public sector face the third alternative of having to limp along as best they can. This would result in a significant credit contraction, which would depress growth in core Europe.

    And because one of the few positives for peripheral euro-zone countries has been to expand exports to the healthy bits of Europe, a slowdown in the core could cause a downward spiral throughout the single-currency region.

    European governments are unlikely to reach a consensus on how to respond to their domestic banking problems. Some are likely to do everything they can to encourage a private-sector recapitalization. Others will use public funds. And still others will stand back, hoping the European Central Bank comes up with something.

    What’s almost certain is that it will create further strain within the euro zone. Tensions over whether further lending to Greece can be collateralized are “just a foretaste of how serious the friction could be” once the issue turns to bank rescues, especially if a country feels it is disadvantaged by another, Monument Securities’ Mr. Lewis adds.

    The post-Lehman banking crisis could yet prove to have been just the foreshock.

  • Yanis, I’m afraid I have to reiterate Penny’s question on the Tranche Transfer of bonds to the ECB. Among other things, you didn’t answer how it is that the transferred bonds are no longer trader in the secondary market.

    Following your example, take an Italian bond maturing on 3/2013. This is currently a liability of the Italian treasury and an asset of some investor or other.

    What you propose is that the ECB take the bond on its books as a liability in exchange for an Italian Treasury commitment to repay any balance on its debit account with the ECB, a balance which will accrue as the ECB services the bond. The bond remains an asset of the investor but now the ECB is an intermediary between the Italian Treasury and the bond investor.

    So, the first question is, given that when the bond is transferred to the ECB it remains an asset of the original bondholder, and that there may be other financial intermediaries involved (such as a bond broker holding and servicing the bond for a non-financial-institution investor), what prevents the bond from being traded in the secondary market? And, if the bond is no longer tradeable in the secondary market, it becomes an illiquid asset which causes a number of problems.

    The second question is, how does the debit account of the Italian Treasury with the ECB, to which the ECB would debit the bond service payments giving Italy time to pay back, not constitute an “overdraft facility” or at least be construed as a “credit facility” in violation of Article 123 of the Treaty on the Functioning of the European Union?

    Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

    Is it because a “credit facility” or “overdraft” implies that the Italian Treasury (say) would have access to funds on demand whereas a debit account is neither a demand account with an overdraft nor an available credit line that Italy cannot “draw on”? Is the fact that the ECB simply announces to Italy that it now ows this or that much sufficient to circumvent Article 123? Will this semantic nuance be approved by the German Constitutional Court?

    • Great questions. To make them justice, I shall devote my next full post to them. Within the next day or so.

    • “If the euro bond is structured like this, and we have public criteria on that, the answer is very simple,” he said. “If we have a euro bond where Germany guarantees 27 percent, France 20 percent and Greece 2 percent, then the rating of this euro bond would be CC, which is the rating of Greece.”

      It sounds like this:
      Health Insurance Smart-bird: “We don’t cover diabetics ( = about 8% of gen. population) because they are not healthy (and they may cost too much). We only accept healthy people (since, in this way, we never loose)”.

  • After listening to that great interview I must confess my sorrow for the lack of serious interviews in the Greek media! I have to inform the non-Greek visitors of this blog that there has not been so far any Greek media in where Mr. Varoufakis had a chance to explain in detail his proposals.
    Wherever he has been called in a media to speak about his opinions and suggestions, they have both not given him the time nor they have asked him the appropriate questions that would have allowed him to thoroughly explain the modest proposal and the various aspects of it. This of course depicts the very bad quality of public conversation that is being held in Greece for several years now.