Greek default does NOT equal Greek exit

Perhaps the greatest enemy of the eurozone, at this particular juncture, is an erroneous assumption: that a Greek default is inextricably linked to a Greek exit from the eurozone. The problem with this assumption is twofold: First, it prevents Europe from escaping a trap of its own making. Secondly, it is false.

By now, reasonable people realise that the Greek Bailouts do not work. Even though the Greek government (its overall incompetence notwithstanding) has managed to reduce its primary deficit by a whopping 9% (at a time of bitter recession), a loan package worth €240 billion (even if the debt write down known as PSI is successful) will have failed to arrest the steady rise of the  country’s debt and the inexorable shrinking of its national income. It is, thus, unsurprising that the EU and the IMF are at the end of their tether. The show can’t go on (with more loans that demand GDP-killing austerity to pacify the Northern parliamentarians who must approve them).

At the same time, the notion that Greece ought to leave the eurozone is unfathomable: while almost everyone would prefer Greece to have been outside the eurozone, the actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically.

The two thoughts above cause Europe to behave like Buridan’s Ass. Meanwhile the eurozone, as a whole, is moving further along the path  of disintegration and generalised recession. However, this indecision and impasse is founded on an error: the fallacious presumption that Europe is constrained to choose between the bailout route and Greece’s exit. But there is a third way which is less costly for all and gives Europe a chance, at long last, to design a new path out of the Crisis not only for Greece but for all deficit countries (as well as of the ailing European banking sector): Greece must default within the eurozone!

The Greek state, let me remind you, is quite close to a primary surplus. With judicious top-down reductions wages and pensions, plus the issue of tax-bonds, the Greek public sector could finance itself for the foreseeable future. All that is needed is that the ECB continues to provide liquidity to the Greek banks. Some say that it cannot do this because it won’t be able to accept Greek government bonds as collateral (since the Greek state will have defaulted). True but irrelevant: Greek banks have already posted whatever government bonds they owned with the ECB for collateral. That creek has dried. Nowadays they are posting domestic mortgages and other such paper titles (which are, by the way, no worse in quality to those posted by Italian and Spanish banks). All that it would take to allow Greece to stay in the eurozone, in a better state than it is today (and less austerity for that matter), is the continuation of the present ECB policy toward Greek banks. As for those who argue that the ECB will take an aggressive stance, think again: the ECB will not knowingly take steps which will destroy the eurozone.

Naturally, while a defaulted Greece can easily (and optimally, under the present constraints) remain in the eurozone, a long term resolution of its insolvency will have to be plotted by Europe. But is that not the case anyway? Is it not time that Europe deals with the various insolvencies in its midst, rather than continue to push their under the carpet (like a spolit 5-year old)?

To conclude, Europe’s optimal strategy is to let Greece default, to allow the Greek government to find ways to live within its tax take for the next year or so and, at the same time, work out the Overall Solution to the euro crisis that was promised last year and never delivered. A Greek default will provide the clarity and the time-space to do this properly. The other two alternatives (more bailouts or a Greek exit) constitute cruel, unnecessary and unusual punishment. For the whole of Europe.


  • Indeed, to equate deault with Euro-exit was a historic “erroneous assumption”, to say the least. Just like it was an erroneous assumption that a rescheduling of sovereign debt is the end of the world (reschedulings have happened dozens of times in recent decades). Just like it was an erroneous assumption that a haircut on sovereign debt must be made if sovereign debt appears “unsustainable” at a particular moment in time. Just like it was (a bit worse than) an erroneous assumption that governments had to bail out banks as soon as they got nervous. And so on…

    • My question is how can we help the many jobless, hungry Greeks? How can we organize as we did in the past to help the Greek people who are suffering ?

  • Dear Yanis

    All is very well with your article and personally I couldn’t agree more. The crucial point is, who is listening? Surely not Merkel, Sarkozy or anybody else for that matter! They seem to be living on cloud nine, (for their own reasons, accommodating vested interests?) and are completely impervious to any other views put forward, other than their ‘orthodox’ approaches. What can one say? God Save Europe!

  • I think that people who say that a default means exit from the eurozone assume that there will be a liquidity problem. You offer the solution of liquidity being provided by the ECB. Lets hope somebody with an IQ better than a ραδικιού listens.

  • Dear Prof. Varoufakis
    Since default is the best solution to solve Greece crisis, as well as DR Doom (Nouriel Roubini) suggest that Greece should default. Why Greek goverment keep ask IMF and EU for loans?

    • Dear Tati,
      it isn’t the Greek goverment that keeps asking for loans, but it is the troika of IMF and EU that insist on lending money to Greece with conditions that, they think, would benefit them. Greek politicians are afraid of being dropped out of the Eurozone, as much as they have not the courage to stand up and fight for their country’s prosperity. So they keep hopelessly borrowing!

  • Απορία ασχέτου: Λέτε πως αρκεί η συνέχιση της πολιτικής στήριξης των ελληνικών τραπεζών από πλευράς ΕΚΤ. Εάν η ΕΚΤ αποφασίσει να μην συνεχίσει την πολιτική αυτή, παρά τους κινδύνους για την ευρωζώνη, έχει δικαίωμα να το κάνει; Και αν ναι, υπάρχει εναλλακτική για εμάς;

    • Δεν θα το κάνει γιατι κάτι τέτοιο θα σήμαινε το τέλος της Ιταλίας.

  • Why we hear a lot about Argetina’s bankruptcy and nothing about Dubai’s or Iceland’s? Aren’t those two more “sucessful” ?

  • Exit from the EZ was never in the cards; it’s purely a scare tactic for the naive and unsophisticated Greek public.

    Re: Bankruptcy. Unfortunately Yani it does not look like you are going to get the kind you envision (i.e real debt relief).

    Germany via its erroneous policies has already bankrupted Greece but in a manner which is neither beneficial to Greece nor Germany.

    My prediction is that – in the end – Germany will bankrupt itself causing serious global injury.

    • “Germany via its erroneous policies has already bankrupted Greece”

      Hm, in the universe I live in, the bankrupting of Greece was done in a fully sovereign manner by erroneous politics of Greeks own people and political (and other) ‘elite’. But maybe I live in a parallel universe.

    • Very Serious Sam:

      Absolutely you are living in a parallel universe and most probably in the 11th Dimension.

      In fact i am willing to wager very large sums of money that your parallel universe is of purely Teutonic origin.

    • @ Very Serious Sam
      Have you ever asked yourself, which have been the correlations between Greece’s and Germany’s elites in the recent past? Don’t forget that german courts condemned german buisiness executives, because they had suborned greek government officials. Even if you think that this fact just serves as an easy excuse for the people, in order to keep avoiding its own responsibilities (which by the way are existent and of which the price has already been paid and ist still being paid by the majority, i.e. the weaker), I am sure that you don’t really believe that people actually chooses in a fully sovereign manner “its” elite. Unless you live in a parallel universe indeed.

    • @ KS, @ Dean

      So I am to understand that in your universe the majority of Greeks are just innocent victims of a sinister conspiracy by and between German business executives and Greek ‘elites’?

      Anwyaw, just for the sake of argument: what about the Greeks’ own responsibility to influence and change the things they CAN change? Like throwing out their very own political, commerical, union and other ‘elites’ who over the past decades created an completely unsustainable and incompetitive economic model with a hugely oversized public sector?

      Why didn’t the Greeks pay the taxes due?

      Why didn’t they abolish the grotesque fakelaki system?

      Are all these, and many more Greek realities also the work of a ‘German business elite’ and ‘Germany’s erroneous politics’?

      Of course not. Sorry, guys. You have to accept your own responsibilities. Otherwise nothing can change for the better. And please realize: no external party can rescue Greece, only provide help if needed. The solution is in your own hands only.

    • Very Serious Sam:

      I don’t know which is more irritating: Receiving advice from out-of-depth ignoramuses or the Merkeloids.

      Wait, I just repeated myself.

  • Αν γίνει αυτό δεν θα σημαίνει αυτόματα ότι η αξιοπιστία της ευρωζώνης θα μειωθεί δραματικά; Κάτι που θα οφελούΣε σίγουρα τις χώρες που εξάγουν λόγω της υποτίμησης αλλά απ’την άλλη πιθανότατα να άφηνε εκτός αγορών χώρες όπως Ιταλία και Ισπανία μιας και είναι οι επόμενες στη λίστα.Ποιός θα πληρώσει γι αυτούς;

  • Dear prof. Varoufakis
    Excellent post as usual. I would like to share with you two points and questions.

    1) You mention that the Greek state is quite close to primary surplus. I think it is fair to say that we all wish for that to be true. How do we know for sure then? Our PM flat out denied that and in fact pointed out that we are still in primary deficit territory in the region of some 5,2 billion euros using this fact as his basic threat towards MPs and the Greek people to accept Memorandum mk2. On the other hand a recent article on reuters pointed out that Greece is in fact in primary surplus territory to the point of 0,2% per GDP. Finally there is the issue of the 6 or 7 billion euros in payments the state (ministries, army, HMOs, Municipalities, Hospitals, etc etc) owes to various contractors, a figure that is growing and acting like a black hole sucking precious liquidity out of the economy. This figure is a total grey area that nobody knows if it is accounted for in the deficit or not. My guess is that it is not since these are payments due and not payments made. We could be facing another round of Greek statistics and not know it losing any shred of credibility is left. My point is how can anyone decide on default when the economy seems like a patient gravely ill put on the strictest diet (austerity) and being forced to hold his breath (non “essential” state payments pause) as long as he can at the same time? The patient right now seems ripe and turning blue from suffocation at the same time..My question is do we have any leverage or not? The answer is directly tied to the exact figure of the primary deficity and i think everybody needs a valid answer.

    2) Your analysis is focused on Greece naturally, but i think it is obvious that whatever decisions our “partners” in Europe will come to make they have more on their mind. Specifically they think of the political backlash not only to their own countries but to other indebted countries as well. A great example of that is the PSI deal. It can’t be from a political point of view something desirable for the PIGS nations. If such a deal goes through it has, in the mind of the powers that be,act as a double edged sword. Easing some of the burden, not all, and be accompanied at the same time by such harsh measures that would seem as grave punishment to the people as well as all spectators. It would also have to annihilate the political establishment that would force this action on its creditors through the very predictable politcal outrage caused by the harsh measures. Clearly what happens with the Greek PSI affects Portugal and Ireland. These two are just waiting to see what happens and bargain for a better or at the very least equal treatment for themselves. There are enormous conflicting interests here and it seems like everyone is throwing the ball to the Greek court to buy time and avoid any hard decisions for themselves. All eyes are focused on us it seems. With this in mind what is the optimal Greek strategy taking into acount all the parties involved? I would love to read an analysis using Game theory, something which you specialize in as well.


  • (I don’t see a previous version of this comment ‘awaiting moderation’. If there is post only one version)

    When you state:

    “All that is needed is that the ECB continues to provide liquidity to the Greek banks. Some say that it cannot do this because it won’t be able to accept Greek government bonds as collateral (since the Greek state will have defaulted). True but irrelevant: Greek banks have already posted whatever government bonds they owned with the ECB for collateral.”

    Have you considered the effect of margin calls? From the ECB’s ‘General Documentation’ (see ), under ‘risk management measures’:

    “The Eurosystem requires the haircut-adjusted market value of the underlying assets used in its liquidity- providing reverse transactions to be maintained over time. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the NCB will require the counterparty to supply additional assets or cash (i.e. it will make a margin call).”

    A Greek bond default may still break the back of Greek banks through the requirement to post massive amounts of additional collateral.

    • You are quite right. But just imagine what will happen to the margin call requirement if Greece and Portugal are thrown out! In short, the ECB will have to wear the loss of PV of its collateral or else face extinction.

    • In addition, there is a further number nobody has estimated to my satisfaction: The Euro-financial system’s exposure to peripheral EU private/corporate debt in the form of CDO’s (securitized loan portfolios).

      I assume it is a substantial amount of assets that would be indirectly but surely wiped out in a peripheral default. Spanish real estate assets in particular. I wonder if this has been taken into account in the amounts needed to recapitalize the EU banks.
      Probably yes, but it has never been stated in public…

  • Yani, I am really sorry for sending it here, but this opinion by Xydakis on Kathimerini was too good to leave it go unnoticed. Knowing that your blog is read by many – Greeks and non-Greeks – please leave it or move it somewhere more appropriate.

    The Greek paradigm

    By Nikos Xydakis

    Early into the crisis, Greece was portrayed as a bad egg, its people seen as victims of unchecked spending, of lost moderation, of imprudence. Greeks had to be made to pay for their mistakes.

    Ordinary people were made to think so too, at least those of us who had for a long time predicted the failings of an ailing state mechanism, a vulgar political system, and a kleptocratic elite that squandered the nation’s resources.

    Allegations of collective responsibility were conveniently adopted and reproduced by the individuals who were mostly to blame for the impoverishment of the people and the dismantling of the state. This was, after all, the reason why they were quick to adopt the painful rescue package designed by the European Union and the International Monetary Fund, without any serious effort to negotiate or see it through.

    Lacking a sense of clear direction, or a contingency plan, Greece’s vulgar and grossly incompetent political elite put all of its energy and effort into one single objective: Saving itself. The burden was as a result placed on the victimized people and the demonized foreigners.

    The Greeks were punished in many different ways. They were impoverished, sometimes to the point of destitution; and on top of that, they were humiliated. The people became the laughing stock among serious or pseudo-serious European partners, the scapegoats and the target of vitriolic attacks.

    Using Greece as an example to be avoided worked. But not for long.

    Attempts to ridicule Greeks, which were to some degree justified, have proved to be unfair. They seem driven by self-interest in a bid to cover up all sorts of failings and weaknesses including the structural shortcomings of the euro currency and of Europe’s elites. Greece is being dragged like a sacrificial lamb to the slaughter.

    The number of black sheep in Europe, meanwhile, is growing. The idea is gaining ground on both sides of the Atlantic. And it is being consolidated as a moderate interpretation of what is happening at home and abroad, despite the relentless it’s-all-the-Greeks-fault propaganda and foreign conspiracy theories.

    Truth lies somewhere in between. We can finally let Europe and the rest of the world know that Greece’s woes — some of which are of its own making — are the new paradigm. If Greece falls, more nations will follow; for better or worse.

  • “the actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically.”
    Why? Can you please describe the costs involved and why the are unbearable? Do you think that Greece can ever be competitive within the Eurozone in the next 5 – 10 years, at least? Why not go out, build an actual state (laws, public sector, private economy) and then actually apply with some TRUE data for a change to re-enter the eurozone. Why continue a lie?

    Thanks for your thoughtful and insightful articles.

    • obviously u think that germany (or some other eu country for that matter) is competitive. well shes not anymore…

  • What are the technical implications of nationalizing greek banks ? some say that 4-5 billion will be enough to take control of them and use liquidity for the market and not for some abstract accounts….

  • This discussion assumes that logic prevails in politics and human affairs, in general.
    Some scientists now believe that logic developed in humans to simply win arguments over other humans and not to determine facts or reach the truth. (Sorry, I do not remember the source at the moment).

  • But the problem isn’t just Greek government borrowing, it’s the Greek current account deficit. Until Greece reaches current account balance, somebody is going to have to keep buying Greek assets. As of now, Greece still has a deficit on merchandise trade of over 5 percent of GDP. Post-default, will ECB support for the banking system be on a large enough scale to finance that?

  • Tasos comments on the ambiguity of the size of the ‘primary surplus’ draws attention to the murky conditions in which answers to simple questions are not forthcoming.

    There is a story from the 1980 Latin American debt crisis (in which all ten of the NYC money center banks were technically bankrupt due to unwise lending) and involves the negotiations between the Chilean government of Pinochet and the debt resolution team headed by someone from Citibank.

    On a table in the central bank in Chile technocrats and the bankers representatives sat down to discuss two piles of contracts; one pile consisted of the debt contracts between the various departs of the Chilean government and one or more the NYC banks ; the other pile consisted of the debts contracts between private companies and one or more of the banks. The bankers insisted all the contracts were government contracts because the government will have wanted to insure future lending to its corporations–and the government of Chile complied, thus condemning the people to a decade of terrible austerity.
    If it is only a story, it is nontheless revealing of the type of dynamic that surely takes hold in those rooms that no one sees and whose conversations go unrecorded. Government officials–often quite junior– with none of their own assets at stake and sometimes hoping to impress a potential future employer may indeed concede to such outrageous requests. The pity is we have no evidence that would lead us to believe otherwise.

  • @ Yannis Varoufakis

    Very interesting idea.

    However, there is a question that bothers me: What will the greek government do with the greek banks that also default after the government defaults? Sure, the ECB could provide further help – but banks would be insolvent, wouldn’t they? Wouldn’t that be a problem?

    Banks could continue working while making huge losses – even with low interest ECB loans – since most of their loans would be (and already are) also in default. Wouldn’t that make the financing of Greek enterprises etc. even harder than it is now?

    Think about Japan after the bubble burst. Many banks were insolvent but were kept liquid – they repaired their balance sheets by cutting loans, shrinking lending and keeping their interest income to rebuild their capital – which meant a credit crunch that put the economy under severe pressure. The only thing that helped were massive fiscal deficits – those however would not be available to Greeks after the default.

    Would the EU have to step in and “europeanise” Greek banks like the Swedes did with their banks in the 90s?

    I’d be very interested in your reply, best, fali

    • The banks are insolvent anyway. All over Europe. But, puzzlingly, they are also profitable. A Greek government default will not change any of this as long as the ECB continues to provide them with liquidity and great opportunities to profit from carry trade. Naturally, this situation is not sustainable long term. But this is independent of a Greek default.

  • Yani, I have a couple of questions for you:

    A. About a month and a half ago you caracterised PSI (Private Sector Involvement) as DOA (Dead On Arrival), mainly because of the the shadow banking sector, i.e. the hedge funds, and the deterioration of the Greek economy. Anyway, a flatus announcement including PSI will be heard on Monday. Is there an indication about the final attitude of the majority of the hedge funds and how it will influence the actual outcome of the PSI?

    B. I ‘ve just red in greek newspapers that there will be activated CACs (Collective Action Clausses), i.e. a non-volluntary participation of the reluctant to involve bondholders ( If that happens, is it possible for the CDSs to be triggered and for the rate agencies to declare a greek default? A non default considered greek default will be an extremely ridiculous situation, that’s for sure!

    C. I’ ve also red that the IMF’s contribution for the second greek rescue package will be only 13bn Euro, instead of the 30bn Euro of the first package ( Has IMF serious doubts about Greece’s viability after PSI, or is it just my mind?

    • Let’s just wait and see. I always thought that a merry announcement of the PSI would happen but doubted what it would mean in practice. I still believe that it will come to little in the end, unless the CDSs are triggered

    • What we fail to understand is this simple truth:

      1. The minute the PSI+ is put in play, Greece will be bankrupt according to all the rating agencies.

      2. the cause of the bankruptcy will be the 100% German insistence to implement the PSI to begin with.A very bad German choice right from the start due to German aversion to ECB-bonds.

      3. Yani’s advocacy of bankruptcy as a means of cure for the Greek debt(as it relates to unfair burdens on the Greek people) is expressly prohibited by Merkozy. Another way of saying that this is not a declaratory relief(good) bankruptcy, rather a capitulation and indenture (bad) bankruptcy.

      4. Greek politicos are sweating bullets to avoid bankruptcy, but this precisely what they will get thanks to flawed German policies.

      5. As a result, Greece will soon be bankrupt and heavily indebted at the same time. This is a way of saying that the bankruptcy will have no beneficial effect to Greece and its citizens in anyway, shape or form as the country will be kept out of the global private financing markets for at least a decade if not more.

      6. This is a pure case of political morony a la Germania Horribilis.

  • ECB Is Said to Swap Greek Bonds for New Debt to Avoid Any Enforced Losses

    The second Greek bailout: Ten unanswered questions

    FINANCIAL ASSISTANCE FACILITY AGREEMENT (Document published by La Stampa on 13 February 2012)

  • “Europe’s optimal strategy” is indeed for Greece to remain in the Eurozone.

    The optimum strategy for the Greek people, however, is for Greece to exit the Eurozone.

    The Greek people need a government which can run a surplus (not a primary surplus, as this is post-default) and need an economy which runs a trade surplus. Neither happen so long as Greece remains in the Eurozone.

    • A trade surplus is built when people are forced to produce doemestically things that they can no longer afford to import, while at the same time cutting down their consumption levels because …well, they’ve run out of money.

      That is already starting to happen in Greece.The country can’t import as much as before since importers are being asked to pay in cash because bank guarantees are not forthcoming or considered worhtless and bank loans are absent.So they turn to domestic production.This is already evident in the food and textile business and will only increase in time and/or with a default.A reinstitution of the drachma will bring this about more forcefully but will cost an arm and a leg (i’m afraid literally) because of domestic inflation which will affect the poorer disproportionally.

    • In principle John Haskel is correct. The real issue however is the trade surplus. I think people are severely underestimating how long it takes to build the productive capacity to run a trade surplus, especially considering that capacity must also be price competitive to imports.

      For example, in agriculture: Greece will need to significantly ramp up its agricultural production in terms of actively cultivated land.
      But to run an effective surplus also requires that domestic production is efficient enough that local produce is cheaper than imports.
      A devaluation helps but the magnitude of the difference between Greek and European agricultural efficiency in terms of ton of produce per sq. km of land, is so high that the scale of the devaluation needed will be massive.

      Let me offer an alternative rule of thumb: in agriculture, you either run modern high tech production or traditional agriculture.
      Belgium does the former. Bulgaria does the latter.
      Minimum wage in Bulgaria is 1/4 of Greece’s new, extra low minimum wage.

      That gives you a (very rough) idea of the kind of discount you need on production inputs. Can Greece survive devaluation of that (again rough) order for long enough to adjust to a new production model?

      For massive portions of the population the answer will be no. This is the reason why, while I agree in principle with Yannis (and John) I think there are no “safe” solutions. This is a minefield for Greeks.

  • Driven by the Markets? ECB Sovereign Bond Purchases and the Securities Markets Programme

    Goldman Sachs conquers Europe

    WSJ published his futuristic alternative history of the next decade for EU:

    The euro is still circulating, though banknotes are now seldom seen. (Indeed, the ease of electronic payments now makes some people wonder why creating a single European currency ever seemed worth the effort.) But Brussels has been abandoned as Europe’s political headquarters. Vienna has been a great success.

    “There is something about the Habsburg legacy,” explains the dynamic new Austrian Chancellor Marsha Radetzky. “It just seems to make multinational politics so much more fun.”

  • Yanisv
    A default even within the eurozone is a default and carries a series of legal implications that are very negative for Greece. One of these is that creditors can take Greece to court and put a lien on all of its assets inside and outside Greece. This includes any and all VAT owed by the Greek state to private entities in Greece. So, while from an economic point of view I could see the logic of your argument, my lawyer friends and hedge fund managers tell me that this is a no go situation.
    I will put it to you, however, that the European (German et all) solution is a variation of what you are saying. The main point that seems to have escaped most people is the creation of the se called “blocked” account and the outlines of this solution have been there for all to see since the May 2011 decisions of the European Council. Specifically, we get the loan and all monies are sequestred for the payment of external obligations. At the same time all proceeds from privatizations (whatever the fantastic duo of Mitropoulos and Koukiadis manage to fudge because the former is interested only in his career and the latter simply does not believe in privatization) have to go to this blocked account for the payment– reduction– of debt. If Greece wants then to run primary deficits it is up to her to find ways to finance them –and I beg to disagree but the ECB will NOT play along in this case. MInd, also, that the total stock of treasury bills that we can issue has been frozen by the lenders –so we can only roll them over.
    In effect we do not default officially, we remain in the eurozone and we have to cut our own throats in order either to finance contiued primary deficits (how really ???) or to create primary surpluses.Lest we forget, the Bundesbank is holding ‘Other assets” (mainly claims on the eurosystem) plus SMP holdings of approxiamtely 570 billion and it will refuse in all probability to provide the additional finance needed to close the gaps that the constantly overoptimistic “studies” about the viability of the Greek debt fail to take into account. This is exactly the moment when social, trade union, left wing political upheaval will come to a peak and the political and street pressure to leave the euro will come to a head. We can then print drachmas to… oblivion.
    Greece is in a way replaying the civil war. The country is horizontally divided between those who are pro-european and those who oppose Europe. Between those who support reform and those who oppose reform. Between the “clients” and the non-clients. The outcome of this struggle is on the proverbial razor’s edge. In the meanwhile Europe has been making preparations to contain the impact of a possible Greek exit from the eurozone– mainly through the creation of the “stretched” EFSF and the ESM as well the close cooperation of governments with central and commercial banks. The problem — as experience has amply shown– is that such preparations are never adequate. If they were we would never have “black swans”.

    • Default is, indeed, a very serious business. Alas, it will happen independently of what you or I think. The question is whether it should happen when Frankfurt’s view prevails at a time of Berlin’s choosing, followed by instructions to Greece to get out of the euro, or now at the behest of the Greek government in a bid to stay within the euro and change the terms of the debate. I opt for the latter. You may well opt for the former. But neither has the option of not defaulting.

    • If we were so foolish as to listen to lawyers and hedge fund managers, then we would deserve to suffer as Greece does now. The fact is that Greece cannot avoid default: the only issue is when and how. It seems that your advisors have nothing to say on these two crucial issues, and their advice is therefore worthless.

  • It appears to me that as in real wars, in economic wars, the first casualty is the truth.

    Let’s get some things straight here.
    Back in 2002, Greece was in a superior economic state than today or 2009 for that matter. The restrictive economic policies and the 1999 devaluation in combination with significant investments (both public and private) in anticipation for the 2004 Olympics and with an “almost” balanced budget, mean that Greece was within the Maastrich criteria and eligible to join the euro. These are now double and triple checked.

    After that point however, the low interest rates, the excessive liquidity caused serious inflation in the Greek economy (for the poor that was close to 10-12%, much less for the rich)

    I remember that in late 2004 and with the triple euphoria (Olympic Games + Euro2004 + Eurovision) I was looking at the economy numbers and was thinking that we are in a desperate need of a devaluation. Indeed, if we still had the drachma, I believe that in 2004 or 2005 there would be a devaluation.

    But no one wanted to call the party was over. The newly appointed government elected on the grounds of re-founding the state (and should had done so) didn’t want to call it a day. Instead, the continued the dead-end path for giving unsustainable pay rises to public sector and started to employ en-mass in the “stage” programs. Young people instead of going to work for the industry preferred to go the public sectors. Numerous companies started to loose precious human capital to work for the state. More money, less work, full security.
    In 2007 it was already too late. The country had lost competitiveness, it was already uncompetitve at the USD/EUR at 0.80… at 1.60 is a goner, the state was bloated, pension scheme unsustainable, balance of trade off the charts…

    But still… someone had to do something… Finance Minister Alogoskoufis realised something was seriously wrong, tried to warn.. but go sacked. After more idleness and a renewed mandate things kept going wrong. The world credit crunch had started and they now had to worry about the banking sector too as well as providing stimulus as most governments did.

    It is now 2009 and the markets don’t realise yet the eurozone is minefield. Then it late 2009 we realised that 2009 numbers are “fudged”…

    In 2010 all the problems are exposed… but then nothing is fixed. A series of tragic errors and misdiagnosis by both the troika and the new clueless government meant that measures not only didn’t help and but they destroyed whatever was left in the economic.

    He are now in 2012… the IMF/EU/ECB program has utterly failed and the finger pointing game started. Greeks blaming Germans, other blaming the “Capitalsim”, others blaming the “State-ism”, other blame the numbers, others blame physics, Germans blame the implmentation,…

    There is absolutely no doubt in my mind that should we never joined the euro, nothing so dramatic would have happened. It is also clear that Germany and the periphery are on different economic cycles. This effectively means we will always have the wrong interest rate and the wrong exchange rate.

    So, my view is we are a tipping point. We either go for a full fiscal and political union similar to the United States, or we exit the eurozone and go back to national currency preferably with a velvet divorce.

    Your defaulting in the eurozone solution doesn’t seam very appealing to me…

    • My thinking is simple: For Europe to move along the tortuous path of proper unification, Greece must default within the eurozone now.

    • There is no path to unification without referendums in some countries. The result of the referendums will look even more anti EU after the mess the one size fits none currency caused

    • Yanni,

      I agree with you on the condition that a proper unification is down the road.
      If not then we should exit the eurozone, take the hit and rebuild the country. The current structure of the eurozone is non-functional.

    • My thinking is simple: For Europe to move along the tortuous path of proper unification, Greece must default within the eurozone now.

      Perhaps this proper unification is impossible, both now and in the medium term (let’s say the next 50 or 60 years).

      How will Greece rebuild a healthy economy when their currency (the Euro) continues to be “too strong”?

  • Dear Yanis, I was wondering about you. But now I understand you:

    Time for me to inform non-Greek readers of what it means to have a degree from a Greek university:

    1. Not a single Greek university is included in the world’s top 300 – strange, don’t you think, for a ‘European’ country.

    2. All Greek professors are the sons, nephews, or sons-in-law of existing professors. Marry a professor’s daughter and you become a professor. It’s as simple as that!

    3. Sorry, one more category I forgot about: you can rise in the academic hierarchy if you perform sexual favors for an existing professor. In Greek, it is called: ‘erpontas, gleifontas, kai me ta kerata’. A rough translation would be: ‘You crawl, you kiss ass, you perform in bed’.

    4. Greek students do not need to pass ANY of the subjects for that year to go on to the next year. Yes, you heard that correctly. So, hardly anyone finishes a degree course in the specified 4 years. They take 5 to 10 years to take exams in the subjects they ‘owe’ and finally, 60% of them graduate (the rest are drop-outs).

    5. The exams are regurgitations of memorized items from the professor’s own textbook in that subject (i.e. you have to buy it to pass)!

    So, when a Greek economist tells you something …… enough said.

    • So, which category do you believe that I belong to? To the Greek professors whose appointment was due to nepotism or to sexual favours? Oh, and something else: I must be a real fool since not one student of mine has ever paid for any of the four textbooks I have authored…

    • bingo this is a highly inaccurate piece of information. Telling half truths is often the same as telling whole lies.

      1. Greeks unis are indeed low in rankings and the system has many flaws. I’d like to see where exactly you get your info on not a single one being in the top 300, as there are many rankings available out there.

      2. All? This is a blatant lie. Indeed it helps (a lot) to be bear an “academic surname” but ALL is a lie. Some is more accurate.

      3. We have a paparazzo in our hands here!bingo! Do elaborate though….is this a straight or gay kind of sexual favors? Cause the women/men ratio is not exactly equal (I kid of course but what else can one say to this kind of comment)

      4. Probably your only correct point. Be reminded though that this changed recently and you have to complete your course in 6 years as a full time student.

      5. I had to pay for none of my books (including Yanis’) so again you are lying. If some professors have actually “blackmailed” their students into buying one of their books that is not handed out (for free) by the university this is of course immoral (not to say illegal) but it’s definitely not the norm. Or maybe I had to send a check to Mr Mankiw for his macro textbook….sorry can’t remember, it’s been a while.
      As for the exams it depends on the professor and the subject…..if only I could have regurgitated memorized items when I was taking econometrics or mathematics. If you have a way of doing that do tell.

      In conclusion….my comments are not aimed at glorifying the greek university which has plenty of flaws (probably failures outweigh the successes of the system) and that needs to be improved in a million ways, nor to defend professor fat cats (we all know them, some are quite famous….or infamous).

      My aim is to say that because Yanis is working in a greek uni it does not make him any less trustworthy than his fellow professors abroad.

      Keep up the good work professor!!

  • What I would say to Serious Sam is that in any business activity, there is a notion of co-responsibility. If I’m a billionaire and I choose to invest in cars made out of jelly in a company run by field mice, then the failure of the company may solely be down to the field mice and their unsuccessful product concept, but as an investor it is my own stupidity that is responsible for ploughing money into the company. They go bankrupt. I lose my money. Silly company. Silly investor.

    French and German banks were only too happy to have Greece is the eurozone so long as it meant that they could indulge in profitable lending and have another quasi-domestic market into which they could sell (how many Mercedes would have been sold in Greece if it were outside the eurozone?). They were delighted to make money when the going was good, but don’t want to take a hit now it’s not. The real world doesn’t work like that.

  • The isosceles theorem put forward by the Greek mathematician Euclid became a test in medieval times of one’s ability to master more difficult matters. Greece this week faces such a test.

    [..] diplomats and economists say it may only delay a deeper default by a few months.(e.q)

    The Next Stage of the European Debt Crisis; Towards Global Financial Collapse?


  • Iceland has regained its investment grade rating – with unemployment down to 6pc.

    The “drachma risk” has already killed investment. Greece is suffering the anticipated consequences of EMU exit without the benefits, so it might as well lance the boil, impose capital controls, and create a new banking system (as Iceland did). Such catharsis might start to unlock €60bn of cash savings in gold, dollars, euro notes. Foreign investors might start to nibble again.

  • Yanis,

    How will a Greek default solve the problem of the trade imbalances within the EU?
    Keeping Greece in the Europe and nurturing it back to health would involve Germany supporting Greek workers and developing competitors within Greece I am not sure the German people would allow this if Germany is dragged into recession.

    • Will you be giving public lectures while in Seattle? We would love to get you to chat at one of our Monthly Review discussion group meetings. Some of our members have given talks at teach-ins associated with the Occupy Seattle movement. We would love to get you to speak at a future teach-in or special event. Please make your schedule public to the extent that you can so that your “public” here can get a chance to hear and hopefully interact with you.



  • Mr. Varoufakis,
    what do you think about the blue/red bonds proposal?
    The more I read and reflect on this crisis and the more I am convinced that it could be the working solution.
    The red bonds would become the mechanism for absorbing the asymmetric shocks (selective default on the red bonds) AND keep an incentive for the countries in the monetary union to converge (the red bonds higher rates for “noncompetitive” countries). At the same time the blue bonds could provide a stable trench against safe assets shrinking (the image in that post is worth 1000 words!), actually the blue bonds emitted by the eurozone as a whole + the red bonds from France and Germany could bring an increase in globally available safe assets, which would be good, if I understood well…
    What do you think?

    • If you have followed my Modest Proposal on this blog (see EURO CRISIS page), you will have known that, though it is on the right track, I prefer our idea of ECB-issued bonds to cover the ‘blue’ debt of each eurozone member country.

    • Yes you’re right, I had given a look at it, but didn’t read the details. Maybe I can guess the rational behind it: avoiding to get trapped in the idea of a transfer union on debt… mhm, maybe it could work, because we avoid the “taxpayers rejection” but the ECB won’t be easily convinced too… anyway let’s hope!
      But I have difficulties in understanding point 1.4, why banks should accept that haircut and would the ECB accept to impose it? Won’t they see it as a threat to the banking system?

      Paul Krugman wrote on his blog ( that he’s going to Portugal, will Stuart Hollan meet him, and will he be able to make Krugman to change idea (at present he thinks only exit from the euro of almost all south countries + competitive devaluations of the “new” currencies could save the euro and the EU…)?

  • greek default means instant outflow of hundred of hindreds of billions.
    majoe crash of all europeean stock market.
    end of eurozone.

    that’s why it will never be allowed to default . Germany and France are controlling the whole Europe they want ot keep thei empire intact

  • As the author rightly says, the key is that the ECB continues providing liquidity to Greek banks. But they won’t, they will cut it off, the way they would have done to us here in Cyprus had we not submitted to the brutal sodomy that was the ‘bail-in’ in 2013. Oh my, those dark days. I hope never to live through that again. I think Varafakis is putting an all too benign face on Greece’s EU paymasters, which is suprising and somewhat absurd given the pain they have inflicted upon the Greek people already. They will not hesitate to shut off the ELA and throttle the Greek economy back into a middle ages barter system. They. Will. Do. it. We saw behind the mask in 2013. It is not pretty what lurks behind.
    Greece/ Syriza have to face facts; the ‘extremists’ in Golden Dawn and KKE are right about one thing : Euro exit and control of Greece’s national currency is the only way to escape the clutches of these Eurovampires. There can be NO reform without monetary reform. The question is how do we go about it ?

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