Crisis Appeasement: The new Greek Bailout as a ‘Euro in Our Time’ moment

According to the official narrative, the euro was saved (again) by preventing a ‘disorderly’ Greek default and against the background of Mario Draghi’s Central Bank ‘activism’. So much for the official narrative. For in my estimation, the sight of our leaders proclaiming such victory against the Crisis has a strong whiff of the moment Neville Chamberlain returned from Munich, to tell a relieved British public that agreement had been struck and to promise them ‘Peace in Our Time’. All he had, of course, achieved, was to buy time for War to become stronger, more menacing, lethal beyond comprehension. Similarly, our European leaders only indulged in a form of Appeasement. Not of Germany (since our leaders are, for better or for worse, Germany) but of the Crisis. A Crisis that is, under the cover of inane celebrations of ‘resolution’ and ‘bailouts’, growing ever stronger, more divisive, efficient in the manner in which it eats into the very foundations of the eurozone.

While the claim that the euro has been saved only needs to be stated to realise its flimsiness, I shall brandish three exhibits:

First, the IMF’s own sustainability study regarding Greece’s debt dynamics, which makes it abundantly clear that to tame Greece’s debt crisis, under the present plan, it would take a string of miracles; of the sort that the post-2008 world is rather short of.

Secondly, while spreads have been declining (due to Mr Draghi’s spectacular open-handedness towards the banks, i.e. LTRO), the true nature of the combination of increasing internal eurozone imbalances and of a complete breakdown in the eurozone’s inter-banking system can be gleaned from the burgeoning Target 2 figure of the European System of Central Banks. Börsenzeitung reports that €511 billion is now the sum owed by the Central Banks of the deficit countries to those of the surplus ones (essentially to the German and Dutch Central Banks). A euro breakup may have been delayed by the ECB’s LTRO but the growing Target 2 figure is a sign that all we are witnessing is Crisis Appeasement.

Thirdly, at a time of pan-European recession (which is disproportionately distributed) the complete and utter lack of any policy to shift idle savings into productive investments (especially in the deficit regions) is the modern equivalent of imagining that Peace can be willed when the Gods of War have taken over the Powers That Be. Don’t take my word for it. Here is Der Spiegel making this point quite succinctly.


  • Munchau’s Eurointelligence-Newsletter just arrived. Quote: “We rarely quote finance ministers after an Ecofin meeting, but the chilling words of Anders Borg of Sweden are worth a full quote.

    „Of course the Greeks remain stuck in their tragedy; this is a new act in a long drama. I don’t think we should consider that they are cleared of any problems, but I do think we’ve reduced the Greek problem to just a Greek problem.“

    The Headline runs: “Paving the way for a quiet Greek exit.”

    Yani: When will they drop Greece, any bet on a specific date?



  • I agree totally,the measures taken are mainly aimed at fighting symptoms. Banking organizations will gain by this extremely well, and can keep on doing what has caused this crisis trough out the whole eurozone. Important question therefore is, why the powers that rule frustrate the proper implementation of the Volcker rule ?. This particular rule/agreement can change things, and can put the banking world on a leash.

  • Yanis, you may want to elaborate a bit on the second point? The only obvious conclusion from the current state of the balance sheets of Eurozone’s central banks, is that the interbank market is closed atm. There is a very persuasive analysis in Greek, in the link bellow:

    I’m asking you to clarify a bit what your point is because, the way this matter is presented on the press at times, could prove misleading to some in believing that the present imbalances between central bank accounts is debt by the banking systems of the deficit countries to the banking systems of the surplus ones. The truth is that the banks of the surplus countries face no counterparty risk whatsoever from the banks of the deficit countries. The only existing counterparty risk is the one that the ECB has towards the banks of the deficit countries, which is related to the asset quality of the collaterals they use for financing their liquidity needs.

  • Quote:
    ‘A euro breakup may have been delayed by the ECB’s LTRO but the growing Target 2 figure is a sign that all we are witnessing is Crisis Appeasement.’

    Dear Yannis, many thanks again for your insightful and, most important, independent analysis.
    Should we assume that by the term ‘Euro breakup’ you refer to the complete demise of the Euro and the creation of new regional currencies?
    I understand it is your position that any one country exiting the Euro would bring about the complete demise of the currency.

  • Der Spiegel also states ‘Restructuring Greece Within the Euro is Illusory’,1518,816410,00.html

    SPIEGEL ONLINE: The finance ministers of the euro zone want to approve a new bailout for Greece this Monday. Can the additional €130 billion ($172 billion) save Greece?

    Sinn: No, and the politicians know it can’t. They want to gain time until the next election. I think we’re wasting time by doing this.


    Sinn: Because Greece’s external debt is rising with every year that passes until it leaves the currency union. We’re getting ever further away from solving the problem. The basic problem is that Greece isn’t competitive. The cheap loans that the euro brought the country artificially raised prices and wages — and the country has to come back down from this high level.

    SPIEGEL ONLINE: So the euro countries shouldn’t approve the aid?

    Sinn: They should give them the money to ease their exit from the currency union. The Greek government could use the money to nationalize the country’s banks and prevent the state from collapsing. The state and the banks must continue to function through all the turmoil that an exit will entail.

    SPIEGEL ONLINE: This turmoil would hit the population hard.

    Sinn: Yes, undeniably. But the turmoil would only be temporary, it would last one to two years perhaps. This time would have to be bridged with the financial aid from the international community. But the drachma will immediately depreciate and the situation will stabilize very quickly. After a short thunderstorm, the sun will shine again.

    SPIEGEL ONLINE: How would a euro exit help Greece in concrete terms?

    Sinn: It would become competitive again. Because Greek products would rapidly become cheaper, demand would be redirected from imports towards domestically produced goods. The Greeks would no longer buy their tomatoes and olive oil from Holland or Italy but from their own farmers. And tourists for whom Greece has been too expensive in recent years would return. In addition, new capital would flow into the country. The rich Greeks who deposited so many billions, possibly hundreds of billions of euros, in Switzerland would see the falling property prices and wages and would have an incentive to start investing in their own country again.

    SPIEGEL ONLINE: Does the exit from the euro zone entail Greece going bankrupt?

    Sinn: No, quite the reverse. The bankruptcy forces the exit. The Greeks will immediately leave if they don’t get any more international aid because the bankruptcy couldn’t be managed within the euro system. The state would be insolvent and the banking system too. The entire payments system would fall apart. The chaos can only be avoided if Greece leaves and the currency depreciates immediately.

    SPIEGEL ONLINE: Does that mean Greece should be forced to leave?

    Sinn: No, no one should force anyone. But at the same time Greece doesn’t have the right to receive permanent assistance from the other euro countries, and Greece’s creditors aren’t entitled to have the debt repaid by the international community. Everyone has to earn their standard of living themselves, and those who choose to earn money from risk must bear that risk.

    SPIEGEL ONLINE: If Greece were to exit the euro zone, would the tough austerity measures still be necessary?

    Sinn: In this case, savings really only refer to a reduction in debt growth. The economist only refers to savings if debt is actually repaid. Greece is nowhere near doing that. But it’s true that Greece has gotten used to the flow of cheap credit from abroad, and that it’s politically impossible to cut wages to the extent needed to make the country competitive.

    SPIEGEL ONLINE: By how much would wages have to be cut?

    Sinn: Greek products must become 30 percent cheaper in order to be on a par with Turkey. You can only achieve that through a euro exit and depreciation. Without depreciation, millions of price lists and wage contracts would have to be rewritten. That would radicalize the trade unions and push the country to the brink of civil war. In addition, companies would go bankrupt because their assets would shrink while their bank debts would remain unchanged. You can only reduce the bank debt through depreciation. The plan to radically restructure Greece within the euro is illusory.

    SPIEGEL ONLINE: Why are the euro-zone countries so adamant that Greece must remain in the currency?

    Sinn: This isn’t really about the country. The Greeks are being held hostage by the banks and financial institutions on Wall Street, in London and Paris who want to make sure that money keeps on flowing from government bailout packages — not to Greece, but into their coffers.

    SPIEGEL ONLINE: What about the contagion that a bankruptcy or a Greek exit would involve? Financial markets may speculate that other countries will suffer a similar fate as Greece.

    Sinn: There may be contagion effects. But I think this argument is being instrumentalized by people who are worried about losing money. People keep on saying “the world will end if you Germans stop paying.” In truth only the asset portfolios of some investors will suffer.

  • The “kicking the can down the road” approach has been omni-present and familiar tactic throughout the many phases of this crisis.

    However I believe that Yanis is extremely forgiving by refusing to pin the entire blame on Germany as logic demands (not begs, but absolutely and irrefutably demands).

    After all it is Frau Dracula’s amateurism, phobias, self-serving calculations, complete inability to complete the task at hand and the criminal and systematic wrecking of the Greek economy which got us here to begin with.

  • Dear Yannis, it was not the euro that was saved– it was the Greek face–and only that! The bailout won’t help Greece in the long run. Only the banks and the governemement will live another day. The only exit from the crisis is to fix your economy and that means less loans, more work. You have already borrowed too much. I’m Finnish, so my government is currently making savings in order to “loan” – which in fact means give because you’re not able to pay back and the loans will be written off — to Greece. When I walk 20 km to a health care center in the snow and -20C because my old one was closed because we need to give Greece money I don’t thank the Greeks! When my governement is saving on national defence so that we are endangered – unlike you we are not in the NATO, but remain unallied, so we must have a credible defence, I, frankly, curse the Greeks. I hear you have a very large defence budget regardless of the fact that you’re NATO country and your only “enemy is another NATO country ,Turkey so, please, explain to me why should we suffer to hand over our taxpayers’ money?

    • Well, if you put it that way… “like”

    • Are you sure it’s not the Jews or the blacks who are responsible for poor old Finland’s problems? Finnish political discourse must be in a terrible state if you’ve come to the conclusion that it’s the Greeks who are responsible for problems with your health service and for your cold weather too! Find the people really responsible for your problems, and stop blaming foreigners and outsiders. Blaming foreigners and outsiders is what fascists do. You think if the Greeks went away, all Finland’s problems would be solved? You should be ashamed of yourself. You sound like that guy who went on the rampage in Norway. And why does Finland need such high expenditure on defence? Who’s going to invade you? Estonia? Or is it the Russian Bear? More foreigners for you too worry about, no doubt. If you read Cavafy, you might realise that Barbarians rarely come… but, as your comments prove, thinking that they will does provide some kind of solution.

    • You, dear partner, should help us, it is the treaty we both signed some years ago. And you don’t give us money for free. It is a loan we have to give you back and pay back interest that is the main part of the loan. At least the US helped us with the Mashall plan without giving them back anything. You should say instead that the US are controlling our foreign policy and have minlitary bases on our land, but the same is happening now with EU and Germany specially, except the military bases, but who cares about them in Greece now. In a way or another our country was never completely independent, and if we have to choose a boss, Germany is the worst at the moment. Just you are a Merkel’s pet, that is Finland today. Sorry for the angry style, but this is not a parthnership in a Union, I hope all Finnish don’t think like you. Blame yourself for your problems, specially the military one, if any, not us. And do not feel superior, please, because you are rich now. You are rich because we buy your Nokia phones.

  • And as to euro – it works just fine for us Northern Europeans. But Greece should not have been in to begin with – Greece gave misinformation to Euro countries on entry. So could you please get out? You don’t seem to like it in the euro and, frankly, you cannot maintain the standards, so what are you doing in it?
    No I’m not looking forward for an encore of this soon, but I know it will come. I have no idea why. Probably because certainpolticians have made agreements they had no business making. I’m lobbying my parlaiamentary representative hard against it and there is a chance that a new poltical force will arise here that will say no to more bailouts. The right and the left just might find each other over this.

  • Bailout, smailout. Greece is still broke. Broke as a joke.

    And what a bailout it was. I mean, you’d think the stewards of Greece, those 300 cowards in parliament — minus those who voted against it, not out of political convenience but out of principle — would at least know the difference between favourable and unfavourable terms (not to mention “sustainable”) in their negotiations with the Troika. You’d think … 🙁

    For example, if a Greek hospital is in dire need of new medical equipment it must “wait in line” for the banksters to be paid first before any money, if there is any left, out of the Greek budget is allocated to the Greek hospital. Is that crazy or what?!

    Here’s another example of Greek negotiation tactics: Salary cutbacks are retroactive.

    That is not negotiation. It’s total capitulation.

    Anyway, the reality is that those losses on the bad loans to Greece must be recongnized (via default) one day. Unfortunately, that day appears to be later rather than sooner.

  • The EU and the Eurozone in particular is caught between a rock and a hard place. Given that there is – as yet – no legal way out of the Euro, and that the new legislation relating to EZ-members’ fiscal budgets (currently under discussion) make budgetary balance, etc, imperative, what future is there for Greece?

    Willem Buiters, elsewhere, argues that the only route out involves a write-off of Greek sovereign debts followed by strict controls of the sort about to be put in place. This would allow Greece to both stay in the EZ and have the ability to rebuild their economy. It would also show whether EZ nations really believe in the EZ enough to lose money for a worthwhile cause, or ….. well, what are they in the EZ for?

    • Noone cares about legal or not legal anymore in the EZ. The just do not want their silly project to go down in flames.

  • Yanis,

    It was nice to meet you in Canada. I assume that you will be asked a lot of questions in Australia about the Greek bail-out. Have you prepared any thoughts on the PSI bond exchange? Do you think that the credit default swaps on particular Greek bonds will be triggered?

  • “If there is some intelligent principle behind this approach, rather than mere flailing incompetence, it would sound like this: “Let’s build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy.”

    Panic is what first turned an EU liquidity crisis (where governments struggle to borrow money) into an insolvency crisis (where the burden of debt settles on an unavoidably explosive path). This financial metastasis works through interest rates. If rates stay high enough for long enough, they can make solvent governments insolvent. When panic gripped the markets recently and bond yields surged, the solvency of Spain and Italy — plainly capable of servicing their debts under conditions of no panic — was called into question. It beggars belief that the EU is willing to let the fear of a calamity on such a scale persist, when there’s no need.

    Maximizing Panic

    But it has been willing, and still is. The EU’s own financial officials doubt the new program will work. Greece may end up defaulting unilaterally — the panic-maximizing event. Lately finance ministers have actually entertained the idea of a Greek exit from the euro as a way of bringing further pressure to bear on the government. Are plans in place for that contingency? Take a guess. If it happens, and bond yields spike again, there’s no firewall to protect the rest of the system. Europe’s banks are still undercapitalized and the European Financial Stability Facility is at best a third as big as it might need to be.

    Greece is small enough for the rot to be stopped right there. Add in Europe’s other two acutely distressed economies — Ireland and Portugal — and the problem is still manageable.

    Greece’s debts, official and privately held, should be written off. Until its government can get to a primary budget surplus or renew its access to market borrowing — for which it needs some economic growth — Europe should provide official financing on terms that won’t kill the economy. Euro exit must be avoided: Wages will have to fall, but dumping the common currency for a devalued drachma opens too many new channels of risk. The EU should stand ready, if need be, to do all this for Ireland and Portugal, as well.

    In any event banks have to be recapitalized and the EFSF greatly enlarged. If all this were done, the risk of renewed panic would subside, and Spain, Italy and the EU as a whole would be moved back from the brink of disaster. The cost to euro-area taxpayers is not small, but it’s nothing compared with the crash they will suffer if this game of chicken with financial markets goes wrong.

    What part of this doesn’t Europe understand? ”

  • There is an interesting interview with prof. K. Rogoff in Spiegel:,1518,816071,00.html

    He firmly rejects a notion of economic imbalances between Eurozone countries as a one of the main reason of Europe crisis and is sceptical of idea to increase wages in Germany. His long term solution for South countries – study, make better products, lower wages and be competive. What does K. Rogoff see while other don’t or vice versa?

    • Rogoff:

      Is a rented mouth piece. He represents the extreme minority in the US and no one (serious) is listening to his punctuated nonsense.

  • Once more Yani, I feel that – quite unfortunately – the most important aspects of this extremely complex situation are flying under the radar as far as Greek media are concerned. PM’s are currently too involved in managing their political clientele to discuss anything of real importance and the press in equally busy choosing sides for the upcoming election. I am afraid that although the arguments supporting the positions you – and a precious few others – are putting forward are mounting by the hour, you (we…) remain at the fringe of press and / or political agendas and as of yet no momentum towards the implementation of drastically different policies seems to exist. Of course, there is hope still. I am curious to see how the French and German elections will influence things. What is your take on this ? Do you think that we might see a shift of mindset when and if new leaders take office….?

    In any case, hard facts will continue to be ignored here in Greece for at least a few more months, maybe even a year. By then the socioeconomic Godzilla will have grown to the size of Lycabettus hill and the populist crap should come to a grinding halt…


  • Nowadays, probably very few people know who Mikis Theodorakis is. He is certainly someone who loves the Greek people, country, land, and air more than whole political Euro/Greek establishment/oligarchy together. And this 87 years old musician/activist/and what not knows what is talking about.

    “There is an international conspiracy whose target is the complete destruction of my country. They began in 1975 aiming at Modern Greek civilization, continued with the distortion of our modern history and our national identity and they are now trying to eliminate us biologically as well through unemployment, hunger and impoverishment. If Greek people don’t rise as one in order to prevent them, the danger of Greece becoming extinct is evident. I place it within the next ten years. There will be nothing left of us but the memory of our civilization and our battles for freedom.”

    Mikis Theodorakis

  • We have the first signs that the whole PSI thing was actually a DoAN (Dead on Arrival Nonsense) and “will come too little in the end”. Eventually the CACs (Collective Action Clauses) wil be activated, i.e. there will be imposed a non-volluntary participation on the reluctant to involve bondholders, leading to a Credit Event and to the triggering of the CDSs (my references are in greek, but I’ m sure it is easy for anyone to find a lot in english too):

    It seems that this turn of events is actually a part of the agreement and everyone in the EU looks quite sure, that it will be a manageable situation.
    For me it smells as the very first step to what has been called “paving the way for a quiet greek exit”.
    If I remember well, you would like to see the CDSs to be triggered. What makes you believe that this could be for the profit of Greece?

    I really enjoyed your tweet-confrontation with Costas Simitis, especially the point where he admitted that the Europe we all want unfortunately is not the Europe we have! He actually was the former PM and not somebody using his name?

    • On the PSI, let’s wait and see. I am still intensely sceptical of its chances. The holdouts will be many. As for the CDS triggering, and this being good for Greece, my view has always been that Greece ought to have defaulted. This would automatically the CDSs. No direct benefit would come to Greece from that. The benefits would come from having defaulted and avoided the issue of English Law new bonds (to be swapped from the old Greek Law ones). BUT, meanwhile, the CDS triggers would expose the puss languishing inside Europe’s banking sector and would make the CDS market meaningful again. Both would be beneficial, at least long term, to Europe and, indirectly, to Greece.

      PS. Of course he was not the real Costas Simitis…

    • Maybe, Yani, this latest “bailout” was nothing more than an attempt by the banksters (et al) to buy some time, to avoid “the CDS triggers [that] would expose the puss languishing inside Europe’s banking sector.”

  • Yanis, irrelevant with your post, but I read somewhere that out of the 110bn of the first package, only 80bn have been released. Is this true? If so what happened to the rest 30?

  • Dear professor, since you mention TARGET2 I suppose you understand that a TARGET2 asset shows a surplus of money in the German economy which leads to inflation whereas the corresponding TARGET2 liability shows a liquidity squeeze in the peripheral economies which is causing deflation. By allowing these imbalances to emerge, isn’t the Eurosystem causing price divergence which is going directly against its primary objective?

    I would strongly suggest that you take a very good look at the economics of TARGET2, if you have not already done so. It is the self-destruction mechanism of the euro which causes the ECB to automatically increase its exposure to the countries that the euro itself destroys. And the euro is already backed almost entirely by TARGET2 claims.

    Best wishes

    • It is because I understand the repercussions of a growing Target 2 imbalance that I used it as an example of why the euro crisis is getting worse at a time when spreads are in ‘recession’.

    • There is no clear mechanism that would support the notion that the surplus bank reserves of the surplus countries banking system has any inflationary effect. Same goes for deflationary effect in the deficit countries. All interventions made in the money market by the ECB are considered (and are) sterilized ones, leaving the monetary base intact.
      As I mentioned earlier in another post I made, the ECB imbalance is merely an indication of the unwillingness of the surplus countries’ banking systems to accept any direct counterparty risk from the banks of their deficit southern counterparts, via interbank placements. To put it simply, a German bank would rather keep its extra bank reserves on the ECB’s marginal deposit facility rather than risking a more appealing interest rate via an interbank placement on a Greek financial institution to help it balance its liquidity needs.
      Three key points should be transparent imho in each coherent analysis of the Target2 system:

      a) The surplus countries banks have no immediate counterparty risk from deficit country ones. Their counterparty is the ECB.
      b) The ECB is financing southern country banks through its discount window, open money market operations and the ELA mechanism. Its exposure is collateralized by southern bank assets, so the ECB does face counterparty and collateral risk.
      c) There is no way to actually find out how the extra reserves are being used by the northern banks. An excellent analysis of different scenarios is presented in the link bellow:

    • The monetary base is indeed intact but the money supply is not. This is clearly evidenced in the monetary aggregates of the NCBs. Ultimately, it is the fluctuations of the money supply which drive inflation.

      As for the counterparty risk, indeed the ECB acts as the intermediary, but the size of the TARGET2 claims, the fact that they are collateralized with predominantly worthless southern assets and the fact that the ECB only has 5bn EUR in capital, make the intermediation almost irrelevant. If the deficit countries’ NCBs take losses, these will be felt across the Eurosystem and into the pockets of the European taxpayers.

    • Since we agree that the monetary base is intact, the next thing we should consider is the actual usage of the extra liquidity the northern banks have acquired with LOTR1. Most analysts claim that the its being used either to refinance short term obligations, or being stored for to cover future financial needs. A very limited amount was allegedly redirected to new credit lines. If we agree that that’s also a true statement, we can’t accept any inflationary pressure in northern economies. Statistics seem to support this notion, since the inflation rate of Germany is quite stable during the last year or so.

      On your second point, first of all the capital of the ECB will be over 10b by the end of 2012. The capital increase has been scheduled back in December 2010. I agree that it’s not a substantial amount, but keep in mind that since ECB’s capital base support comes directly from EU states. Thus, the only real restriction to its future size and amount is political will.

      I already noted myself that the ECB faces counterparty (mainly) and collateral risk from it’s open market operations. No doubt there. But if Yanis’ claims hold any truth in them (and I think I do), the moment the Italian and Spanish bond market collapses in such a bang that the ECB is faced with actual losses, we’ll have much more to worry about than the losses that the northern banking system will have to absorb. It’s a nightmare scenario from there.

  • In its roots Greek means knowledgeable person therefore Greece means the land of the knowledgeable people.

    Etymological coincidence or an exact measure of how much knowledge is valued today?

  • Mr VAROUFAKIS,If this practice from the ECB continues,does it undermine one of the pillars of your modest proposal??I mean if the the state of ECB’S books worsen will it be able to accept,when needed,debt equal to 60% of GDP from EMU countries??

  • It’s worth reading Munchau’s last article in FT (The Bundesbank has no right at all to be baffled):

    After EFSF, ESM, PSI, CDS, LTRO, …, a new term in our dailly life. I can almost hear my 70 years old mother asking me in agony “How is TARGET 2 doing today my boy?” !

    Yani, although you’ ve already mentioned the importance of TARGET 2, I wait your comment about Weidmann’s unwise proposal (maybe in a new post or newsletter).

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