On the transition to a viable Eurozone and the Modigliani-Miller Theorem: Continuing the dialogue with Kantoos Economics on the Modest Proposal (response YV3 to KE3)

Continuing our exchange with Kantoos Economics (KE) on the Modest Proposal, today we turn to the question of the lead-up to a new Eurozone architecture. What kind of transition period will be necessary?  Also, KE asked me to respond on the relevance of the Modigliani-Theorem to our ECB-mediated debt conversion scheme that we are proposing.

[Readers unfamiliar with this debate should read preceding posts in the following order: KE1, which was the original critique of the Modest Proposal, YV1 (my response to KE1), KE2, YV2 and now this post – which will be known as KE3]

Kantoos Economics asked: How is the transition period (to a Modest Proposal type of Eurozone) supposed to look like? Will each bondholder get two new bonds: one which is backed by the ECB, the other by the national government? Or will countries, as I assumed, just replace bonds that run out with ECB bonds? The latter will run into legal problems, as new debt will be senior to existing bonds which, as far as I know, would be a default event on existing bonds that often have a pari passu clause. On the other hand, it would give countries a grace period in which they don’t have to turn to the market, which could be helpful in current circumstances.

Yanis Varoufakis: What I had in mind was something much, much simpler. In fact, it is so simple that there is no need whatsoever for a transition period. And it certainly does not require a bondholder to get two bonds. This is how it will work: Tomorrow morning the ECB announces that, forthwith, it will be servicing the Maastrich-compliant portion of any maturing member-state government bond (assuming that the said member-state signs its contract with the ECB that commits it to the terms and conditions of participating in this debt-conversion scheme that is to be run by the ECB).

E.g. take a Spanish government bond that matures on 1st September 2012 with a face value equal to  1 billion. The ECB does nothing till the 31st of August. Tomorrow’s announcement is all that is necessary. What it tells the bondholders is that, come the 1st of September, they will receive around  670 million from the ECB and the remaining  230 million from the Spanish government. (Note that these sums reflect the Spanish government’s Maastricht-compliant debt; that is, I am assuming that 23% of Spanish debt exceeds its Maastricht limits). On the same day, or perhaps on 31st August, the ECB will have issued ECB-bonds equal to  670 billion in, say, 20-year bonds (or more depending on the coupon value) and, simultaneously, open a debit account for Spain into which Spain is now obliged to make periodic deposits to cover the capital plus the coupon.

So, to answer KE’s question: Holders of the original Spanish debt simply get their money back – partly from the ECB and partly from Spain. Two types of bonds are issued in the money markets in order to effect this debt conversion: ECB bonds and Spanish government bonds. Investors chose which they want to buy (the ECB ones at a low interest rate with greater security or the riskier, but higher yielding, Spanish government ones). Note that there are no legal problems here and no need to have a transition period. Policy 2 of the Modest Proposal will be up and running the moment the ECB makes its announcement tomorrow morning. With all the benefits (i.e. the calming effect on the market and the alleviation of fiscal stress for countries like Spain) applying immediately.

Kantoos Economics: [A] very famous theorem, Modigliani-Miller, tells us that the structure of how a company finances itself – under lots of idealizing conditions – is irrelevant for how much it is worth. For the Modest Proposal and other suggestions of how to structure European sovereign debt, this means that when the “blue” part of the debt has higher seniority and thus, lower rates, the yields on the “red” debt will be so high that the interest rate cost will be the same in total. In theory, that is, without panic or disintegration or mutualization of debt. 

Yanis Varoufakis: I suppose that KE mentioned the Modigliani-Miller theorem (MMT) because of what it may bring to bear on the debate regarding the structure of the Eurozone’s aggregate debt, and my claim that re-structuring it (along the lines of Policy 2 of the Modest Proposal), would return the Eurozone to structural robustness. MMT shows that, all other things being equal, and under a set of assumptions that I mention below, a corporation’s expected net worth (and thus solvency) is independent of the extent to which its finances are predicated upon debt, equity or any conceivable mixture of debt and equity. In other words, no corporation can be aided back into solvency by altering the mix of debt and equity of its finances. 

As KE understands well (and says so in his post), MMT is irrelevant to us (i.e. to a debate on re-structuring the Eurozone’s public debt) for two reasons. First, because the assumptions underpinning MMT do not hold. In particular, MMT assumes that bankruptcy is not an issue, that price formation falls Brownian motion (i.e. is fundamentally random) and that all relevant decision makers share the same information set. None of these apply in the case of the Eurozone. Secondly, and much, much more importantly, the Eurozone’s member-states are not corporations. This is important for two reasons: (a) Their financing is not based on equity at all but, rather, only on different debt instruments. The Modest Proposal simply argues that ECB-bonds are a better debt instrument than the existing government bonds or the touted severally and jointly guaranteed bonds. (b) The other reason, naturally, is that the member-states’ revenues (i.e. tax take) cannot be deemed independent of their expenditures (unlike a corporation’s that can be; and are).


  • Under Maastricht rules (and the infamous Article 123 in particular) Eurozone states are forced to function as private non-sovereign entities. It’s true that they are not funded by equity, but they are balance-sheet constrained unlike a true sovereign in its own fiat currency.

    As for the irrelevance of Modigliani-Miller because of bankruptcy, the Merton model is essentially MM with bankruptcy. The objections on the random character of “firm asset value”, symmetric information, etc, are more on point.

    But the crux of the modest proposal is the use of sovereign funding in its own fiat currency. Without that, it should be approximately true that “the average cost of funding of the Eurozone public sector should be independent of how its debt is structured”. Sovereigns with fiat currencies get to set their own funding costs (in their own currency). This is tendentiously called “financial repression” by people who should know better.

    • “Sovereigns with fiat currencies get to set their own funding costs (in their own currency). This is tendentiously called “financial repression” by people who should know better.”

      I’ve been suspecting that the markets were not really aware that this was not the case for EZ members since inception of the currency union.Thus the cheap borrowing costs for all members.I highly doubt whether most economists realised that also.
      I think the markets became aware of the fact only a little while after demanding higher interest from Greece in 09 and saw no intervention from the ECB.

    • Crossover: “the markets became aware of the fact only a little while after demanding higher interest from Greece in 09 and saw no intervention from the ECB”

      The message coming from the ECB and the Ecofin ca. February 2010 was “we have no better assessment of Greece’s solvency than market sentiment”. Those statements of market worship sealed the fate of Greece and, possibly (since they reflect the entrenched ideology of the EU’s economic policy establishment), of the Eurozone itself.

    • I would like to tackle this from a Financial Economist perspective: the MMT model is flawed in its assumption that the firm value takes on the random path effect, as it would be collectively assigned to market forces underlying the perceived yet collective value assigned to the firms’ assets given that all agents share the same information and thus all mutually arrive at the same price dialogue. That happens only instantaneously and yet only in the short run (assumed market completeness and the whole lot becomes an explosive price process and so on). This has nothing to do with the Mertonian parallel (which assumes market completeness without even explaining why, though it elaborates on the price process creatively). I cannot see how to draw parallels on two explicitly inconclusive models and whether these bear any subtle refuge to the current sovereign macro debt dynamics and their ensuing micro-monetary structural effects, as we speak about economies and not corporations. The Financial Repression is rather a good example though rather incomplete (it is in fact a product of endogeneity within existing monetary policy outcome, which is a lacking tool for the euro-zone members and a severely under-represented issue by the ECB). The Modest Proposal is not an identity-analogue for a supra-nationalisation of individual sovereign debt components, such as the Eurobond would have us assume (presume rather, as it is more a fathom of presumption). Its merits lie in what we call the “expansion of the Monetary Base”, and not to overcomplicate with the fiat currency paradigm, as it is, firstly, too late for this – the euro is in true circulation within a sub-sovereign centralised currency policy – and, secondly, the ECB is introduced by the Modest Proposal as the “umbrella” debt holder (a close parallel to the Fed but not a substitute as there will need not be a Federalised monetary authority unless the Germans push for it for reasons of policing and subversion) a priori, absorbing market debt dynamics prior to the mezzanine, sub-senior national debt components.

    • @ThornstenNielsen

      “too late for this – the euro is in true circulation within a sub-sovereign centralised currency policy”

      What if the ECB was allowed to finance all the countercyclical deficits while governments being responsible only for their structural deficits and the accompanying debt servicing ?This would still not require the establishment of a federal treasury and it would be a quasi regular modern fiscal policy in terms of how sovereign gvt finance works when on a free floating fiat currency system.

      My question is mostly theoretical obviously,the ECB wouldnt be allowed to act like this,not even in April 1st but im just trying to understand whether the reasons you believe “its too late” are political or operational.

  • An excellent interview of Yiannis Kiourtsakis. Another politismic hybrid. As Yannis the author of this blog is.
    A perspective supporting that an exit from crisis in our times can be imagined by starting from politism and synthesis. Think of the words οικο-νομία and δημι-ουργία. From what elements these words are consisted of?

    Again, this is not a solution, but definitely signals that a new culture may come out of this crisis. Inter-relations between european and greek civilization.

    Unfortunately, this is not for non-greek speakers, but i think that kiourtsaki’s book is translated in french as well. And there are many videos of him in french.

  • “The Modest Proposal simply argues that ECB-bonds are a better debt instrument than the existing government bonds or the touted severally and jointly guaranteed bonds.”

    Indeed, this is the full essence of the Modest Proposal and every other aspect of this debate will cloud the issue, which is to bring rapid stability back into the entire European financial system. This is thus the primary aiming point of the mission upon which everyone should remain focused.

  • “[…] with a face value equal to 1 billion […] On the same day, or perhaps on 31st August, the ECB will have issued ECB-bonds equal to 670 billion[…].”

    A typo, I guess, this should be 670 million, no?

    “they will receive around 670 million from the ECB and the remaining 230 million from the Spanish government”

    Spain has to refinance this 230 million, the red bonds – how high, you think, will be the spread over the ECB (==EMU taxpayers) backed part?

    Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds.

    That makes the purely national bonds subordinated debt and may raise rather than lower their risk. Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.

    So what does it help if the blue part gets, say, 4%, and for the red part the markets demand 40%?

    • vss

      Hell ,i’m gonna be rich (yeah ,right).

      It is only logical to assume that less people (experienced investors) will buy this kind of bond.
      Taking for granted ofcourse that the banks inform the public this time.

    • The question of what happens to the part of the debt that is not taken over by the ECB but is subject to a possible default of the respective sovereign country I think is crucial in order to assess if the Modest Proposal would be helpful or not.

      I guess that if the ECB takes over a part and the markets are convinced that this part is very safe, then the interest rate on that part should be extremely low.
      For the remaining debt of e.g. Spain that is not guaranteed through the ECB, the interest rate would be higher than it would be if there was only “one class” of debt. So the risk the markets see with the debt not guaranteed by the ECB would be higher under the “Modest Proposal” scenario than the interest rate if there was no “Modest Proposal”.
      Overall, I would assume the cost for servicing the debt would be lower under the Modest Proposal (I am no expert on “Modigliani-Miller”, but smart economic academic truths have been proven wrong, irrelevant or misleading all along since the Financial Crisis started 2007 / 2008 so I wouldn’t take this one too seriously).

      I would assume that if there is a part of the overall debt that the country can roll over paying very little interest on it (as it’s held by the ECB, under the assumption markets are convinced) this should make the debtor country appear a better risk overall. So even if the interest rate on the non-ECB-held debt went up significantly (which I am sure it would), the overall interest (ECB-held and non-ECB-held combined) should get to a lower level.
      Which could really make the high debt burden more realistic to carry.
      For Spain, it may actually be enough – if the country got some help from the ECB to deal with its banks.
      For Italy and Portugal, the non-ECB-backed debt would still be around 60% of GDP which would be very difficult to carry for those two countries. But I guess that overall, the cost would come down because the very low interest rate on the other 60% (held by the ECB) should give the countries more breathing space.
      The Modest Proposal would clearly not be enough to sort this mess out on its own – but I would assume it could be a valuable component of the overall solution.

      I think the solution in the end has to be something like the Modest Proposal – and probably at some point, the EU’s leaders will realize this.
      In order to help making sure they realize it sooner rather than later, it would be good the EU could hold up discipline and trust in the meantime. Without the two, Germany and other countries won’t agree because in the past (and including today) they’ve been doing things based on the assumption that other countries keep their word which has proven wrong.
      So this Greece situation has to be sorted out one way or the other and then the EU may be able to agree on something that could make a happy end more likely.
      But be aware: The electorate in the north will only agree to this set-up which ultimately raises their risks still further (in the case of non-compliant, not-keeping-their-word countries carry on as they have so far) if they trust that they have something in their hands that gives them a reason to believe that they won’t be taken for a ride again.
      So maybe, Greece needs to be kicked out of the Euro to make this point clear if there is no other solution.
      Let’s see what the election brings…

    • Oh ,Martin ,

      no solution ,not even the modest proposal can correct this crisis now.
      Especially after such a delay.

      The crisis is inherent in the system. You can not escape it. Even if the leaders were fast and accurate. But it would have been more manageable.

      Now all steps must be taken on all levels simultaneously.
      They need to hurry up or just man up ,accept responsibility and let the banks fail.

      The crisis is coming home. Where it should have been from the beggining. To those that first of all didn’t keep their promises and took us for a ride.

      So ,just stop talking about Greece as she is the cause of it all.
      What i see you are trying to do ,is use logic and truth about everything but at the end you twist your opinion just enough to pass the blame on Greece.

      Cut it out.

  • And surely it should be 770 million (not 670) and 230 million to make up a billion…

    • They will print it and thus take it from everyone who has some of it.

    • crossover

      hehe ,i do not think we should reply to n eu d anymore.

      It has no meaning.

    • Please show me one central bank in the world that has issued bonds.

    • I guess No EU D the Americans should have never gone to the moon because nobody ever went before them huh ?

      Or maybe just for the sake of your “argument” could you show me another currency union that was able to survive without a surplus recycling mechanism?Because if you cant then you all your arguments vanish to thin air due to the lack of a precedent and you should agree with us that Merkel’s demands are pure bull….

      But at least you got your precedent from Proffesor V.
      I repeat, we understand that you have wet dreams about the destruction of the euro, but until you can bring serious arguments on the table then dont bring that childish bull here….

    • And btw, given that bonds are nothing more than IOU’s, even you can issue bonds.The problem is obviously whether someone is going to accept them or not….but there is NO reason for someone not to accept ECB bonds….

  • No country is an island.

    “German industrial output stumbled more than expected in April, fuelling concerns that Europe’s largest economy is running out of steam and succumbing to the crisis engulfing much of Europe.

    Production slid 2.2 percent in April, Economy Ministry data showed on Wednesday, below the consensus forecast in a Reuters poll of 35 economists for a 1.0 percent decline and also below the lowest forecast for a 2.1 drop.

    “Welcome to the euro crisis, Germany,” said ING senior economist Carsten Brzeski. “(The drop provides) evidence that the economy has finally caught the euro crisis virus.”

    The fall was broad-based, with only energy showing growth of 2.4 percent. The construction sector was the hardest hit, shrinking by 6 percent in April.”

  • By now you all know my position on the upcoming Greek elections, so there is not even one chance in a trillion that you might mistake me as a pro-Syriza guy.

    However, Syriza voters are still my fellow citizens and I care for them misguided as they might be. They are my people and within the family we are entitled to disagree.

    Therefore, when occasionally Syriza does something right I am first to acknowledge and congratulate.

    Syriza is 100% right on one thing. That in challenging or even cancelling the memorandum, such action will not result in Greece leaving the euro.

    First, the background and then the evidence.

    Those advocating a possible Greek ejection reason it along these lines. They say that since Greece has a primary deficit then if the EU aid is suspended, Greece will be forced to cover the deficit by printing in some local currency or equivalent. It’s important to understand that even the Cassandras in this debate understand that treaty-wise there is no way that the EU could commence action against Greece leading to loss of EZ and EU membership, however, they quickly conclude that if Greece is left unaided then Greece will initiate such action in order to cover pensions, salaries and similar needs.

    However, the evidence now is in (see article below) that Greece is almost at the crossing primary surplus point and if the idiotic PSI 2 was not delayed until the end of March, Greece would have crossed into positive territory already.

    So, Syriza is 100% right on this issue. Not only Greece could cover(or almost cover) its own needs but is also in a position to call the Merkel bluff. Render on to Caesar what belongs to Caesar (aka Tsipras).

    Therefore this unintelligent rhetoric that somehow this upcoming election is a referendum of staying or not on the euro is a bunch of hogwash.

    Those who take such position are basically towing the Merkel line and hence they are traitors. The Germans already know that 70%+ of the Greeks want to stay in the euro and therefore they are attempting a false association as an instrument of terror.

    This is why on this particular issue Syriza is right. This is a false dilemma. Greek voters deserve to go to their ballot boxes on the 17th and vote as they please, WITHOUT fear or coercion. And my urgent advice to those I politically support is to drop this pseudo-dilemma because it leads nowhere.

    I have long given up in trying to talk sense to my fellow Greek citizens regarding politics. By definition, Greek voters know everything and anyone who attempts to change their opinion has a hidden agenda. I therefore give up on the conversion or proselytizing part. So, go my fellow Greeks and vote as you please. My whole point in this debate is to teach you to vote strategically not tactically. An impossible task, I know.


    • Dean, I can’t quite figure where you are in this political debate. In this post, you defend Syriza, making it clear that Syriza is right on the issue of the Memorandum, and then make clear that you abhor Syriza – as you’ve done before. Then you make a plea to whoever it is you now support to quit the fear mongering: “Greek voters deserve to go to their ballot boxes on the 17th and vote as they please, WITHOUT fear or coercion. And my urgent advice to those I politically support is to drop this pseudo-dilemma because it leads nowhere.” Actually, it does “lead” somewhere – it leads toward the election of pro-memorandum coalition. As Demetris points out above, fear and coercion, is exactly what this election is about, and if you support a party spreading fear you are not excused by your “urgent advice” for them to stop it.

      I don’t understand you; Syriza appears to be the only honest party in Greece’s politics that stands firm to stay in the EU and Euro Zone AND fight the Merkle/ECB led neo-liberal onslaught against the working class of Europe. What more could you ask of a party in Greece’s position?

      First, before the election, you urged a vote for ND on the assumption that Samaras was a tough guy. Right. As he was failing to put together a coalition he made it perfectly clear he’s a pro-memorandum stooge, a weak sister neo-liberal. Same with PASOK. Do I remember your saying you may vote for the Independents? On what grounds?

      You just seem to be all over the political map, and I’m beginning to think you’re naive about what politics is about. Politics is about MONEY, period. Syriza fully understands that, as do ND and PASOK. So, there are your choices – what do you choose?

    • David:

      You are asking why am I in this political debate? obviously to shape it.

      I am not an ideologue. So if Tsipras says or does something right I am willing to acknowledge it.

      My aim is whatever is best for Greece. Your aim is to make connections with ideological enthusiasts of similar beliefs to yours and grow the club membership – so to speak – across Europe.

      My universe is the sum total of all political expression in Greece with the purpose of manifesting its practical best. Your objective is to connect with others of similar political interests so that you can talk shop and spread the movement. Am I right?

      If not state your purpose.

      Since I am not running for office and not seeking people’s vote, I think I am entitled to a very loose, adaptive behavior until I have cherry picked everything that is available at my disposal for the expressed purpose of arriving at the position which maximizes political benefit for my country.

    • Αν είχε η θειά μου κατρακύλια θα την λέγαν αραμπά ( Πολ;iτικη παροιμία)

      “However, the evidence now is in (see article below) that Greece is almost at the crossing primary surplus point and if the idiotic PSI 2 was not delayed until the end of March, Greece would have crossed into positive territory already.”

      The truth is that these two elections have derailed further the system, tax income falling so low they are going after those defaulting their taxes for 3000 euro. If we were near break even, we would not have this problem of getting medicine to the hospitals and cancer patients.

      Reality is that if no extra money is to come in ( a third memorandum, since this year we were supposed to break even) we are uncontrollably bankrupt.

      Can you fore see a third memorandum signed by Syriza, if they win? If they do sign, changing by 180 degrees their position, the party will break up and there will be new elections, again leading to default.

    • @anna

      Just because we are close to a surplus doesnt mean that the remaining budget allocation is efficient.As a matter of fact the smaller the deficit,the harder it is to allocate the budget effectively.
      Just because we shrink the deficit,it doesnt mean that we equally shrink the needs of the economy and thats exactly why we are in a recession.The private sector is trying to deleverage and net save and it cant because the deficit isnt big enough.
      Its simple really…

    • anna v

      The problems we have ,are because the money do not go to the right places. As simple as that.

      I am willing to see bad times as long as the problems of healthcare are adressed first.

    • Dean,
      I’m not sure what point you are trying to make in reply to me. First of all, you are poorly understanding me if you think my interest is ideological and not practical in Greece’s election and its future. My only concern is that Greece survives and prospers in the EU and EZ, which I believe is exactly the same as yours.
      When you said: “My whole point in this debate is to teach you to vote strategically not tactically.” does that mean you have a strategy that elevates one party over others? If so which party? Politics is not so difficult to understand if one is paying attention to the money – ‘following the money’ as the saying goes. Are you considering ‘Who benefits?’ as you’ve developed your political “strategy”? You still seem to me to be hiding, or at least not revealing, which party you think can do the most to help Greece. The two oligarch parties, ND and PASOK, should be easy to rule out as viable choices for Greece’s future as we already know they are fully allied with the banker’s coup that the ECB and Germany have used to take control of Europe.
      Who do you support, Dean? WHO?

    • @David Sheegog

      I agree entirely with your comments. I also object to being included as an ideologue because I have concluded that ND is not serious and cannot be trusted with anything — not even a small corner shop, let alone an entire fucking country.

      Of the available options, where voting could conceivably produce a functioning government, only Syriza looks serious. Of course, there are questions about the party’s manifesto and programme, about their lack of experience, and even about the abilities of their key personnel. Even with these reservations, they still look better than ND!

  • When I read your MP I was under the impression that the ECB was supposed to pick up the WHOLE tab – for as many years until it had bought up the 60%-BIP-share.

    Hard to understand: In your MP you speak of a stress test for banks assume a 30% writedown for the over-70%-BIP-debt of each country. But you don’t say that creditors are to renounce those 30%. Even though you state that some countries are practically insolvent. What should your readers make of contradictions and omissions like that, Mr. Varoufakis?

    Self-contradicting: Super seniority (p. 8) to me seems incompatible with your MP demand (repeated several times in your short paper!), that debt with the ECB should not be counted as part of the country’s debt.
    Plus now you dodge KEs question as to pari passu clauses in past bonds.

  • Did you see the new trailer of New Democracy?

    How low can they go?
    When will these people stop using such tactics of extreme manipulative sentimental impact?

    They used the big guns…..Kids.
    They had kids playing sad about a future event of Greece being out of EZ and EU.

    • Yes Dean ,i too vote for EEZ.

      You say that if i vote for syriza i can kiss EEZ goodbye?

    • Fluid Intelligence

      In exploring personal and global transformation, it is important to talk about the concept of fluid intelligence in relation to the ability to grow and expand our awareness. Fluid intelligence has little to do with IQ or “book” intelligence. It is rather the ability to step outside of our beliefs and consider information which does not fit into our previously accepted view of reality.

      Our deepest beliefs and conceptions about life and the world are to some degree conditioned by our childhood experiences, our education, the mass media, and various other external influences. An individual’s level of fluid intelligence can be determined based on the degree to which he or she is able to let go of previously held conceptions on encountering reliable information or experiences which show these conceptions to be mistaken or overly simplistic.

      At the other end of the spectrum from fluid intelligence is static intelligence. If an individual is rarely willing to reconsider or challenge their established beliefs, they are said to have a high degree of static intelligence. They aren’t much interested in thinking outside of the box.

      Science and Fluid Intelligence

      When scientists on the static intelligence end of the spectrum encounter evidence which seriously questions the established paradigm, they attempt to discredit the new information using laws and principles previously agreed upon under the old paradigm. If they fail at this, the new evidence is then deemed not worthy of study and discarded. At worst, the evidence is actively attacked as being irrational or unscientific, even though it may be easily tested and verified.

      Scientists with a high degree of fluid intelligence who are attracted to study matters outside the current paradigm are often labeled kooks or wacky by those operating with static intelligence.

      Yet history shows that it is often these “kooky” scientists who go on to make the most astonishing discoveries which pave the way for entire new areas of study which were once considered nonsense. Einstein, Galileo, and Pasteur were all ridiculed by many respected scientists of their day for their amazing discoveries which ushered in entire new branches of knowledge.

      All of us are sometimes resistant to letting go of old beliefs, while at other times we are excited to explore new ways of thinking and being. Static intelligence and fluid intelligence are but two ends of a continuum, and each of us shifts to varying points on that continuum over time.

  • A question to Mr Varoufakis. Enlighten us.
    It’s probably a stupid question, but still.
    ECB is a private or a public bank?
    If it’s a private, why ECB wasn’t included in PSI?
    If it is institutional and that’s the reason it was not involved, why the greek insurance funds were involved?

    • Well, Ilia: you spotted the conundrum of the decade. Why are central banks now all private? And if they are private, why were they privileged in not having to accept the Greek haircut?

      And your third question, why were Greek parastate insurance funds affected?

      The answer to all of these is that politicians decided, and they decided that everything would be done that way. There is no logic; there is no law. This is just neoliberal crap and right wing politicians (who didn’t feel any sympathy for Greece, and also invoked their Protestant “morality”).

    • They are not all private.Most of them are simply “independent by law” but even in USA the Fed Act clearly says:

      “Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. “

      In other words the minister of finance can order the fed to do whatever such as print money etc.

      Now if you ask me, there is nothing wrong with being independent.The judicial system must be independent also,does that make it private?

      But then you should look at the forest and not at the tree.A central bank doesnt have to be private in order to do harm to the public and in favor of certain interests.The police is not private yet there are times that it breaks the law.The gvts are not private yet most of the time they dont give a flying [email protected] about the people….i think you get the point…

    • @Crossover

      Well, you are making fine legal distinctions here, between “private” and “non-state”. In some countries, such as Greece, there is an intermediate status usually called parastate in English. This concept does not exist in UK or US law, so they have had to contrive specific legal arrangements of the type you mention.

      As far as the developed world’s trend of giving central banks independence is concerned, it derives from the allegedly superior performances of the Bundesbank and the Fed. This evaluation is part of neoliberal orthodoxy and is not shared by all economists. Furthermore, what matters when central banks are “independent” is who is actually running them. In the case of the ECB, it is staffed by rabid neoliberals put there by the current German government. In effect, it is a puppet central bank with a fake veneer of legitimacy for the public to swallow.

    • “This concept does not exist in UK or US law, so they have had to contrive specific legal arrangements of the type you mention.”

      Ι dont think i agree with this.Take ECB for example,ECB is by law not open to gvt interventions (at least for the majority of gvts,because it might as well be open to Germany) as is the case with the Fed,based on the Fed Act i presented.The ECB just today declared no changes in the interest rate,while the European economy is gradually getting slower and slower.And need i not remind you about that wise man Trichet who raised the rates in the middle of the recession.As far as i know,the intervention-friendly FED did a way better job than the ECB here…We only need to check the stats and see thats the truth.

      “As far as the developed world’s trend of giving central banks independence is concerned, it derives from the allegedly superior performances of the Bundesbank and the Fed. This evaluation is part of neoliberal orthodoxy and is not shared by all economists.”
      I partly agree.Again the Fed is not really independent.I dont know about Bundesbank and the laws that came with it,but the Fed isnt.
      I think the initial reason for giving independence was the fear for inflation.They believed that reckless money printing would cause hyperinflation and thus you cant leave the power of issuing money to the hands of politicians.

      Apparently,money printing is not by definition inflationary but neoliberal heads cant get over it

      “In the case of the ECB, it is staffed by rabid neoliberals put there by the current German government.”
      The ECB is run by the board of the governors which is comprised by the governors of the 17 Central Banks of the eurozone members.I cant comment on whether Germany really runs it or not (it looks like it does,if one looks at the general stance of the ECB) but if it does,then this must mean that it also runs the majority of the Central Banks

  • Yanis, if I’m not mistaken, your arithmetic of paying off a bond with 1 billion face value at maturity with 900 million (670+230) implies a haircut of 100 m., or 10% on its face value.
    Something is wrong here.

  • My previous commentary was based on the old version of your MP. I’ve now detected your latest version, which you’ve completely reworked.

    In footnote no. 5 you clarify on how in your opinion due bonds are to be refinanced:

    “E.g. for a member state whose debt to GDP ratio is 90% of GDP, the ratio of its
    debt that qualifies as MCD is 2/3. Thus, when a bond matures with face value,
    say, €1 billion, two thirds of this (€666 million) will be paid (redeemed) by the

    So the countries’ debt would have to refinanced partlyt through private funding. I don’t know what the present state-debt-GDP-ratio is for Greece (and Portugal), but for sure it must be over 60.

    So assuming that Greek (Portuguese …) debt of 10 Billion would have to be redeemed 1st of August (arbitrary example), only part of the money would come from the ECB. Since private investors are unlikely to buy any fresh Greek (Portuguese …) bonds at the moment: Who pays for the difference?

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