Greece’s Grand Decoupling, the Nuclear Option and an Alternative Strategy: A comment on Münchau

tripitoIn his latest Financial Times column Wolfgang Münchau concurs with much of what I have written here (on the Greek social economy’s deep coma) and here (on the reasons why investors are piling in) but goes on to suggest that Greece should seriously consider exiting the Eurozone. In today’s post I offer an evaluation of his argument. In brief, I argue that, while Münchau’s assessment of the situation on the ground is spot on, the use of the ‘nuclear option’ (i.e. threatening to exit the Eurozone) is neither desirable nor necessary as a means of forcing Europe to change its ways.

The Grand Greek Paradox of the day, meaning the impressive rise in the assets of a nation more bankrupt than ever, is neither that grand nor that much of a paradox. There is, indeed, a simple reason that international investors are piling in to buy some of the nation’s paper assets (e.g. the freshly minted government bonds and shares in some banks), even though the country is economically kaput and its government is steeped in long-term insolvency more than ever. What’s this simple reason? The short-term decoupling of the value of paper assets from Greece’s real economy.

Take for instance the new bonds, worth €3 billion, issued last week. This new debt has been added to the existing stockpile of €320 billion for a shrinking economy with a nominal GDP, currently, around €180 billion. To service it next year alone (in 2015), the government must achieve a gargantuan primary surplus of 12.5% of GDP and use it all to redeem debt (while Greeks are in the clasps of untold misery and only 10% of the 1.3 million unemployed receive any benefits). Why would a self-interested investor buy these new bonds, in view of the unsustainability of the country’s overall debt? The answer is, of course, that Berlin and Frankfurt have signalled to investors that there is nothing to worry about. That, while Greece’s debt will be, eventually, haircut with the same probability that the sun will rise against from the East tomorrow, these particular bonds will not be touched. Indeed, they have been led to believe that the ECB (via OMT or some other pretext), perhaps with the participation of the ESM, will stand behind these bonds. Similarly with banks like Alpha and Pireus that are immersed in non-performing loans: the Governor of the Bank of Greece has clearly stated that stress and quality assurance tests should “not be too strict lest they deter investors”. Statements of this sort (by the, by the bye, former VP of Pireus Bank who moved straight to the office of Central Bank Governor) give heart to investors that new shares issued by these banks will be supported by active ‘gaze aversion’ on the part of the regulators; by a committed attempt not to look too seriously into the banks’ asset books. 

Thus the Grand Decoupling underpinning the Grand Paradox that lies in the heart of Greece’s current predicament:

  • Banks are insolvent and yet attract considerable amounts of international investors’ money.
  • The state is insolvent yet, again, investors are queuing up to lend it money.
  • Meanwhile, investment in the real economy is negative, credit is non-existent and everyone owes to everyone and no one can repay their debts, while deflation is taking its ugly toll on the sustainability of all these liabilities.

In his regular Financial Times column (13th April 2014), Wolfgang Münchau begins by giving his own, quite apt, account of what I call Greece’s Grand Decoupling. He suggests that Berlin’s strategy for declaring victory over the Greek crisis (not too unlike Mr Bush’s famous speech upon an aircraft carrier off the coast of Iraq) is simple: “let’s generate a massive financial investment bubble and hope some of the money trickles down into the real economy eventually.” Of course, as Münchau adds, “…it would take quite a bubble to get to that point… And this brings us back to the fundamental problem: who in their right mind is going to make a long-term investment in a country with unsustainable long-run debt?”

Quite. No one, is the answer. This is why, most recently, there was a single, depressingly low, bid (of about €85 per square metre) for a vast piece of prime real estate right on the riviera of Athens (the old airport at Hellenikon) which the government auctioned off in order to repay some of its unpayable debts. This is why even Gazprom was not interested in purchasing a gas monopoly of an EU member-state. It is why Greek businesses are shutting up shop and relocating. And so on.

The current Greek government’s tactic is to rely on Berlin’s New Bubble strategy and to pretend that there is no Grand Decoupling; that the New Bubble (in bond and share prices) is tantamount to real growth or to a certain path towards it. Münchau correctly disputes that. And what does he propose? He suggests that the Greek government (perhaps the next Greek government) contemplates the ‘unthinkable’: a full default on all of Greece’s foreign debt, withdrawal from the Eurozone, a new Taylor Rule for running the new monetary regime in a manner that bolsters a credible inflation target, and labour market deregulation that will add the oomph needed to give the Greek economy the necessary exit velocity. 

Where Münchau is spot on is in his implication that the current policy, of relying on an ever-inflating New Bubble and trusting in some trickle down effect, is not a realistic option for Greece. In essence, the Greek government must clash with Berlin and with Frankfurt if it is to avoid many decades of stagnation and unnecessary social misery. Regular readers of this post know that I agree with him perfectly on this. Where I continue to disagree is with the assumption that the only alternative, the only confrontational strategy available to Greece’s government, is to pull up stumps and exit the Eurozone.[1] Put differently, I do not see why Greece is confined to this nuclear option (of Eurozone exit) when the EU’s institutional setting gives its government a variety of bargaining cards that it can deploy sequentially within the Eurozone in order to convince its partners of the necessity of the ‘debt conference’ which Münchau agrees would change the parameters considerably and in a manner that renders Greece’s economy sustainable again (and which could include helpful agreements for Portugal, Ireland, Italy etc.).

More precisely, Greece can select a strategy of escalating pressure on Berlin, Frankfurt and (the decreasingly important folks in) Brussels as follows:

  • It could begin with a refusal to sign the Banking Union agreements (as it its right) which, as Münchau knows well, Europe in general and Greece in particular are better off without.
  • It could then state that, until there is substantial debt relief, Athens will refuse to issue new Treasury Bills or bonds, or indeed to accept the last tranche of bailout funds, in order to redeem the Greek government bonds purchased as part of the SMP program by the ECB.
  • Furthermore, it could escalate matters further by refusing to accept any elongation of its existing debts to the troika; an elongation that Berlin is planning to offer the Greek side this coming summer instead of serious debt relief. And so on.

That Greece has the right and the opportunity to deploy these bargaining cards there is no doubt. The important question, that Münchau and many others might pose, is this: What if Berlin and Frankfurt do not budge? What if they tell Athens to ‘go jump of the tallest cliff’? The Greek government currently claims that it has a budget surplus. While I strongly doubt this claim, I suspect that a small primary surplus can be concocted through some additional cost cutting and a leximin squeeze of top public sector incomes downwards (without affecting the lowest incomes, pensions and benefits). That should suffice to allow the Athens government to meet its needs during any medium term standoff with Berlin and Frankfurt, as the Greek state will need no financing either from the official sector or from the money markets. In short, the answer to a German “Go jump” can be: “We shall not jump but we shall stay rock solid within the Eurozone and behind our demand for a debt conference. Just watch us.”

Berlin and Frankfurt will, undoubtedly, be furious. They will issue a variety of threats, including the suspension of structural fund flows from Brussels. But the real battleground will be the banks. As they did with Cyprus, where they threatened the government with an immediate suspension of the island nation’s ELA, so too in the case of Greece they will threaten to pull the plug on the Greek banks. Two points need to be made here. First, the Greek banks no longer hold any Greek government debt, which means that their collateral with the European System of Central Banks cannot be downgraded legally. Secondly, Frankfurt will have to think twice before it issues the threat of bending its own rules to close down Greek banks – since doing this would threaten to engulf the whole of the Periphery’s banking system into another cascading panic. Confronted with such a reality, I have good cause to hope that Berlin will prefer to accommodate the Greek government and to look with a great deal more ‘kindness’ the ‘request’ for a debt relief conference. And if it does not, and wishes to bring the Eurozone down with it, let it do its worst, I say. 


Wolfgang Münchau and I are in agreement on the current situation: Greece’s economy is kaput and the German New Bubble strategy for reviving the country is certain to produce decades of unnecessary misery. Moreover, Berlin and Frankfurt will never concede changes to this New Bubble until and unless Athens confronts them. The question is: What type should this confrontation take? Münchau considers the nuclear option of exiting the Eurozone. I submit that there are ‘conventional’ weapons that can do the trick of shifting Germany away from its current position of irrational intransigence. Or forcing Germany to take itself the political initiative of dismantling the Eurozone. In this sense, Greece has no reason to volunteer to take the blame for the common currency’s fragmentation as long as there are legitimate and legal moves with which to confront Berlin’s and Frankfurt’s intransigent position within the Eurozone.

“I am not advocating exit” concludes Münchau before finishing off with the useful reminder that “Greek voters and foreign investors should however know that Greece is now in a position where there is a choice.” I could not agree more. Which brings me to the conclusion that, so as not to issue threats that Athens would not want to implement, the right choice for Greece is to deploy a series of bargaining cards that it has the right to use within the institutional and legal framework of the European Union.  

[1] This disagreement between Wolfgang and myself goes back some time. Here is a post on it dating to July 2013.

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  • I understood Münchau’s article a bit differently. I thought his major point was that now Greece, for once, has a choice: continue in the Eurozone (with or without new bargaining strategies) or opt for a local currency in an orderly manner. I think the ultimate question is what is best for Greece’s longer term future and not so much which bargaining strategies would allow Greece to better live with the Euro. I just find it very hard to see any way how the Greek employment situation will improve significantly in the foreseeable future if Greece stays in the Eurozone. At the same time, I can’t tell whether the employment situation would improve more quickly with a local currency. But my point is that both alternatives should be examined very carefully and without prejudice. In the final analysis, if and when the Greek people are well informed about each of the two alternatives, one could put the issue up for a referendum. Whatever happens, Greeks will rather soon have to regain the feeling that they have something to say about their future.

    • I am more sympathetic to Klaus rather than Yanis, but then I am against the concentration of power in Brussels and superstate concept. I believe in the nation state and a much, much weaker Brussels with very limited powers. I do not think that the EU in its present form is sustainable. The Eurozon, moreover, was never founded on sound economics. Creating debt bubbles and managing them by Ponzi schemes is not likely to have a happy end, especially in a currency zone with such rotten growth rates.

      Of course, Brussels will go ape shit over any referendum in Greece. The Brussels elite hate anything to do with popular vote. Their system is always behind doors.

      In fact, the EU is a highly repressive entity both politically and economically. The Brussels elite have few scruples to trample over basic civil liberties.

    • Klaus,

      You make the same mistake. 70% of Greeks do not want to leave the Euro.
      Do not place the burden on the Greeks, place it on Germans instead.

      I know that Germans are happy with 5% unemployment, but continuing along with the current gaps between the countries of the north and the countries to the south and east is the worse for the Eurozone.

      Time to grow-up.

  • Sorry. Not convinced, especially on why the blackmail against Cyprus cannot be repeated against Greece.

    • Two quick reasons: First, the Greek state needs no loans from Berlin/Frankfurt for a year or so (unlike Cyprus did). Secondly, because the Greek banks (unlike Cyprus’) have no Greek gvt bonds to rely upon for liquidity.

    • Yianni, Yiorgos is right here. Remember markets are driven by perception.

  • Από που βγαίνει το 12.5%, ή 22 δισ, πληρωμών χρέους για το 2015 ?
    όπως τα καταλαβαίνω πολύ χοντρά
    για να πιασθεί ο στόχος του 2022 για 110% του χρέους
    πολύ χοντρά από το 2016 μέχρι το 2022 , να πληρωθούν από τα 320δισ. -70δισ.
    ώστε να μείνουν 250 δισ .
    Δηλαδή πλεονάσματα και τοκοχρεολύσια 10 δισ. τον χρόνο, στην επταετία.
    Στο ίδιο διάστημα το ΔΝΤ, από το 2015 μέχρι το 2022, υπολογίζει ανάπτυξη κατά μέσο όρο 3.5%.
    ( 2.8 το 2015, 3.5 – 4% τα επόμενα χρόνια), για την οκταετία.
    Δηλαδή από τα 175 δισ του 2013, αύξηση +50 δισ. για να φτάσει τα 225 δισ
    ( αδύνατο με αυτή την πολιτική αλλά για την υπόθεση εργασίας).
    σχέση χρέους 250 δισ με ΑΕΠ 225 δισ= 110% του ΑΕΠ
    Αρα πλεονασματα ~10 δισ.
    Απο που βγαίνουν τα δικά σου ?

    • Από το χρονοδιάγραμμα αποπληρωμών που έχει ψηφίσει, στο πλαίσιο του Μνημονίου 2, το ελληνικό κοινοβούλιο… Τόσο απλά.

    • What are Greece’s total debt-servicing costs for 2015? That sum is the MINIMUM “primary surplus” that must be realized in 2015, somehow. Is that correct?

  • After I originally left a comment I seem to have clicked the
    -Notify me when new comments are added- checkbox and now every
    time a comment is added I recieve four emails with the exact same
    comment. There has to be a means you can remove me from that service?
    Thank you!

  • Finally, Münchau understands and recommends what I understood and recommended since years. Greece should default and get out of this mess of a common currency. A pity, that some pundit guys are on the learning curve years behind people who just apply common sense….

    As for “Berlin and Frankfurt have signalled to investors that there is nothing to worry about” is correct but only part of the ugly truth. The other part is: they gave an implicit guarantee that the taxpayers will be milked again to serve this new credit.

    BTW, your renewed proposals that and how Greece should blackmail (that’s the essence of your finely crafted wording) the creditors won’t work. I told you so already.

    • It’s not blackmail, although you can call it whatever you wish. It’s asking, effectively, “or else what?” Cynical realism is not blackmail.

    • Why do you call it blackmail? It is only blackmail when you ask for something in return. Refusing to be forced into borrowing more money can hardly be called blackmail.

    • Munchau ignores the opinion of Greeks. So whatever he writes is only good in theory.
      Yianni knows Greeks want the Euro so he is striving for communication with Germany. His error is he does not realize who is on the other side of the table.

      No easy solution here, other than Greece fighting to stay alive within the current bad system and explaining clearly to the people the situation with Germany’s policies in the Eurozone that has created a super currency and super unemployment to go with it.

  • it is beyond comprehension for a shattered and developing economy to be operating with a (strangely) expensive currency. Furthermore, in a country where the economy for 193 yrs has been driven through public spending is rather absurd to insist on government austerity w/out having achieved re-alignment of the economy, improvements in basic infrastructure and public frameworks, reasonable reduction of corruption (i.e. corruption is synonymous with human nature everywhere the only factor deters corruption is consistent and strict enforcement of laws and rules), re-structuring of the purpose of existence of universities (i.e. to produce individuals that can actually contribute to the economy not to the causes of the various political parties). Unless such reforms have started generating fruits only a maniac/dogmatic imbecile would insist and implement austerity programs and to a lesser extend stay coupled to an expensive currency.
    Κύριε Βαρουφάκη μακάρι να είχαμε και πολιτικούς με το δικό σας επίεπεδο και γνώσεις στα οικονομικά. Δυστυχώς όμως είναι χάλια το υπάρχων πολιτικό και κομματικό προσωπικό.

    • Look Yani, I agree with Antoni, and I seriously think its time for you to start your party. The timing is ripe and I am sure some good pasoktzides will help you.

  • Mr Varoufakis many wishes for happy -healthy Easter and every success .
    Are you prophet or a fortune teller?
    STRATFOR : Greece’s return to the market does nothing to resolve Greece’s systemic economic deficiencies. Instead, it enables Greece to build up more debt, which will leave it a permanent bailout state for the foreseeable future.

  • Any scheme or plan whereby Greece continues to (have to) borrow (adding to its sovereign debt) in order fully or in part to service its existing debt (i.e. to cover ‘coupon payments’) is self-destructive, counter-productive, futile.

  • There is no chance that the Greek people will support, much less, demand, such a policy of confrontation with the EZ as you propose, while you and most of your colleagues, the Greek economists—or rather, those Greek economists that are allowed to appear on TV—either exorcise Grexit or leave the predominant currency fundamentalism unopposed.

    An example of unopposed currency fundamentalism was a poll presented on the Pretenderis TV show last week, where the question “Do you support Greece staying in the Euro, whatever sacrifice it takes?” was affirmed by ~ 70% of those polled.

    The recent ECB shenanigans that you denigrated in this blog a few days ago, are a good indicator of the “whatever”s that the kleptocracy will impose on our country, in order to achieve the “national goal of the 70% majority” or staying in the euro.

    So, rushing to counter any article (like Wolfgang Munchau’s FT latest) calling for or considering Grexit, while aloofly “ignoring” the currency fundamentalism spewed by the klepto-media, distorting the populus’ political reflex, is not the best way to promote your stated opinions.

    PS. I know that you firmly denied being a candidate for the Europarliament, but I just saw news that you and Lapavitsas are both on the short list for Syriza’s ballot. The commentary was that you were the pro-euro candidate favoured by Tsipras, while Lapavitsas was the pro-drachma one favoured by Lafazanis. Your years of economic analysis typecast in terms of currency fundamentalism… all that the populus needs to hear of your ideas… Will you let this pass by as well?

  • Obviously negotiations (nuclear or otherwise) with stronger parties holding the guns are never easy, and certainly not for the fainthearted. I would like to offer the wisdom of Sam Spade.
    Sam Spade: If you kill me, how are you going get the bird? And if I know you can’t afford to kill me, how are you going to scare me into giving it to you?
    Kasper Gutman: Well, sir, there are other means of persuasion besides killing and threatening to kill.
    Sam Spade: Yes, that’s… That’s true. But, there’re none of them any good unless the threat of death is behind them. You see what I mean? If you start something, I’ll make it a matter of your having to kill me or call it off.
    Kasper Gutman: That’s an attitude, sir, that calls for the most delicate judgment on both sides. Because, as you know, sir, in the heat of action men are likely to forget where their best interests lie and let their emotions carry them away.
    Sam Spade: Then the trick from my angle is to make my play strong enough to tie you up, but not make you mad enough to bump me off against your better judgment.

    Yanni, who do you think could play this game with Mr. Scauble on behalf of Greece better that GAP did with Sarkozi etc?

    • This is the question that Yanni needs to answer. The leader that tries this risks loosing the people that elected him the minute Germany issues the euroexit threat.

    • Now it is difficult or rather impossible for Greece to toughen up its posture for two reasons. The threat of the systemιψ risk has been removed – in regards to Greek sovereign debt positions held by EU systemically important banks (hence a Greek default will not create a big dent in their capital position whether Regulatory or Economic, hence it will not create an increase in their credit spreads, hence there will not be margin calls on their OTC/repos, nor will there be a dramatic increase in their short-term funding like ABCP/interbank market, hence their Liquidity buffers will not be damaged etc.,). Second, via the “ingenious” (NOT) PSI plan so eagerly signed and touted by the capital markets “genius” (NOT) Venizelos, having transferred almost all of the debt into non-Greek law the country would face huge legal consequences should it try to default or technically default on its obligations. In 2010 the other “genius” Papandreou surrendered w/out a fight. Back then Greece could threaten and indeed could have immense substance on its threats of default. It would have caused a systemic havoc and no-one would call this bluff especially if on their side they stood to lose massively. Now it is too late and the only alternative is either “saranta xronia sklavia kai fylakh” or Plan B=exit euro and the EU. At the end of the day some of the principles of operation of the EU are at least preposterous and counter-intuitive in regards to free markets and free capital markets. For example, it is idiotic to ask from a country in the brink of entrepreneurial extinction to keep increasing taxes. Furthermore, to have to ask permission to formulate tax policy at least in relation to attracting capital inflows and FDIs. It is as if in the US a State would need to take permission from Washington before adjusting their State tax system. That would be deemed dictatorial. But perhaps strict tyrannical central planning and authority is the norm for some cultures.

  • In addition to economic threats, Germany might also deploy other weapons against Greece. One of the most fearsome weapons would be depopulation of Greece targeting those who are beneficial for German economic success.

    So, during the standoff Germany and its allies could start programs to further accelerate emigration of highly skilled/educated people from Greece. If successful, such programs could damage Greek society severely.

  • It seems that we are in the middle of a struggle. The London stock market wants an EMU break up asap. That is why they are suggesting exits, or even advocating for them. Good old Argentina style panic, only this time ten times as big. The Frankfurt stock market wants to keep inflating the EMU bubble. It will burst one day but, until then they will have made enough. Your are right when you say that we should bargain without exiting. The problem is that , first, you need to convince the majority of people. They refuse to understand basic economics, even though their life depends on that. Those of them who still have some money in the bank will be afraid of losing them and, be sure about that, that is what they will be told. If, on the other hand they have no money left, they blame the EMU for that and, they are not that wrong, are they? So problem number 1 is: convince the majority that Greece must remain in the EMU and bargain. Problem number 2 is, since you seem to like aesop’s fables, who will hang the bell on the cat’s tail? Who will bargain? The mice agree that they should fight the cat but, they are too afraid to go near it.

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