Yanis Varoufakis calls out extend and pretend

New Greek Finance Minister Yanis Varoufakis calls out extend and pretend with superbly simple logic:

 

Houses and Holes
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      • Those are two separate issues.

        OR is redirecting interest payments into the local economy more spending?

      • Bankruptcy of a nation can be dealt with by debt forgiveness.

        The idea that the citizens of a country should be held hostage by lenders to their government is barbaric.

        Governments should not issue public debt to foreigners and any foreigners who buy debt issued by governments should accept that their speculations are always at risk.

        If a government wishes to permit productive investment by foreigners in an economy it can do so with careful regulation of direct foreign investment.

      • “OR is redirecting interest payments into the local economy more spending?”

        Yes, it is. Greece has always had a structural deficit and has always defaulted. In fact if we applied Pfh´s dictum that “Governments should not issue public debt to foreigners and any foreigners who buy debt issued by governments should accept that their speculations are always at risk.”, we would have to accept that, for borrowers, there are also consequences. Greeks, the electorate, would have to accept 0 deficit and be self-sufficient fiscally. They would gain competitiveness much faster than through internal deflation, but dreaming that it would be less painful is dreaming a lot. They could take a leaf from Australia and sell it in bits though. They have many islands. Maybe Russia could do with a Med base.

        To make it clear, I am all for Greece to call it quits and make an orderly exit. Default, reset and rebuild. The problem is that it is hard for people to live within their means and even harder for people (any nation) to pare down.

      • No dreaming involved.

        Exchange rate devaluation or internal devaluation with ongoing national debt servitude.

        Both involve plenty of pain.

        The latter is simply less productive and more likely to result in the same situation happening again.

      • Phf:
        “No dreaming involved.Exchange rate devaluation or internal devaluation with ongoing national debt servitude.Both involve plenty of pain.The latter is simply less productive and more likely to result in the same situation happening again.”

        So…. we are saying the same thing. There is pain either way. We can pretend one pain is better than the other but the reality is that either way Greece is cooked. Alas Syriza (and by default its voters) doesn´t want that. They want, debt forgiveness and more funds from the EU. Greece would probably be better off outside of the EZ, but how do you tell them?

      • “…hey want, debt forgiveness and more funds from the EU. …”

        That is a sensible approach.

        There are plenty of Euro-philes who love the idea of a European Mega-state and do not want Greece to jump ship.

        The new Greek govt sensibly is talking about a nice big hair cut and ongoing access to EU cash in order to stay – delivered with a tough screw you tone.

        If they don’t get that or Brussells calls their bluff they can move onto other options.

        Only a mug would stay in the EU with those European Bank accounting entries driving one into the ground.

        I have a feeling that Brussells will cop a big fat hair cut on Greek debt rather than the ugliness of a Greek departure.

        And why not – they are running the printing press buying up bonds anyway.

        A few hundred billion of Greek Debt bonds that they can feed into the shredding machine will not be a problem. The money they print to buy them will just congeal in the reserves of the banking system that owns the bonds.

        Of cause they might want to think twice before loading up the Greeks with cheap debt in future.

        But bankers never learn when the taxpayers makes them whole so that is unlikely as well.

      • Pfh

        The French may go for keeping Greece at all costs but the Germans may prefer to cut their losses. This time it is Greece, next Italy. Time will tell but I have a feeling that Germany will open the door and wave goodbye. As for blaming the Germans for Greece being Greece, that is just weird, although it may fit with your world view, I don´t know. Greece could have gone Iceland (with all its consequences) but instead went for the loan. Suck it. You mess with the bull, you get the horns. If now you find the conditions tough then quit. Banks collapse, sell whatever assets are worth selling, cover deposits if you can and dwell in tinancial limbo a few years. It is the correct thing to do but I wish you luck selling that to the Greeks. Heck, with Cyprus all hell broke lose a MB! “How dare they touch deposits” some said. And why not? Bank deposits are insured to a point as long as there is money to cover the liabilities. The world before “socialized losses” was like that, but it seems nobody wants to understand it. And BTW, I would be more than OK with that. I just like to point out the hypocrisy of governments and the electorate they represent, even little ones like Greece.

      • Gotta say – Jason is spot on! Without reform Greece just goes on doing what it is doing into yet another debt crisis. At some stage somebody will get a bit sick of sinking their savings into them.

        Anyone thinking that the sort of devaluation Greece is facing, if it told the EU to stuff itself, will not be very very painful (to the extent of gross civil disorder) is delusional.

        Maybe we’ll get one more kick of the can but that is all it will be.

      • @JasonMNan,

        Blame should be awarded to those that concocted the derivatives which allowed Greece into the EU, both the sell and buy side.

      • If that spending improves your earning capacity. eg education leading to better job and then buy out of bankruptcy. Then yes.

        Or to turn it around. Your debtor is unable to pay and the debt is not backed by assets. Do you ?
        a) keep lending them money if they promise to continue on a below subsistance income. (current plan)
        b) force them to bankruptcy take what you can and write off the rest. For a country this amounts to default and Grexit.
        c) negotiate a reduction in debt and repayments to something they might be able to pay.

        under a) their ability to repay the debt gets decreases gradually and you probably end up with some interest payments in the meantime and eventually a larger unpayable debt and having to go to b or c. Really only sensible if you can convince another sucker to take on some of the debt while you stall for time.
        b) you probably don’t get a lot but it’s cleaner and the uncertainty and risk come to an end. And your victim gets to recover to one day be lent money they might acutally be able to repay.
        c) usually the option that gets you the most money but idealogically impossible for some creditors.

        plan a is working nicely for the powers that be but for the actual people of europe (including the germans) b is better and would be best.

      • Skippy
        “Blame should be awarded to those that concocted the derivatives which allowed Greece into the EU, both the sell and buy side.”

        Agreed. But the Greek electorate as well. When money rained from the sky nobody cared about the source, or the fact that competitiveness was going down the drain. They cared about new flashy cars, a second house in the beach and holidays abroad. Sure, banks deserve to lose, but to claim that the people who took the loans to get rich quick and spend like a sailor were innocent bystanders is asking for the same later. Call me Scrooge if you like but the Greeks need to go to be schooled on the value of money.

  1. Its a shock to hear a Finance Minister speak so frankly.

    It is too early in the morning. And it is a bloody shock!

    Best of luck to him.

      • Spot on R2M and here in Aus the art of bullshitting is a finely honed skill. Ref to the movie The Dish…”you just lied to NASA.”….”no mate I just bullshitted”

  2. He speaks well with great clarity.

    Probably all those years in Australia observing our high quality finance ministers has helped. /snark

    A sensible approach requires a large amount of Greek debt to be written off.

    It is that simple if the Euro-philes want to protect their mega state dream.

    Varoufarkis sounds like the best last chance for common sense to prevail.

    In typical fashion Brussells will probably deliver less urgent haircut and a more elaborate bee hive reliant on a truckload of gel and hairspray. Watch out for the rain.

  3. Wonderful to hear from such an intelligent, knowledgable, clear sighted, no BS leader. The Germans/Troika have just met their match.

    • Indeed. Good chance they are putting together a hit squad at the moment.

      Clear logic that cuts through BS is infections and it wont be long before citizens in Spain, Portugal and France realise they have been unfairly repressed.

      • citizens in Spain, Portugal and France realise they have been unfairly repressed.?????

        Everything is always somebody else’s fault. They are where they are because they have, over a long period, consumed more than they have produced.
        So what do they do? Withdraw from the EU? The what? They will find out what real austerity is.

  4. “blogger Irate Greek reckons Greece’s new finance minister told a reporter outside the presidential parliament that he’ll see Mario Draghi, ECB chief, on Friday.”

    — Theodora Oikonomides (@IrateGreek)
    January 27, 2015
    Journo: What will you tell Draghi tomorrow? Varoufakis: Nothing. Journo: Whyyyyyy? Varoufakis: Coz I’m seeing him on Friday. #TrueStory

    🙂

  5. bernard collins

    Interesting that george babouras said on switzer last night “all the wealthy greek people have taken thier money out of greece a long time ago and they need to bring it back now”.

      • Rent Seeking Missile

        First year economics, first semester, Sydney University, 1993.

        First ever lecture I attended.

        He was superb. His approach of critically examining the claims of mainstream economics, which most economists take for granted, made a strong impression on me. He’s going to take the mindless bureaucrats and politicians of the ECB and EU to the cleaners.

        Also, at that time he had a pony tail and was into power-lifting. Made quite an impression on the young women in the lecture hall.

  6. “The solution is straightforward: default on all debt by no longer making interest payments. There is no way Greece can pay back the $240 billion of current debt, and the sooner that the delusion that this can be renegotiated to preserve the oligarchy is smashed, the better. As for the big threat of kicking Greece out of the euro currency–since most Greeks are already impoverished, how can they get any poorer? The reality is poor countries prosper by making their goods and services cheaper via currency devaluations, and by paying a healthy rate of interest on capital so capital is attracted and invested productively, as high interest rates make speculative, marginal gambles soberingly risky.
    (CH Smith)

  7. Well, good story tough talk, but he is cap in hand, up against the Germans, who are holding all the cards. More important than this discussion is that the DOW was down over 400 pts at one stage over night.WW

    • He isn’t cap in hand. His position is governed by mathematics and there is no higher authority. The bond holders position is untenable and the debt will not be repaid. The only question is How much will they will lose.

      • Greece has a structural deficit of (as of last night) over 7% (they signed in some new spending which effectively doubles it). If they were self-financed, yes, they could say stuff you. But how can you say that and the next sentence be “…and our next cheque will be coming when?”

      • Varoufakis has little to no leverage. Greece is a basket case and will be insolvent by March.( must repay €3.4bn to the IMF by 28 Feb) If the European Central Bank( ECB) fails to support Greece, they then return to the Drachma and immediate crisis .
        All the smart money has bailed, probably to Switzerland, before the peg was pulled.
        Barclays estimates the outflow at €20bn approx 12pc of GDP.
        The sword will fall in July and August when Greece has to repay €7bn to the ECB.
        Greece is just not viable, GDP has shrunk 26%pc and the youth jobless rate hits 62%.
        My call is that Greece is a bridge too far and should be cut loose.
        Losses on any current debt will probably be the least. Should Greece have the capacity to survive we will know by mid year WW

      • The Greeks haven’t anything to lose. Threats of foreclosure are meaningless when there is no money to extract. Back to the drach.

      • @ WW

        Greece has enormous leverage – Greece can simply not pay.

        In the end creditors are only interested in getting their money back, and if that means taking haircuts and foregoing interest then that’s what they will do.

      • “Greece has enormous leverage – Greece can simply not pay.In the end creditors are only interested in getting their money back, and if that means taking haircuts and foregoing interest then that’s what they will do.”

        That only works on existing debt, not the structural debt that still needs financing month by month. It is not just the monies you are owed, it is the money asked in the future as well. The only way Greece will get a deal is if they agree to reduce their deficit to 0 and repayments are delayed again, to say 2020. Pretend you will pay your debt and at the same time prove you will not incur anymore. Otherwise, it is better for bondholders to cut their losses. So Syriza´s “End of austerity” is only half true.

      • @ PF. My call is that Greece is trying to stay under the umbrella of the Euro. To stay with the Euro they have to put a proposition to those from whom they have borrowed, nearly 200% of their GDP.
        Should they decide to not make the repayments, they will revert to their old Drachma, and will not have the goodwill of the power brokers of Europe, the Germans. The Country will certainly collapse. The hard times of WW2 will seem like a summer picnic.
        Everyone knows this. The instruction to Greece will be pay up or piss off.WW

      • @ JasonMNan
        Yes I see your point, but Greece may well have the cashflow from normal streams required to maintain their country if they are not burdened by debt.

        The exact situation is way too hard for us to know from afar, and in fact even the new government will be struggling to come to terms with the exact financial position that they are in.

        It will be interesting to watch, because it may then become a model for other periphery EU states.

        The question that Germany has to ask is if the EUzone was dismantled and they again became a separate state, what would the value of the DM be and how competitive would they be in the marketplace, and how much would that cost them in the long term.

      • PF

        Greece has never had normal cashflow since the time of the triremes. They borrow, they default and they start again. As for the unpayable bailouts, they are supposed to start paying in 2016 or 17, can´t remember. Their current predicament is on the current expenditures alone.

        “…because it may then become a model for other periphery EU states.The question that Germany has to ask is if the EUzone was dismantled and they again became a separate state, what would the value of the DM be and how competitive would they be in the marketplace, and how much would that cost them in the long term.”

        That is the problem. Syriza is leaving very little wiggle room to fit a “kick the can” approach. They want everything reversed. Forgive the debt and keep the cheques coming. Showing them the door might be preferable. The idea that a territory cannot leave a common currency area doesn´t pass the laugh test. Although I concede it might be costly, the germans might feel that the cost is easier to justify to their electorate.

      • Maybe nothing, certainly not much. The adjustment would be great. But as WW points out, it is disastrous already. Continuing on the Euro path has no future if all it means is paying debts that deprive young Greeks of a future. They just come to Melbourne with the Spanish and Irish.

        Either way the bondholders are burned.

  8. Looking forward to his tenure and if he can effect change for Greece but also more widely as he has called out the absurdity of the Euro, in the face of German/French intransigence.

  9. Fun fact everyone, Yanis used to work for Valve – a popular video game company.

    “Almost three years ago Valve hired an economist to analyse and direct the Steam Market. Yanis Varoufakis was going to chart the sale of Dota 2’s vanity items, the purchase of Counter-Strike weapon skins, and try to understand why the hell everyone was buying hats.”

    http://www.pcgamesn.com/valve-s-economist-may-become-greece-s-new-finance-minister-fear-the-hat-event-horizon

    – DOTA player here

  10. We all agree, Greek Bond holders will need to take a haircut.
    “a little of the top, please”
    ……”sorry sir, this is the Army, we only do short back and sides!”

    • We all agree on the haircut, I just don´t think the ZeroHedge brigade at MB understands that the austerity is not going away. It will be a shock for some when it lands in Oz.

    • Derivatives are senior to bond holders if memory serves.

      Mig-i … MMT does not inform policy, derivatives are a creature of the free market posse.

      Skippy… reminiscent of your stance on AGW and other issues imo.

      • migtronixMEMBER

        Skip-i MMT is a creation of the free market.

        Ideological obsession stops your cognition.

        Or maybe just boomer dementia

      • No MMT is an act of law by the state where as free market ideology is an off the shelf ideology funded by corporatist and as you should know…. constantly tweaked in a failed attempt to get it to perform.

        Granted the state is currently suffering what Galbraith pointed out in The Predator State.

        Any glitches are blamed on everything else… like boomers.

        Hint… generations have no agency.

        Skippy… Kant Can’t…

      • migtronixMEMBER

        Kant can’t, but Aristotle does the can-can.

        When you get better at quips let me know eh?

      • Both are from dark antiquity’s navel gazing experiment, I give them both the same about of relevance it duly affords and nothing more.

        As your a practitioner of said dark arts and incantations I afford the same relevance to your opines.

  11. General Disarray

    It sounds like he’s going to use the ECB printing program as a bargaining position. Fair enough, too.

    Ridiculous situation. ECB is going to print as much as it takes to get inflation while they expect Greece to stick with “extend and pretend”.

    Yanis’ middle finger should rightfully get a good workout over the coming months.

    • Hopefully he will present a sensible write down and repayments offer which would benifit both parties far more than the current delusional behaviour.
      After their ideology rejects then get out the middle finger and take the hard road out of Europe. Still less painful and faster than the slow bleed out they currently have.

  12. That was just awesome.

    She was just having a crack at him, and, unperturbed, he used logic and simple maths to make the German/Austeriticks position sound just silly.

    Speaking to the common person, who understands expenses and income.

  13. Brief piece of Troll food for opponents of MMT.

    Greece currently has one currency for both internal and external transactions – the Euro.
    So instead of devaluing their currency their massive trade deficit is being felt through other mechanisms which lower Greeks real wealth in terms of Euros. Which means not only more expensive imports but also more expensive food and shelter.

    A Grexit would return them to two currencies, internal and external. They can print the local currency but have to buy Euros or dollars or pounds to trade. Their deficit results in devaluation and expensive imports and cheap exports. Hopefully making their tourism and other exports both competitive and profitable. It does mean a kind of austerity in doing without a lot of imports as they are just too expensive, but its better than not eating. Unless those imports have price elastic demand like food then your Zimbabwe and it’s inflation city MMT or not.

    Meanwhile the massive debt deflation internally can be fought by government spending to fill the demand gap and hopefully invest to improve things. Competition with government for resources may inflate some prices but where spending is on unused labour or goods with elastic supply that won’t be a problem. expect some inflation. Although wether this is bigger than the defaltionary pressure from the debt remains to be seen and depending on how well the government manages the recovery.

    They still have the structural problems like massive rents to the rich that have to be fixed or further pain.

    Its not a magic bullet but it allows some solutions impossible in the alternative money theories. A bit like neoclassicals can’t even conceive of writing down debt as being sensible or even an option.

    Thats my thoughts on it anyway.

  14. Varoufakis handles these mindless media peons with aplomb; much like a University Professor would handle a first year undergraduate who thinks they know everything having finished High School.