The treasury departments of the French and German banks had loaded up on GGBs - Greek Govt Bonds because they yielded more basis points than eg German Govt bonds, but also had AAA rating. The AAA was culpable negligence by Moodys, S&P, Fitch rating agencies. Ignoring the credit quality implication of the discount built into the market price of the GGBs was culpable negligence on the part of the treasurers at the French and German banks. Yes, the Greek Govt was culpable too. But the Greek people are bearing years of economic pain while the French and German banks and the ratings agencies have got off scot free because Merkel & Schauble put the fix in and parked the dodgy GGBs in the ECB.
The false data Greece reported to get into the Eurozone was an open secret, I vividly remember it being talked about extensively in Greek cafes after 2001.
the more cynical among us ahem would probably say that it borders on the impossible to accurately report data on this scale and in such amounts, regardless of intention.
It's quite far from being impossible. Actually, it's a widely known fact that a string of greek governments systematically falsified Greece's books, and it actually culminated with Greece going as far as hiring Goldman Sachs to hide their double-digit deficits.
> The false data Greece reported to get into the Eurozone was an open secret,
That's the old attempt at diffusion of responsibility that often pops up. It's the same old tired argument: once the fact that Greece did in fact cooked its books and falsified their accounting for years, there comes the argument that they still have no responsibility for their own actions because somehow.... others might have known they were falsifying their records?
It's a lame excuse, and it never sticks.
Apart from the AAA rating, government bonds also had a very low risk rating in the Basel accords (Basel I, and Basel II that just came into effect during the global financial crisis 2008).
Basically, the Basel accords specify a minimum capital adequacy ratio, that is a certain minimum capital level to support given risk weighted assets. (Capital in the bank context basically refers to equity - i.e. funding that can absorb losses without the bank going bankrupt due to debt obligations they cannot fulfil.)
Now, the risk weight for government bonds is zero! (in Basel II, they had to be AA or AAA, and it gets complicated quick, but basically...) So you can load up on them without having to increase your equity cushion.
2. This allowed banks to increase their Return on Equity, which influenced bankers' pay.
3. Furthermore, I think they were all implicitly banking on either bailouts (directed at individual banks) or a version of "The EU would never allow a member government to go bust".
So, I think everyone was in it to an extent (while formally "correct" and "safe"), cashing out merrily, and hoping for the best.
Another great book on this, by the way, is The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig.
(Funny side note: I searched "bankers new clothes" on Amazon to get the author names right, and got a page with dress shirts and briefcases.... :-)
> "The whole building is about to collapse anytime now," Tourre wrote to his girlfriend in 2007, the SEC charged. "Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
Accusing Greeks of false statistics and what-not was part of political propaganda in Greece and abroad more than anything else.
So falsifying their accounting to hide double-digit deficits as well as tehir massive debt is not cheating anymore?
Ultimately, a shared currency with nations with such disparate levels of income and corruption just doesn't work out in real life like it does on paper. Arguably, Greece could have restructured its debt and engaged in inflation with its own currency and handled this much better, but that's not an option when you're wed to the Euro. Personally, I like the idea of the EU, but a shared currency is extremely questionable.
Credit ratings are just that, ratings, not investment advice and like all ratings should be understood to be of limited value. A nation state can hide quite a bit from organizations like Moody's and every election changes leadership, so there's no static "Greece." Instead its a handful of parties fighting for power with different agendas and goals and with differing levels of corruption and incompetence with a baseline being pretty bad to begin with. Heck even senior Moody's staff were warning investors about Greece and its dealings with Goldman. You'd have to be a little thick to think that AAA rating meant no-risk. All investment involves risk.
I suspect the larger economies always saw Greece as their 'little brother' and countries like Germany had a sort of "Well, if we give them money, they'll build industry and catch up to us eventually," instead Greece blew it on pensions for people retiring at 50, questionable social programs, and other unsustainable and unwise spending.
I sense a high level of paternalism in general from other Europeans especially when I'm perceived as a native Greek when in Europe. Sadly, I think everyone would be better off if we were rougher with Greece and instead of seeing it as our tourist-friendly 'little brother,' but instead as our dishonest and thieving neighbor. I hope this current crisis has changed perception and paternalist attitudes in Europe and made everyone think about the limitations a shared currency creates.
In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”
>The difference is Chicago and Illinois can raise taxes and make appropriate cuts over the long term
Chicago, Illinois, New Jersey, federal, and most of the other governments will also be defaulting, just not by name because of course you have to prop up the bond markets. What has been happening, and will continue happening, is under investment in infrastructure, education, cuts to promised benefits (which is a default in and of itself), and inflating away a portion of it. Basically a continuous erosion of quality of life to keep the game going.
For example, California sends 180 billion in tax revenues to the fed while accepting approximately 30 billion in federal spending. In the EU this kind of thing occurs only in the single digit billions.
Are you trolling? What kind of mechanism does the EU have? How does Germany have such a high surplus if such a mechanism is in place?!
Germany should be running a trade deficit with the rest of Europe right now but it refuses to.
1. They knew what Greece was up to.
2. They facilitated it - or turned a blind eye.
3. They benefited from it.
I don't see how it's unreasonable for everyone to share the blame for this. Sadly the cost can't be shared as equally as the blame.
Because I'm pretty sure that greek governments decided all for themselves to pile up even more debt and falsify their records to hide it from the public.
Well. Yes. And even in your reformulation, it sounds like a fairly reasonable argument.
Do you really believe that? After all we have seen, do you think that Germany cares about the greeks? And they say Varoufakis is naive.
Greece has lost more GDP for more time that the states in the Great Depression, and you know what? there is not end in view to that. They can't do anything because they don't control their currency.
Everybody know that the debt never will be pay, but instead of facing that, they just "extend and pretend".
All the predictions of future growth from the Euro institutions and the IMF are wrong year after year, but they just keep doing the same. What was the definition of insanity again?
If you have an interest in Greece "being successful" you should check the facts again.
After one week of working on a stockbroking floor I was disabused of almost all the economics I learnt in school.
Varoufakis's tactic was "catenaccio" (for the football/soccer aficionados). What Italian football/soccer teams established in the 80s and Barcelona perfected in the 00's, meaning keep the ball, pass it around with no purpose to attack/defend, just delay till kingdom come. Because since we will never "win" (maintain an inefficient and ineffective economy), we will also never "lose" (progress, liberate professions, promote state transformation, reduce of corruption and cronyism).
And this is why Greece is suffering this brain-drain while at the same time the economy is struggling.
Don Quixote was an honorable figure. Varoufakis, Tsipras and the rest of the happy campers in government are just a useless gang feeding of a dying country.
Greece won the euros in 2004 as heavy underdogs playing heavily defensive, fast counter-attacking, catenaccio style football. It's not fun to watch.
You are Greek right? That kind of comparison of politics to soccer is something that many Greeks are accustomed to, hence my assertion.
Btw Varoufakis clearly states that this method was employed by the rest of Europe, not him. Feel free to call him a lier, but this directly contradicts his statement and so some proof is needed to substantiate your statement and provide more credibility to it than his.
That is what Moody's et al always said.
We are useless but you make us profit freely! Good for you, all you stupids!
What he thought (and later stated) was that people would be interested in solutions instead of blaming, finger pointing and political games.
He reminds me of a goal-oriented team member versus the team members who want so save their hides at all costs to the detriment of the company.
Would anyone be interested in bureaucratic machinations over solutions? Varoufakis' ex post facto statement sounds bitter and judgemental and to be expected in the face of his failure.
If you listen to his EconTalk episode, you get a sense of an admirable and optimistic person who, when faced with the defensive positioning of EU stalwarts, represented his ideas in a naive and condescending way that denied himself and the Greek people he represented the chance to establish trust and the proper report to begin alternative negotiations in earnest. His economic ideas might be perfectly salient but his self-introduction at the bailout talks did not represent those ideas very well.
At least he tried, for sure.
That's very poor understanding of what he did. What he said was we won't accept any more loans that we can't pay back and requested a sort of new deal for Greece which of course, included a large debt haircut.
He was never pro-Grexit. He was arguing that even throwing Greece out of the common currency was impossible, etc.
I understand that his way of doing things might confuse some people, but if you take the time to read/watch his interview his thinking is crystal clear: He wants to change the EU from within not disintegrate it. In fact he is trying to save the EU from itself (e.g. Brussels) by democratising the processes (e.g. add mics and records to Eurogrops, etc.).
Plus, I the ECB effectively closed the GR banks he had a plan of putting the ECB (Mario Draghi) against the Bundesbank. His own party kept him down stripping on of his only weapon by re-assuring the ECB behind his back that they'll not allowing him to use it. His plan was very clever.
And here is, I think, the problem. In general people don't take the time, and that's OK, but then they have not problem in having a strong opinion, that they read in some interested media.
My advice to the people so inclined is: check some of Varoufakis (and others) youtube interviews. Read a little about what is going on.
Check, for instance, how Spain was allowed to spend without consequences above the deficit limits just before the elections.
Check how, in the same way there is a limit to deficits in the treaties, there is a limit in surplus that Germany don't feel it has to respect.
Or just think how it's impossible that everybody is in surplus at the same time.
Or how all integrated monetary areas have deficit and surplus regions and that is OK because they have some way to compensate the unbalances.
For example if you read the picture The Economist paints around him, as opposed to Dijsselbloem (Dutch Minister of Finance) who is technically several orders of magnitude inferior is astonishing.
Varoufakis said that when he went to the US, at the beginning of his tenure, someone (Larry Summers?) told him that he'll be the victim of an organised campaign of character assassination by Brussels. I found this claim a tiny bit far-fetched, but on the other hand, the amount of false claims the established media kept throwing at him is amazing.
I came across ppl who thought Varoufakis as a buffoon like Trump, Boris Johnson, etc. and other political figures who can't put two words together. V is not like that at all, he is a intellectual beast, with a surprising ability to simplify rather complex ideas.
He had a plan (allegedly it was a Plan B) for the exit of the Euro if Brussels (actually Berlin) continue with the craziness. The Greek primer minister decided not to continue with the plan and he resigned as finance minister.
The primer minister could be accused of cowardice, but we have to understand that Greece was threaded with the shut down of its financial system in what, in the opinion of a lot of people, was an illegal movement by the ECB (1). It was a really difficult decision.
That's sort of my problem with him though. I don't think of him as either a hero, or a jerk, or a guy doing his job, but simply an idiot. He was trying to bluff with a hand that everyone knew was empty, and of course it didn't work.
Stathis Kouvelakis, a member of Syriza's Left Platform faction that later split from the party, had this criticism  about both Varoufakis and his successor Tsakalotos (another economics professor), which I think has some truth to it:
Tsakalotos said he was very disappointed by the low level of the discussion. In the interview to the New Statesman, Varoufakis says very similar things about his own experience, although his style is clearly more confrontational than Tsakalotos's. From this it is quite clear that these people were expecting the confrontation with the EU to happen along the lines of an academic conference when you go with a nice paper and you expect a kind of nice counter-paper to be presented. I think this is telling about what the Left is about today. The Left is filled with lots of people who are well-meaning, but who are totally impotent on the field of real politics.
This is telling about what the Euroarea is about today.
I suppose, at least it's a good thing if those naive professors, now that they are not so naive, explain the rest of citizens how the system really works.
If it wasn't for the group of clowns that constitute the current government and gave him the keys to the economy, nobody would give a flying fuck about what he says. He's a second rate economist at best.
By doing what, exactly? The country was bankrupt. In such a situation, the only sensible thing to do is default. Instead, Greece will be a 3rd world country with almost no public assets, and mass unemployment for decades.
Regaining competitiveness through decades of internal devaluation is, to me, far less preferable than default. What Greece was given was like Versailles on steroids.
And to make it worse, it's going to happen again, and again. I'd say we're due another club-med crisis any moment now. http://www.zerohedge.com/news/2017-02-26/european-debt-bomb-...
And all to save a few German and French banks, because politicians feared the results of telling them "you wanted to play in the casino and you lost, now the money is gone" after Lehmann.
The origin is that banks can lend money without any risk. End of story.
Banks get interest for various reasons - one reason is risk of not seeing the money again and that has to be a real risk or banks will just lend money without thinking twice.
By what mechanism? Each round of cuts drives up unemployment and poverty, and cutting expenses hasn't solved the deficit because trashing the economy has destroyed tax revenues.
The first few rounds were rationalization, but they were too little too late. At this point the deep restructuring that's still needed is unapproachable - it's too slow and too unpopular, and the economy is already too weak. The recent cuts haven't been sensible and structural, they've been deadline-beating short-term moves to unlock a new tranche.
Germany gains from this, certainly, but by making an example of Greece. It deters other high-debt Euro nations from getting into the same state, but it's not moving Greece closer to functionality.
No, it hasn't. The "primary surplus' doesn't include any debt repayments.
If fact, I think that, as the data show, it's in the same league of 'Trickle-down economics'.
By the way, how injecting money in the hands of a chosen handful and taking it from a country to try to pay back can make a viable and competitive economy?
The problem here was cashflow; defaulting might save you from more loan payments, although actually doing it is quite painful under international law (see Argentina). But Greece needed to take out further loans in order to meet immediate public funding needs - and defaulting would have prevented that, or made it much more expensive.
I've turned this over in my head a number of times. None of the options are particularly pleasant, but it's not a good idea to pretend that defaulting would have been trouble-free.
Obviously Greece needs a balanced budget for defaulting. Too bad it seems to be moving the other way.
I'm not sure it was possible - the deficit was too big to close without damaging the economy - but I suspect that leaning on international support while preparing an easy default might have been the best chance.
Furthermore, you can't just default on the debt just by saying so. There's a naivety among mostly Greeks that just by going back to drachma and defaulting on our debt will magically solve all of our problems. In a country that imports pretty much everything that would be catastrophic.
Varoufakis never came up with a plan. He admitted that there was no substantial alternative about converting into drachma. All that he did was playing bluff for six month, dragging a whole nation under his ideology. Then he moved on to greener pastures, not giving a fuck about the havoc he wrecked with his actions.
He can act as a smart-ass all he wants in his books, but we were here and we experienced first hand the results of his reign. Once we get rid of this charade of imbeciles that act as the government, he and many of his former colleagues will end up in jail for their actions. There he will have plenty of time to write memoirs.
Well thinking from a trader perspective, by defaulting and going back to the drachma (and leaving the EU), Greece would have more flexibility wrt what goods they can import and from where compared to now with all the restrictions on trading that being within the EU imposes.
Combine that with land access to the rest of Europe, I can imagine a prosperous almost black market for such goods that would provide much needed inflows of capital to the Greek economy (outside of selling junk sovereign bonds and hoping pensioners die faster).
But I guess the consensus will be in favor of trying continue to squeeze blood from stone until there is none left. And when it gets that far, compared to the threat of cheaper citric acid, steal, etc imports hurting "blessed" EU suppliers, you'll have surplus kalashnikov's coming in from the ME, which I guess is even more profitable for traders ;)
yeah no, that would be equivalent to being kicked out the EU. Greece tried to use some leverage with refugees and got some money in return but that's all. Also, COSCO has already acquired the port of piraeus so there is an asian connection already.
Has there actually been any country that's been and/or in the process of being kicked out the EU (besides threats wielded in media and talked up for ad-views)?
How do you reconcile them willing to kick out Greece but trying to put a multi tens of billion euro bill on the UK for leaving the EU? Would Greece be demanded to pay a similar bill when kicked out and actually pay such? (We already know the ability for them to pay such a bill).
What about all the northern countries running a surplus to Greece, what would happen to those companies special positions due the trade restrictions in their favor?
I really doubt the folks in Brussels want at situation like that to happen, nor do I see them having absolute control over what comes in from customs, in every country, much less in any one in particular.
>Also, COSCO has already acquired the port of piraeus so there is an asian connection already.
Not really sure how to interpret what you mean by "asian connection". So having one state related shipping company from China, now satisfies all the demand for people trying to import into Europe from all over asia, as if every trader must some how just use that port/company? Besides, the issue isn't technically with shipping things, its actually having it cleared to leave the port to the buyer with the right paperwork.
At the same time other countries which are not on the brink of collapse are prepared to face an eventual break up of the Euro (e.g. LePen winning the elections in France) and the only who doesn't have a plan, and God forbid it comes up with one, is Greece...
Pretty much how it is everywhere wrt having an actual discussion of practical options on the table (setting aside juicy ad revenue) that might not favor those whose social economic status puts their heads first in line on the not so metaphorical guillotines at some point ;)
I think the citizens of Greece should take page out of the Victoria Nuland play book.
I mean if I had means to be able to talk to the all the pensioners I would:
- advise them the reach out to any of there family/friends who have (decision making) roles in customs/commodity importers w/ decent import volumes from other EU countries
- work out a deal where they buy their materials from cheaper non "market economy status" places + flag them through while discontinuing imports from their northern neighbors (already profiting here, because cheaper)
- then pooling their funds and shorting companies/securities with the largest exposure to their non buying before earnings calls, and close out shorts soon after. (profiting on the other end, because why not? but you have to liquidate short positions before the ECB printing press comes to the rescue :P)
Just because some of us don't agree with defaulting it doesn't mean we're in the elite or we're serving some agenda. Please, you can do better than that.
You're confusing Varoufakis with Leventis. Varoufakis, to this day, is always put under unjustifiable strain by the Greek media.
As far as your previous post, it's so mis-informed and ill-conceived, that the fact that you have a right to vote in my country scares the shit out of me.
> Just because some of us don't agree with defaulting it doesn't mean we're in the elite or we're serving some agenda. Please, you can do better than that.
Of course I can, but you're a .NET developer! So I'm not sure you could follow through even if I did :-P
ps. Jokes apart, I understand there are many different opinions in a democracy and I respect that. Let's agree that we disagree...
Sure, only people who agree with you should vote. I find it quite ironic that this comes from someone who supports a leftist government.
As for being misinformed, you could provide something useful to the conversation by arguing with facts. Because all you've done so far is attacking me personally. Isn't it his fault that we have capital controls enforced? Six months before he took charge the banks were open and working just fine.
Maybe when dealing with an unsophisticated or under-informed borrower which the sovereign states in question are not.
When I take out a loan a bank usually asks for collateral but these loans to Greece are unsecured and not worth paying back. The banking system should have been left to fail but instead we live in this world where governments bailed them out. Capitalism for the poor and Socialism for the rich.
And not only that, I will be morally right. What amazing times we live.
Default is not a solution to repay a debt. You can choose to default, but you can't expect any credibility later. The message Varoufakis sent to Greeks was: "Let's just say we don't want to pay and everyone will forget about in a couple of years."
The solution he proposed to the EU was rejected and the next day was applied by the letter on Ukraine.
Plus being accused of talking macro-economics on a Eurogroup should be like accused of liking basketball at an NBA playoff game. But then again, if the room is full of politician, who don't understand the first thing about economics and just blindly execute, that's what happens.
The only way to get financing is by debt restructuring. It has happened time and again. You'd be amazed how many countries defaulted the last century. I think Germany defaulted twice.
When politicians stay it's always "bah, bah, no one ever takes responsibility". Now, someone took responsibility and it's "bailing on Greece".
* Jah-Rule on fyre festival: "this is not by fault but I take full responsibility"
* Hillary Clinton on losing election: "this is misogyny and fake news fault but I take full responsibility"
* Heather Bresch on Mylan price gouging: "The real fault is in the supply chain but I take full responsibility"
In Greece, I know of NO politician in 50 years, who retired promptly when his views and gov's views stopped being aligned.
So regarding Greece, that's a huge deal and gives him alone more credibility that the last 10 Greek governments put together.