The Euro crisis – Euroland should be bearing gifts to Greeks.


                There are three possible ways of handling the Greek phase of the running Euro crisis.

1. Muddling through – or Pretend and Extend. This is the way favoured by the current Euro establishment. Greece is offered loans on special terms from Euroland members and the IMF in return for promising to make major cuts to spending, increases to taxation, and to sell assets.

2. Devalue and default. Greece could withdraw from the Euro, establish the drachma again, devalue, and come to an agreement with  creditors about how much of past debt will be repaid, and on what terms.

3. Press  on to political union for the Euro zone. The richer areas within the Union would then have to send more money by way of grant to the weaker areas, including Greece. Greece would have a budget controlled or influenced by the central Euro political auithority, and would be able to benefit from the common interest rate for borrowings that were part of the Euroland budget.

          Today I wish to explore Pretend and Extend, as this is the main option on offer. Its attractions to the political establishments of Europe are obvious. It delays having to take the losses on Greek sovereign debts. The authorities can still pretend that banks that have lent to Greece on favourable terms will get all their money back on time. It leaves open the chance that Greece will sort out its domestic economic problems sufficiently to be able to borrow again in the normal way from the markets and banks. It does not require richer Euroland members to have to send more grant to Greece, which their own electors might oppose.

             Many people in the markets are sceptical. They do not see how Greece can get back to a credit worthy position. They point out that the first loan package was meant to buy enough time for Greece to sort herself out, but it has not been successful. Every addition to the Greek debt mountain makes future budgets that much more difficult, as the interest rate bill is constantly rising.  The authorities can pretend that the banks have not lost money on their Greek loans, but if they were to mark them to market – value them at today’s prices – they have already lost a lot.

          The Greek people are not impressed. They think they are being asked to sacrifice too much as they see the tax rises and the spending cuts. The Greek government was unable to hit targets for reducing the deficit in the first half of this year. There are serious questions over how successful its latest austerity programme will be. There are doubts that it can raise as much money as planned from asset sales, as Greek assets are not popular at the moment. The protests of the Greek people against their EU and domestic governments make Greece a less attractive place to holidaymakers and investors.

           The Greek recovery plan needs a lively pace of economic growth. Greece is restricted in seeking this. It cannot devalue to price itself back into world markets as the US and UK are doing. It cannot create extra money to stimulate activity. Its banks are losing deposits, as savers withdraw their money in fear of adverse changes to their wealth.

           If Euroland is determined to save Greece from within, they need to sit down and hammer out a new plan. Pretend and Extend on its own delays but does not resolve the crisis. This may well require EU intervention to an even greater extent in Greek budgets and EU involvement in the implementation of a deficit reduction programme. It also needs changes to Greek banking and to policies for growth and enterprise to give the Greeks some chance of working their way out of the problem. It would help if the Euroland area accepted more of the responsibility for funding Greece, by sending more grants to her to offset the adverse consquences of the currency on that part of the zone.


  1. lifelogic
    June 23, 2011

    Pretend and Extend is clearly the EU’s chosen route and it will continue to delay and Greek recovery and cause pointless harm and unrest there. Let us hope – against all expectations that the Cameron & Osborne have nothing whatever to do with it – these idiots with (Darling’s help) have already thrown enough cash down this drain. A few billion lent to UK businesses is what is needed (and some business friendly policies for once – not just his usual hot air followed by more regulatory attacks on business and an ever increasing parasitic sector).

    Good to see the proposals to allow non doms to be allowed to remit more funds to the UK for investment in business and the rather clearer revised residence proposals. (So on the plus side Hip packs (in part) removed the M4 bus lane and this) – not much for over a year!

  2. norman
    June 23, 2011

    Couldn’t we combine 1) and 3)? The Greek islands could be made a modern Crimea where the ruling class could establish their holiday Dacha’s and this would allow us to justify continuing subsidies to Greece?

    As this would have to be paid for by taxpayers the odd Stakhanovite would have to get sent there to show we’re all in this together but if we sent them off-season and kept them out of the way (and downwind) I’m sure it wouldn’t be too bad.

    Utter nonsense? Of course, but then I thought I’d stick with the quality of opinion our leadership have so far offered during this building crisis.

    Talk about sleepwalking into disaster.

  3. Duyfken
    June 23, 2011

    The steps you chart indicate a path to the third alternative: political union, since the fiscal control which the EU/IMF would be imposing must surely so emasculate the Greek legislature as to make it little more powerful than a local council.

    I look forward to your discussion of the second alternative and hope you can explain the mechanics that a withdrawal from the euro and re-establishment of the drachma will entail.

  4. lojolondon
    June 23, 2011

    Send them grants?? to cover 50 Billion Euros per annum? That is what they tried last time. That is why the Euro is bad and the EU is bad. It is a communist system that only works by taxing and granting and legislating. So it is a failure and if the crooked politicians we vote for were not feathering their own nests it would never have got as far as it has. For an MP to support the EU is, after all, treason.

    Reply: I repeatedly say the UK should be no part of Euroland and pay none of the bills.

    1. Scottspeig
      June 23, 2011

      Yes, but you are only one MP lead by a non-conservative.

      1. Mike Stallard
        June 23, 2011

        This government is in no sense Conservative as the Labour have been trying to pretend. It is a Coalition.

        The deputy Prime Minister and several other cabinet ministers with important portfolios are Liberal Democrats and they are firmly in support of the EU. Indeed, in the case of the Deputy PM, his pension and, perhaps, his future, depend on being nice to Brussels.

        Our host is a true blue Conservative and is, therefore, not really in this discussion. He just tells it like it is.

        1. Jon Burgess
          June 23, 2011

          Yes the Deputy Prime Minister and other Lib Dems are Euro fanatics but they are not the problem as we all know where they stand and at least have the honesty to openly declare their

          It’s the Conservatives (Mr Redwood and a precious few other notables excluded) who have consistently been exposed as the snakes in the grass who say one thing in public when seeking your vote and then rub your nose in it by dishonestly doing the opposite when in power.

          Who started the whole nonsesnse off in the first place? Who signed us up to the Single European Act, Maastrict, and the ERM? Always it goes back to the Tories – that most eurosceptic of the major parties (if only) – and Cameron and Osbourne are looking every bit as likely to stand up for UK independence as Ted Heath.

    2. Iansk
      July 13, 2011

      All these (colourful adjective-ed) Euro MPs do not give a hoot, if you think our (same adjective-ed) MPs were getting good pay and expenses. Go and find out what these lot are on.
      They are all the same (people taking too much pay and expenses from the public purse-ed).
      How many MP do you think want to do the job because they love it.
      I hope i am wrong, but i see civil unrest.
      These so called government’s can not see it coming, they do not have first hand experience of life on the streets.

      Reply: there are peaceful means to get change in the Uk which should be used.

  5. Richard1
    June 23, 2011

    What is your view of the argument (prevalent in Brussels & echoed by some banks) that Option 2. is unthinkable as it would lead to ‘contagion’ in Portugal Ireland & maybe Spain and a major new Lehman-style financial crisis?

    Reply: A managed debt rescheduling is the least bad option, and needs to include provisions for other states and bank debt at risk.

    1. Richard1
      June 23, 2011

      I agree with that. Kicking the can down the road means a more painful reckoning in the end.

  6. alan jutson
    June 23, 2011

    Pretend and extend just delays the inevitable if you are in as much financial trouble as is reported.

    The fact of the matter is, action is too little too late to make much difference.

    Perhaps they should encourage Ed Balls to join them on a free transfer, he seems to have all the answers about future growth and growing debt.

    The Greek Government as representitives of the Greek people, now need to take action that will be in the best interests of Greece, and forget about their EU masters,

    The Greek people (and others) need to understand that you cannot live forever beyond your means, wanting the government to provide a whole range of services, without a reasonable level of tax to pay for them.

    The public services need to understand that no job is for life, and no terms and conditions of employment can be fixed for ever, no matter what the circumstances.

  7. alan jutson
    June 23, 2011


    Just a little off topic, but am I just begining to see in one or two areas that a few reporters, are now just begining to see what you have been reporting here for the last year, that government spending is actually increasing, as planned, that drastic cuts are really very low.

    A few reports of late seem to be just mentioning the above.

    Is the penny at last dropping, or is the cat getting out of the bag ?

    Real problems ahead for Cameron if there is no real deficit reduction !

  8. Brian Tomkinson
    June 23, 2011

    Perhaps you would remind us what measures the Greeks have actually taken in response to the first loan package. I was under the impression that there has been plenty of talk but little action (just like our government here).

  9. Javelin
    June 23, 2011

    John I work at a hedge fnud, before that I looked after CDSwaps at HSBC – the facts are Greece, Ireland and Portugal cannot and never will be able to afford their debts. That is the reality. Having said that it doesnt rule out any of the above options – it just makes them more extreme.

    You are absolutely right in saying Euroland needs a new, and more radical plan to deal with this. A more honest plan that presents the facts and solutions in an upfront way. I think the FIRST step is that they need to make it clear to tax pays (and the world) WHY they are putting tax payers money into the Greek bailouts – when prima facie – 50% of it will be lost at some point on a haircut. The unelected Euroland politicians needs to be more upfront, not less up front, because they are unelected.

    I spent a few hours yesterday reading the Greek news and social media to get an idea of the dynamics in the Greek market. After filtering out the naive, the crackpots and the stupid. I’ve drawn the conclusion that the Greek politicians will have to fight very hard to make any cuts. The Greek state has a weak grip on society, and politics in Greece seems to be much more oriented on the individual MPs than it is here – possibly because of Greek history of separate city states. I came to the conclusion that Greek MPs will be left with the impression that they can get away with their political lives with one bailout – but they would be left on a life support machine – and that they could not ask the Greek people to borrow again and get further in debt. I see the next set of Greek parliamentary elections in 2013 being run on Greece leaving the Euro or a referendum. BUT, a further bail out in later 2011 seems to far from 2013 and I think the tensions in the political system will result in further general strikes and I dont see the Greek people suddenly becoming more productive – but I see them become LESS productive because of the strikes. I see the reality of the problems crystalising and an election being called before 2013.

    1. Mike Stallard
      June 23, 2011

      That was a super comment from an expert. Thank you for sharing it with people like me who aren’t.

    2. EJT
      June 23, 2011

      “much more oriented on the individual MPs than it is here”. I’d have a high confidence that it’s due to clientism.

      Can I second Mike S in appreciation of your expert posts.

  10. Alan
    June 23, 2011

    I don’t think your options 1 and 3 are practical politics. The Eurozone could perhaps pretend and extend for a little more but your analysis describes how it results in the Eurozone paying money to Greece. The nations that would have to provide this money are already coming close to refusing any more payments, and Greece will not accept much more interference in its affairs. We are seeing quite clearly that the Eurosceptics great fear, that the EU would evolve into a super state, will not happen any time soon. For that reason Option 3 (closer union) is also impractical.

    Which leaves only Option 2. Except in my view it should just be called ‘default’. There is no need for Greece to leave the euro once it has defaulted, and it would gain considerably from staying within the euro.

    If we had joined the euro we too could be in a better situation than we are now. I see our currency is now at a record low against the Swiss franc, and has again lost value against the dollar and the euro.

    1. Mike Stallard
      June 23, 2011

      Remember the early 1990s?

      1. Alan
        June 24, 2011

        Ah, 1992, when the pound was worth DM2.95, equivalent to €1.43, or $1.775. Then alas we were ejected from the ERM and have continued our decline. It is more interesting still if you go back to 1970 when the pound was worth the equivalent of €4.4

        Your comment is actually a bit too subtle for me, and I am not quite sure what point you are making, but I imagine you are referring to the boost to the economy given by leaving the ERM. I accept that, but my point is that people who rely on sterling as a way of storing value are being badly let down by our policy of devaluing out of trouble, and I am doubtful that these boosts have much long term effect. I don’t think there is a monetary trick that makes our country more productive, and I think we are easily deceived by devaluation into thinking we are doing better than we are. I see the euro as at least having the advantage of making it clear which governments are working well and which ones are not.

  11. MickC
    June 23, 2011

    The Greek government can pass all the legislation it wants, the Greek people will not put up with more taxation (they don’t really put up with any!).

    All democratic countries are only governed with the consent of the people-in Greece that consent has been withdrawn, especially as the “governing” is not being done by the Greek government but by a foreign, unelected power.

  12. Scottspeig
    June 23, 2011

    Maybe the ECB should just link its credit rating to the worst country? Rather than a median?

  13. waramess
    June 23, 2011

    Here’s an equally impractical option: let the EU buy all the Greek assets presently proposed for privatisation and then float them off at leisure. This will give the Greeks the ready cash with which to meet their liabilities, return the interest rates being charged to normality and provide the EU with the only other viable option in their armoury which is to gift the Greeks the money.

  14. Damien
    June 23, 2011

    JR: The fundamental problem facing Greece is best encapsulated in the World Bank Index for ‘Ease of doing business’;

    The index shows the UK near the top at 4th place. Greece on the other hand is positioned at 109. The index shows that it is easier to do business in Papua New Guinea (103) Ethiopia (104) Paraguay (106) and the Marshall Islands (108) than in Greece !

    It would take a decade for Greece to become competitive. Agreeing an austerity plan with the Greek government is not the same as getting the people to accept that plan. There is certainly no chance of the Greeks being able to return to the bond markets by 2013 and so a third bailout will be necessary.

  15. Javelin
    June 23, 2011

    Thought I should also point out this bit of research – that 30% of the losses from PIG are covered by CDS insurance and that it is the US banks who will pay the insurance out. However in the case of Greece 56% of the losses will be borne by US banks – via CDS insurance.

    Of course this is ALL dependent on whether the ISDA-EU commitee calls a credit event and as I pointed out the other day there are 5 UK/US banks and 5 EU banks with voting rights. So it will be a bun fight between the EU and US. As Ive have also said I still think the biggest casuality will be the demise of confidence in CDSwaps and the consequential shifting of risk cost back onto the soverign bonds and a rise in Government borrowing costs and interest rates. I dont see the fall out from Greeks defaulting as catasrophic BUT I do see the pain being spread amonst bond holders, CDS insurers, tax payers and Governments.

  16. Denis Cooper
    June 23, 2011

    In line with your article I’m only going to comment on the first option.

    The first thing which needs to be said, and repeated as often as possible, is that the EU measures to support Pretend and Extend are illegal under its treaties.

    As far as I’m aware there’s no exception to that, no measure taken by the institutions and member states of the EU which does not contravene the treaties in one way or another.

    Given that those EU treaties were solemnly approved by Acts of our Parliament prior to final ratification, it’s an appalling reflection on our MPs that there have been so few and so belated objections to the illegality not just under EU law but under our national law.

    The second thing is that it seems increasingly unlikely that it will work, but if it does then in some cases banks and pension funds will just have their original, at the time supposedly “safe”, investments protected courtesy of the taxpayer, but in other cases speculators will profit mightily.

    Greek bonds are still being traded, and presumably some of the earlier investors have been gradually disposing of them for what they can get – so to that extent their losses have now been crystallised, if not publicised – while speculative private investors having been picking up the bonds cheaply.

    The third thing is that apparently the ECB has now accumulated such a volume of these bonds that if Pretend and Extend fails then it will need to call upon the eurozone states to cover potentially massive losses.

    Then there’s the fourth thing, the extent to which banks and other institutions are exposed to losses through the insurance they issued, Credit Default Swaps.

    Basically the EU leaders are digging us deeper and deeper into a hole not for economic but for political reasons, and if/when the sides of that hole collapse we’ll be buried financially but the euro will probably survive intact.

    Preserving the present eurozone intact, so that it can recover and continue to expand, is what matters to them more than anything else – and I certainly can’t exclude Cameron, Osborne and Hague from that, even though it is very clearly a deadly threat to our long term national interests.

  17. Peter van Leeuwen
    June 23, 2011

    Muddling through is IMHO also the most likely option for now. It is a reflection of the complex ongoing debate in the EU and decisions usually requiring consensus, within Euroland, within the EU, and between EU, ECB and IMF. Continental Eurosceptics (less vocal but far more powerful than the British variety) had to have their turn to weigh in, national parliaments on the continent are increasing their grip over what ministers may agree at an EU level, all this points to muddling through until an overall plan will take shape. I imagine that it will comprise further integration, austerity and also investments in the peripheral countries. The euro will be successfully defended.

    1. lojolondon
      June 23, 2011

      For a moment perhaps, when the Irish and the Portuguese see how the Greek economy improves when they default and move to their old currency, then they will want the same. When Spain sees the benefits they may want to follow just because it will be much better for their economy. The Fins will happily go back to their old currency and the whole plan will unravel, because the EU and the EURO are basically really UNFAIR. Why should hard working, highly industrialised countries like Germany and the UK subsidise the poorest nations in Europe with no relief in sight? Why should France be allowed to claw back more in farm subsidies than they pay in their EU contributions? The whole EU is a massive scam, and the sooner it collapses the better for everyone, the richest nations and the poorest nations. I guess the only losers would be France.

  18. Mark
    June 23, 2011

    This isn’t just pretend and extend for Greece: it’s for the whole EU project. Alternative 3 amounts to coup by bureaucrat. Can anyone point to an example in history? I doubt they would carry the military, or that Eurofor has a real “demos” to enforce it.

    We need to be planning for the collapse of the EU. It is simply a matter of time, and the degree of disorder that accompanies it. I do hope that somewhere in government some contingency planning is taking place.

  19. BobE
    June 23, 2011

    “Greece would have a budget controlled or influenced by the central Euro political auithority”

    Would that also be un-audited like the EU budget?

  20. Anand
    June 23, 2011

    From my understanding, the ex DEBT INTEREST balance sheet of the greek Public Finances still run up a deficit? ie they are spending mroe than they bring in in revenue BEFORE factoring in debt payments.

    Default and leaving the EURO would be the best thing to do, but if they cannot balance their books even after 100% default, how can they raise the deficit borrowing amounts if and when they leave, knowing that their currency will plummet over time, noone would lend to Greece from external sources.

  21. sjb
    June 23, 2011

    What is your opinion on Gavyn Davies’ alternatives?

    (1) “[…] a Brady-type plan for the restructuring of the Greek public debt, swapping new par Greek bonds for the bonds currently in issue. The new bonds would be longer in duration and the existing ones, and would carry lower interest rates, so there would be implied losses for private sector bond holders to accept. But since the new bonds would carry the same face value as the old ones, there would be no immediate write-down of banks’ capital.”

    (2) “[…] a larger issuance of EFSF debt which would be used to purchase Greek bonds in the marketplace. Yes, that would involve a fiscal transfer. But that is exactly what is happening already. An orderly plan would probably involve a further fiscal transfer which is no bigger than the one which will happen ayway under the present strategy, but it would replace the current risky cocktail with a programme of much greater order and control.”

    Reply: This is a variant of my proposal that the EU sits down and hammers out a solution to the Greek insolvency, which of course entails losses on existing bonds as well as new management of the Greek public sector. A country one fifth the size of the Uk cannot afford a larger amry than ours, for example.

  22. Javelin
    June 23, 2011

    I did a little bit more research on this and figured out the Greek Parliamentry elections are in 2013 – BUT they seem to vary from Feb through to Sept. So they is some leeway. Also the Euro Stability Mechanism kicks in in July 2013. So you would have thought that if the incumbents wanted a better chance of getting elected they would hold late elections and show the bail out as evidence.

    However this means the European stability fund will believe the socialists will get voted in again OR that the conservatives will continue with the cuts. PLUS the whole goal here is not to let Greece default whilst they are still running a deficit because then they will have to leave the Euro zone.

    So it all depends if the socialists can run a surplus before the next election. And given the negative growth in Greece I think this won’t happen.

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