Saturday, June 27, 2015

Yves Smith — Tsipras’ Bailout Referendum Sham

Have Tsipras and Syriza bungled this?

Naked Capitalism
Tsipras’ Bailout Referendum Sham
Yves Smith


Dan Lynch said...

I'll keep an open mind but Syriza does not have a good track record.

There is already a bank run and the EU will tighten the noose before the referendum, so voters will be frightened. Syriza has done absolutely nothing to convince the public that it has a competent plan -- there is neither a workable plan to stay in the EU nor a workable plan to leave the EU.

While I agree with Bill Mitchell that it would be better for Greeze to exit, that assumes a level of competent governance that does not actually seem to exist.

mike norman said...

"So take your pick: is Tsipras deluded, or is he cynically having his cake (leading Greece to a rejection of the bailout due to well-known creditor constraints) while trying to eat it too (packing the outcome as of now as a voter choice)?"

Tsipras is deluded. Always has been. Varoufakis, too. I have been saying this from the minute they won the elections (and even before).

They will totally cave. Impose capital controls and all the measures demanded while going into "arrears" (defaulting) with the IMF.

The irony is that the euro will go to zero eventually and everything they supposedly sacrficed for (which was what? The euro, really) will be gone anyway.

All that misery for nothing. Even the Germans will suffer as they get the inflation and worthless currency their central bank, the ECB, always wanted.

Ralph Musgrave said...


I agree that Tsipras and Varoukakis are deluded, but why does 3% of the EZ population (i.e. Greece) quitting the Euro mean the end of the Euro? If Alaska set up its own currency buy stayed in the US, that would not be problem for the US dollar.

Obviously Greece leaving the EZ sets a precedent of sorts, but other small periphery countries clearly want to stay in the EZ and will not leave it unless they have problems on the scale of Greece. Those countries problems are now receding, thus it will be (at a guess) a decade or two before any of them take that step.

NeilW said...

"There is already a bank run"

So what.

Why are people here getting excited about 'bank runs'. Why is a swap between the Greece Central Bank and the Greece Commercial Banks such a big deal.

And the Bank of Greece can do that on its own until the cows come home. Until every last deposit has gone elsewhere or to cash.

That's all basic MMT.

If the ECB tries to stop TARGET2 transfers then it creates the New Drachma instantly - and then the Bank of Greece really is free to do what is needed.

John said...


If a bank run is no biggie, why did Northern Rock implode because of it? A bank run is presumably only disastrous if the national central bank doesn't stand behind the bank that is experiencing the run. It seems in the case of Northern Rock that the BoE didn't do its job. If it had so desired, the BoE could have supplied all the liquidity to Northern Rock that it required but it didn't, which in itself is an interesting story because surely the BoE understood the consequences.

Is the Greek Central Bank in a position to provide all the liquidity Greek commercial banks require (like the BoE with respect to Northern Rock)? The Greek Central Bank is subordinate to the ECB, and since the ECB won't allow the Greek Central Bank to dictate terms it will not go along with the proposals, thus putting Greece in a position of not being able to supply commercial bank liquidity even though it wishes to do so. The ECB will force a triggering of a new drachma. That may be what the ECB and the EZ want but it isn't what Syriza or the Greeks want. That's surely the issue; not whether Greece can issue new drachmas. Whether we believe Greece returning to the drachma is a benefit or a hindrance is sort of irrelevant. The Greeks shouldn't be forced into adopting the drachma because the EZ has decided to dump Greece after saddling it with unpayable debts.

Time will tell if you're right in claiming that adopting a new currency won't be as difficult as most claim. But I would say that it depends on the circumstances. If it is orderly, managed and the result of a national consensus, then there is no reason in thinking that it couldn't work. But if its forced, hasty and a decision taken by your creditors, as it now looks likely, then it may turn out to be as bad as Varoufakis and Syriza believe.

Dan Lynch said...

@Neil, my point about the bank run is that people are panicking. And why shouldn't they panic when Varoufakis has repeatedly said that leaving the Euro would be a disaster? Syriza has done nothing to assure the Greek people that they have a plan to fix things.

If you were a Greek citizen, would you have confidence in the Greek government? In your Greek bank accounts? After what happened to Cyprus? Heck no.

When Greeks go to the polls, they will be like frightened sheep. Without a constructive alternative on the ballot, the referendum amounts to putting a gun to the head of the Greek people and saying "accept austerity, or else." So there is a good chance Greeks will vote to accept Troika austerity.

Regardless of the outcome, Syriza will be viewed as a failure. Their days are numbered. And that was the EU's plan all along.

Roger Erickson said...

Troika: "Resistance is Feudal."

Dripping with irony.

John said...

Dan, that's an excellent point about Varoufakis's previous comments and what's happened in Cyprus. Greeks are acting rationally given the information they have.

And once a bank run commences, is it rational to do nothing or to join the queue? I'd say join the queue. That's why it is the height of political and economic madness to allow even a suspicion of a bank run to fester.

It does seem that Syriza is digging its own grave, with Golden Dawn ready to fill it in.

NeilW said...

"The ECB will force a triggering of a new drachma."

But that's the key point. It will be the *ECB* triggering the situation by failing to stand behind Greek Euros.

And that can be used politically by Greece to destabilise the Euro, since they can clearly point out that the ECB clearly won't stand behind anybody else's Euros either - particularly if you're a small country.

The important point here is that Greeks are withdrawing *cash*, not transferring their money to Germany. And that is *entirely* within the remit of the Bank of Greece. It doesn't touch the ECB at all.

The real issue is actually running out of physical cash, since what Greece will create is a full reserve system as everybody switches to cash.

That's not to say that it isn't going to cause economic damage, because people start to hoard. But Greece is so economically damaged anyway, you have to wonder how much difference it makes in the short term.

The key political trick here is to make sure that the people understand it is the ECB and the European powers that are trying to crush Greece by crippling their bank system.

It's not the banking system and cash withdrawals that is causing the problem. That is merely a symptom of the problem. And it requires a political response as a nation would when it is threatened with war.

This is not being managed that well by the Greek government, which really needs to understand this is an attack on Greece and respond accordingly. They've been incredibly naive so far.

But then the Europhile Left has a historic tendency to see what they want to see in the EU treaty, rather than what is actually written down. They are now finding out what is actually written down.

Unknown said...

Where does the physical cash come from? If Greece "prints" its own physical Euro notes, then there is no problem, if Greece gets the physical notes from ECB central, then there could be a problem.

WRT the digital BofG currency, my understanding is that each nation's CB is responsible for keeping its own books and settling INTRA-nation payments, and then INTER-national payments settle via the target2 ECB central system. So the BofG already creates and destroys GREEK Euros everyday as its balance sheet expands and contracts, this wont change after target2 access is restricted. SO the 1 to 1 peg will be gone, so what? nothing changes inside of Greece. As Neil has repeatedly pointed out and everyone continues to ignore, there is no need whatsoever to even reintroduce the drachma as all the accounting and mechanics of the system are 100% the same regardless of whether the IOUs are denominated in Drachmas or greek Euros.

So ECB cancels Greek access to target2, and poof, Greece has a brand new floating FX sovereign currency...the Greek Euro. Just announce that the Govt stands ready with deposit insurance and that all commercial bank IOUs are pegged 1 to 1 with Greek National Euros, and then the whole system works exactly like MMT 101 describes. Again, I cant heap enough praise on Neil for being so early and consistent on this point. And I have yet to see any fellow MMTers point out where and how is analysis is wrong. And if its not wrong....

Then I dont understand what the big deal is? Its not like there arent dozens and dozens of national fiat currencies operating in the world right now, this stuff is rocket science. They are reinventing the wheel here.

Unknown said...

this stuff is *NOT* rocket bad

Dan Lynch said...

Good explanation, Auburn and Neil. But is Varoufakis explaining this to the Greek people, assuring them there is "nothing to fear but fear itself?" No, he's part of the problem, insisting that bad things will happen if Greece leaves the Euro. Whose side is he on?

I don't doubt that Greece could print its own currency and be OK, I do doubt whether Syriza is competent and whether they will survive much longer.

Ignacio said...

Yes, but when YV and Tsipras are saying "the sky will fall"/"is falling", they are not helping.

As Matt Franko says, those two are not competent. Technically is as you guys say, but in practice, politically, incompetents are in charge and spilling their own (unintentional) pro-EU propaganda by saying "the sky is falling" and scaring the population with fairy tales about how they can run out of money.

They don't understand the TARGET2 system, or are afraid of unilaterally taking decisions (ie. the Bank of Greece printing notes if needed without coordinating with the ECB).

Unknown said...

No doubt that YV and Tsipras are a big part of the problem. Does anyone have a good description of the "capital controls" issue wrt to Greek Euros? For example, what exactly is being controlled and restricted? Once the Greek Euro becomes its own sovereign currency on Mon, where can they go? Just like the US Dollar can not leave the US Dollar financial system, the Greek Euro would not be able to leave the Greek Euro financial system, as Greek Euros only exist on the balance sheet of the Bank of Greece\Tsy (just like US Currency only exists on the Balance sheet of the Fed\Tsy), excluding physical cash of course. So are there people leaving Greece with briefcases full of Greek Euro cash? What would they do with it? That would be like Mexicans leaving for the USA with shoeboxes full of peso cash, so what? What are you going to buy in the USA with pesos, except for dollars of course? What are Greek Euros going to buy in France? Looking for a little clarity. Thanks.

Tom Hickey said...

Theoretically there could be a Greek Euro or "G-euro" but it would be a stretch to have it float against the euro successfully, since many if not most people would assume exchange at par because they are both "euro." It could work, but it might be more practical to just go back to the drachma. But it could serve as a transition from euro notes to drachma.

Unknown said...


The Gruro is the default currency, as thats what all the IOUs are denominated in right now and will continue to be denominated in on monday when the ELA is cut off. Once the 1 to 1 peg is gone, then the Gruro immediately floats. I dont know what "successful" means in this context. Gruros are IOUs of the Greek CB and they always have been, the only thing that changes on Monday is the ECB central no longer guarantees that Greek CB IOUs will trade at par with all other EU CB IOUs. One interesting thing to think about is what happens to the physical cash that people have throughout the EU that was issued in Greece. If you take $500 cash to a bank in Germany and $100 of that cash has the Greek CB stamp on it (I think Neil said it has a Y in the serial number???), what is the German bank going to do? Will the German bank accept that Greek CB IOU at full value? Not at all? certainly there wont be much in the way of a FX market to determine its exchange value on Monday or tues. That would suck for regular people in Europe, but wasnt that the original intent and purpose of the EU, to screw regular people :)

Another way to think about it....It would be like bring in $100 in US dollars and $100 in Canadian dollars to my local Chase branch, both physical currencies are called "dollars" even though they are completely separate currencies. I honestly dont even know if Chase allows you to do a spot trade like that for foreign currencies. The only difference in the Euro example is that not only would the Gruro and Euro have the same name....they would even look the same (minus the serial number identifier or the coins with the Greek letters on them).

I guess my point is Tom that the Gruro will float on monday or tues without the Greek Govt having to do anything, when the ECB pulls the peg, the Greek national floating Euro era officially begins.

Tom Hickey said...

I mean it is probably not the best longterm solution. Better to break with the euro cleanly by transitioning to the drachma ASAP. Staying with a floating G-euro also carries the implication that Greece would like to rejoin the EZ at some point and that the float is only temporary. A floating G-euro that moved significantly away from par with the euro would be a further agitation, I think, reminding people of what they "lost."

Greece would be better advised to do to the drachma, join up with BRICS, and tell the eurocrats where to stick it. As an Orthodox country Greece was never Atlanticist anyway, even though Greece was the cradle of Western civilization and the Christian scripture is historically in Greek Koine rather than Aramaic.

Unknown said...

YV's intervention at the EuroGroup yesterday,

It shows that Yanis Varoufakis tried to persuade colleagues that a referendum made sense, as well as being democratic.

The full intervention is worth a read. In particular, YV says -

To those who instruct us to phrase the referendum question as a euro-drachma dilemma, my answer is crystal clear: European Treaties make provisions for an exit from the EU. They do not make any provisions for an exit from the Eurozone. With good reason, of course, as the indivisibility of our Monetary Union is part of its raison d’ etre. To ask us to phrase the referendum question as a choice involving exit from the Eurozone is to ask us to violate EU Treaties and EU Law. I suggest to anyone who wants us, or anyone else, to hold a referendum on EMU membership to recommend a change in the Treaties.

Unknown said...

Fair enough on the politics Tom. However, maybe the word "drachma" has an even bigger stigma that "gruro" in Greece? Dont know, as I've never been there. One good thing about aligning with China nowadays is that at least China will do some Foreign direct investment. We use to bribe our allies with investment and free money but now we dont because "we've run out". It seems to me that China's foreign policy of mostly aid and investment with some defense spending is a better model than all military defense spending with a tiny bit of aid and investment.

Unknown said...

Further what Syriza wants is an end to austerity, and a resolution of the "odious" debt - Greece was forced into taking the debt in order to save the French and German banks.

In order to do this they need to get into a stronger bargaining position vis a vis the EuroGroup (which has been the main stumbling block). The referendum is a win for Syriza (whether the vote is a yes or a no) If a no, it obviously strengthens Syriza's bargaining position (and yes, there is going to be more bargaining - already the chess pieces are moving)

If the vote is a "yes" (which I don't think it will be) then the Greek government calls for a new election (since the EuroGroup has implied that they would rather not deal with the current government.) As the polls stand today, Syriza will win that election in a landslide. This will again strengthen the bargaining position of the Greek side.