Not Too Late: Let Greece leave the eurozone. A Controlled Grexit

WASHINGTON POST

IN GREECE AND IRAN, OUTCOMES AND ATTEMPTS AT RECONCILIATION.

Greek MP's during the tense debate.

Greece Gives A Bitter Consent

THE GUARDIAN

In Greece, lawmakers approved a package of harsh austerity measures and economic policy changes that were required by its creditors as the terms of a $94 billion bailout package.Tsipras faced a revolt over the reforms from his radical-left ruling Syriza party, which came to power in January on anti-austerity promises. But the Athens parliament eventually carried the bill on Wednesday night by 229 lawmakers in favour, 64 against and six abstentions.

In a vote that saw tensions soar in and outside parliament, Syriza suffered huge losses as 40 MPs revolted against the measures, but pro-European opposition parties delivered their support. The outcome will significantly weaken Tsipras as the scale of the rebellion sinks in. Stripped of its working majority, the Syriza-dominated two-party coalition will struggle to enforce the pension cuts and VAT increases outlined in the deal or implement any other legislation outside it.

Still, there was relief that the Greek parliament had overwhelmingly supported reforms to ensure that talks on a third bailout for the debt-stricken country can begin.



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U.S. Offers to Help Israel Bolster Defenses,

NY TIMES

When President Obama called Prime Minister Benjamin Netanyahu on Tuesday to discuss the nuclear deal with Iran, the American president offered the Israeli leader, who had just deemed the agreement a “historic mistake,” a consolation prize: a fattening of the already generous military aid package the United States gives Israel.

The nuclear agreement, which would lift sanctions on Iran in exchange for restrictions designed to prevent it from developing a nuclear weapon, would ultimately provide a financial windfall to Israel’s sworn enemy in the region, and Mr. Obama said he was prepared to hold “intensive discussions” with Mr. Netanyahu on what more could be done to bolster Israel’s defenses, administration officials said.

But, as in previous talks with Mr. Obama, Mr. Netanyahu refused to engage in such talk “at this juncture,” the officials said, speaking on the condition of anonymity to detail the private discussions. And on Tuesday, as administration officials fanned out to make the case for the Iran agreement, one aide suggested in a phone call to Jewish and pro-Israel groups that Mr. Netanyahu had rebuffed their overtures because he believes accepting them now would be tantamount to blessing the nuclear deal, say people involved in the call who did not want to be quoted by name in describing it.

The president himself has hinted that he believes the Israeli prime minister is loath to talk about any additional security assistance he may want from the United States until after Congress has had its say on the Iran deal. Lawmakers have 60 days to review the deal, which Mr. Netanyahu has urged them to reject.

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No Time Like The Right Time...

NY TIMES

 One by one, the roadblocks to a nuclear accord between Iran and the United States had been painstakingly cleared.

For the Iranians, this was a negotiation first and foremost to get rid of what Mohammad Javad Zarif, the Iranian foreign minister and his country’s chief negotiator, often called the “unjust sanctions” while trying to keep their nuclear options open. And while they treasured their nuclear program, they treasured the symbolism of not backing down to American demands even more. But Mr. Zarif was walking his own high-wire act at home. While he had an important ally in Iran’s president, Hassan Rouhani, hard-liners did not want to reach any deal at all; many were making a fortune from the sanctions because they controlled Iran’s black markets.

And conservatives around the supreme leader, Ayatollah Ali Khamenei, were looking for any signs that their Americanized chief negotiator, who studied at the University of Denver, was ready to give away too much nuclear infrastructure without getting Iran the sanctions lifted in return, as the ayatollah had decreed.

There was no single event, no heart-to-heart conversation between adversaries or game-changing insight that made the Iran deal happen. Instead, over a period of years, each side came to gradually understand what mattered most to the other.

For the Americans, that meant designing offers that kept the shell of Iran’s nuclear program in place while seeking to gut its interior. For the Iranians, it meant ridding themselves of sanctions in ways they could describe to their own people as forcing the United States to deal with Iran as an equal, respected sovereign power. And it happened because a brief constellation of personalities and events came into alignment:



The top energy officials of the United States and Iran, respectively, were Ernest J. Moniz and Ali Akbar Salehi. Mr. Moniz and Mr. Salehi, a former foreign minister and now head of the Atomic Energy Organization of Iran, joined the talks to work out the nuclear details — in a less political, more scientific environment.

The officials working under Mr. Salehi “were mostly hard-liners, and they would give on nothing,” one American official said. But when Mr. Salehi, who got his nuclear training at M.I.T. before the Iranian revolution, showed up and developed a rapport with Mr. Moniz, the secretary of energy and a former chairman of the M.I.T. physics department, the Iranian bureaucrats were often sidelined, or overruled.

During a break on one particularly discouraging March day in Lausanne, Switzerland, where negotiations were held before adjourning to Vienna, Mr. Zarif struck a different tone as he invoked the names of the key figures on two sides, including Vice President Joseph R. Biden Jr. and the top energy officials of the United States and Iran, Ernest J. Moniz and Ali Akbar Salehi.

“We are not going to have another time in history when there is an Obama and a Biden and a Kerry and a Moniz again,” Mr. Zarif said, according to notes of the conversation. “And there may be no Rouhani, Zarif and Salehi.”

Hassan Rouhani was allowed to run for president in 2013 largely on a platform of ridding Iran of punishing sanctions. Credit Ivan Sekretarev/Associated Press

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When the photo ops were over, the seven foreign ministers who had negotiated it met for the last time. Each spoke briefly about the importance of the moment. Mr. Kerry spoke last, but then added a personal coda. Choking up, he recalled going off to Vietnam as a young naval officer and said he never wanted to go through that again. He emerged committed, he said, to using diplomacy to avoid the horrors of war.

Deal on Greek Debt Crisis Exposes Europe’s Deepening Fissures.

NY TIMES

Forced by his nation’s creditors into broad new concessions to avert financial collapse, Prime Minister Alexis Tsipras of Greece returned home on Monday with just days to sell the deal to fractured lawmakers and a dazed electorate.

The agreement he struck with other European leaders early Monday after a contentious all-night bargaining session would give Greece the chance to receive its third international bailout in five years, a package of as much as 86 billion euros, or $96 billion, as well as easier repayment terms on some of its existing debt of more than €300 billion and a short-term economic stimulus plan.

Should he succeed in carrying out the policies set out in the agreement, he would oversee just the kind of market-based changes that creditors have been demanding and successive Greek governments have been failing to deliver for years.

As the talks ended in Brussels, Mr. Tsipras, who had once vowed to overturn the austerity policies he says have undercut the Greek economy and left its people suffering, was no longer talking of “blackmail” by creditors or “hostage taking.” Instead, he said the new package of proposals would “maintain Greece’s financial stability and provide recovery potential.”

The country which we help has shown a willingness and readiness to carry out reforms,” Ms. Merkel said, referring to Greece.

Mr. Tsipras came to that willingness very late in the game, but some critics as well as supporters said that his turnabout was pragmatic in the face of shuttered banks and a collapsing economy.

“At a certain point he realized that he had been given very bad advice,” said Aristos Doxiadis, an economist and venture capitalist who writes about politics and has been critical of Mr. Tsipras in the past. “It wasn’t whether it was a good or a bad deal, but whether there was any feasible alternative.”

“Some will surely feel betrayed by what has happened,” he said. “But most Greeks will say this man tried very hard and if he was convinced there is no better way, then there is no better way.”

Among the elements that must be dealt with this week are increases in the value added tax, including the end of a special tax status for the Greek islands; a makeover of the pension system; and the imposition of automatic spending cuts if the government misses budget targets.

If the deal is a political earthquake for Greece, it also puts the country on course for a major economic shake-up. It aims to force Greece once again to tackle many issues it has kicked aside for years, from simple ones like getting reliable economic statistics to more complex ones like opening up product and service markets, further streamlining the pension system, improving tax collection and moving ahead on privatization.

Yet even if the Greek Parliament passes a spate of reforms this week, Athens has a spotty track record at carrying out tough changes. As a result, Mr. Tsipras has now agreed to have the International Monetary Fund survey every move he and his government make.

Many of the changes demanded by creditors are political hot potatoes, including increasing the consumption tax to 23 percent for a range of goods and services, raising the retirement age to 67 and reducing more pension benefits in an aging population. Many of the changes could have the effect of further slowing the economy in the short run and reducing standards of living for some Greeks.

“It will be extremely difficult for the Greek people to accept such an adjustment off the back of five years of economic depression,” Megan Greene, a managing director at the financial firm Manulife who has been monitoring the Greek situation, said in a report.

The creditors’ insistence on tough terms reflects years of pent-up frustration with Greece’s slow progress in modernizing the economy. Many claim that austerity is harder than it would have otherwise been had Athens moved swiftly to promote change.

Mr. Tsipras and most Greeks say that austerity is what killed the economy, especially after previous governments slashed state spending 20 percent since 2010 under previous bailouts, mainly by cutting pensions, wages, health care and social services, impoverishing many Greeks.

One of the more contentious new demands from creditors — one that is likely to prompt an outcry among Greeks — is that Greece transfer €50 billion worth of state assets to a fund that would have international monitors. The fund would oversee sales to pay down Greece’s debt and help recapitalize its teetering banks.

Passage of the new measures appears assured, since Greece's opposition parties have pledged to support Tsipras' deal. His most pressing problem was more likely the speaker of Parliament, Zoi Konstantopoulou, also a member of Mr. Tsipras’s Syriza party, who objected to Mr. Tsipras’s attempts to pass narrower proposals last Friday.

Some analysts said that Ms. Konstantopoulou, a stickler for rules, could prevent him from using the fast-track procedures that would be necessary to get the job done in time to satisfy European leaders. Portions of the plan must be passed by Wednesday, and more a week from Wednesday.




NY TIMES

The latest effort to preserve Greek membership in the eurozone has only deepened the fissures within the European Union between north and south, between advanced economies and developing ones, between large countries and smaller ones, between lenders and debtors, and, just as important, between those 19 countries within the eurozone and the nine European Union nations outside it.

In the name of preserving the “European project” and European “solidarity,” the ultimatum put to Greece required punishment for all of Greece’s past sins, and for all of the gamesmanship and harsh talk of the governing Syriza party.  Paul Krugman, the Nobel prize-winning economist and prominent critic of austerity in Greece, said the creditors’ demands on Greece  were “a grotesque betrayal of everything the European project was supposed to stand for.”

But it averted an outcome that could have left Europe even more badly fractured. And it highlighted the willingness of some leaders to make a compelling case for unity over narrow national interest, especially President François Hollande of France, who played an important role in mediating between Germany and Greece.

Unpopular and yet contemplating another run for the presidency in 2017, Mr. Hollande displayed leadership and distanced himself from Ms. Merkel and German demands, which many in Europe, especially in France, saw as selfishness and vindictiveness.

Francois Hollande, French President

It remains to be seen if the European Union can now, after so many years, lift its head from its euro crisis and begin to concentrate on other critical issues: providing economic growth and jobs for its young people, a rational and unified policy on migration, a response to Russian ambitions in Ukraine and elsewhere, and a British vote on whether to leave the European Union.

A so-called Brexit — an exit by Britain, which is expected to overtake France as Europe’s second-largest economy and is one of Europe’s main military and diplomatic actors, with a permanent seat on the United Nations Security Council — would be far more damaging to the European Union than the departure of small, difficult Greece.

Britain, which never joined the euro currency bloc, plans to hold a referendum by the end of 2017 on whether to remain a member of the European Union, and Prime Minister David Cameron is negotiating now to change Britain’s terms of membership. The mess over Greece has hardly helped the reputation of the European Union inside Britain, but it may also help Mr. Cameron secure a better deal.

As for Ms. Merkel, her reputation hangs in the balance, at home and in her role as Europe’s de facto leader. Having rejected a Greek exit from the eurozone three years ago in the name of European solidarity, she has again avoided that outcome. This time, she risked considerable cost to her political standing at home. But what would really damage her legacy is another expensive bailout for Greece that fails.

The crisis that played out over the weekend was just the latest in a series that traces back to the origins and nature of the currency union.

When Germany under Chancellor Helmut Kohl gave in more than two decades ago to the entreaties of President François Mitterrand of France and agreed to give up the deutsche mark for the new common currency, the euro, he did so not for economic reasons, but for political ones.

Mr. Kohl and Mr. Mitterrand ignored the voices that warned against a common currency without common financial institutions or fiscal policies in a set of widely varying economies.

Greece was allowed into the eurozone for largely the same reasons, wishful politics, that put ancient Greece, the core of European culture, at the heart of a European ideal built on civilization and peace. The fact that today’s Greece bears little relationship to the country of Socrates or Pericles was simply ignored. And so was clear evidence, well-known at the time in Brussels, that the Greeks were regularly faking their budgetary figures to qualify for the euro.

The magical thinking involved was that the euro, somehow shorn of politics, would bring all these different economies into closer balance. The last decade has proved that to be illusory. And Monday’s deal — if it is ratified by an angry Greek Parliament, and by an unhappy German Parliament, and not derailed by smaller countries like Finland [which is expected to vote against the agreement] with coalition governments that depend on the support of euroskeptic parties — will avert the debacle of a country leaving the common currency for the first time. But by itself, it will do little to strengthen the future of the euro.

For many in Europe, the euro’s economic benefits have been offset by the constraints it imposes. For the weaker economies in particular, it has become a sort of prison, limiting the ability of elected governments to use budgetary policy to smooth out the ups and downs of the economic cycle and eliminating their use of currency fluctuations to help manage national economies.

The victory in January of Prime Minister Alexis Tsipras and his Syriza party led to the reversal of some critical economic overhauls demanded by creditors, threw the Greek economy backward and raised even higher the requirement for further loans. Mr. Tsipras bet big but lost. But so have the Greeks.

It is one thing to undergo changes when a government and a people have bought into them as necessary and hopeful — this is how the Baltic nations took the pill of economic austerity and overhaul, and this is largely how Ireland, Portugal and Spain saw matters, too, when faced with implosion.

But it is a far different thing to have further social changes and austerity shoved down one’s throat in an exercise of political power and domination, as many Greeks are no doubt interpreting this deal. Carrying out these changes will feel like enforced labor to many Greeks, and especially to the Syriza government, if it survives at all.

As Samuel Johnson said about second marriages, this prospective third bailout of Greece is a triumph of hope over experience. Even more so with Mr. Tsipras and Syriza, their protestations of mandates and sovereignty thrown back into their faces by European colleagues offended by Syriza’s moralizing, and even more, by its gamesmanship.

A DEAL TO KEEP GREECE IN THE EUROZONE IS REACHED.....MAYBE.

Greek Prime Minister Alexis Tsipras, left, shakes hands with Donald Tusk, president of the European Council. Euro zone leaders reached a unanimous agreement to move forward with a bailout loan for Greece, Tusk said on Monday. Credit: Associated Press

If your head is spinning, either because you’ve just woken up to find the talks are still going, or because you have been up all night following the talks, the NY Times and The Guardian are reporting a tentative agreement has been reached. 

NY TIMES

European leaders said Monday morning that they had reached a deal meant to resolve Greece’s debt crisis and avert a historic fracture in the Continent’s common currency project.  German Prime Minister Angela Merkel said thr threat of Grexit is off the table, even though a new bailout hasn’t been agreed yet (and that’s an important point).

Merkel says she can recommend “with full conviction” that the Bundestag should agree to open negotiations with Greece. But the Greek parliament must approve the entire conditions before the German parliament votes.

Donald Tusk, the president of the European Council, wrote on his Twitter account shortly before 9 a.m. on Monday [that] The new bailout for Greece would involve “serious reforms & financial support,”

The agreement, whose details have not yet been described, aims to provide Greece with its third bailout package in five years. The tough terms, demanded by Germany and others, are meant to balance Greece’s demands for a loan repayment system that will not keep it mired in recession and austerity budgets, against creditors’ insistence that loans worth tens of billions of euros would not be money wasted.

Any agreement in principle would still need to be fleshed out and to receive further approvals before new European aid flows to Greece. Greek banks, closed for the last two weeks, might still not be ready to open. But an accord would end five months of bitter negotiations that raised concerns that Greece would be the first country to be forced out of the euro currency union – a development that proponents of European unity had sought desperately to avoid.

During the marathon negotiation session, Alexis Tsipras, the Greek prime minister, struggled with economic overhauls demanded by the creditors but which his left-wing government will find difficult to sell at home — just a week after Greek voters overwhelmingly rejected softer terms in a referendum.

Chancellor Angela Merkel of Germany, President François Hollande of France and Prime Minister Alexis Tsipras of Greece before the meeting of eurozone leaders on Sunday. Credit John Macdougall/Agence France-Presse — Getty Images

THE GUARDIAN


Prior to reports of the above agreement, Ian Traynor and Jennifer Rankin write:

A weekend of high tension that threatened to break Europe in two climaxed on Sunday at a summit of eurozone leaders in Brussels where the German chancellor, Angela Merkel, and the French president, François Hollande, presented Tsipras with an ultimatum.

The ultimatum - debated over more than 15 hours - entailed a series of draconian measures as the price of avoiding financial collapse and being ejected from the single currency bloc.

The severity of the eurozone terms being applied to a country on its last legs shocked Greeks.

It remained to be seen how Tsipras would be received when he returned home from the climactic negotiations of the five-year debt crisis.

Social media sites throbbed with outrage. The hashtag #ThisIsACoup soared to the most trending in Europe, in Greece but also in Germany where Der Spiegel described Berlin’s demands of Athens as a “catalogue of horrors”, and to the second-highest trending worldwide.

In what a senior EU official described as an “exercise in extensive mental waterboarding” to secure Greek acquiescence to talks on a third bailout in five years worth up to €86bn (£62bn), Merkel and Hollande had pressed for absolute certainty from Tsipras that he would honour what was on offer.

Under the terms set before Tsipras, the Greek parliament has to endorse the entire package and then pass several pieces of legislation by Wednesday, including on pensions reform and a new VAT regime, before the eurozone will agree to negotiate a new three-year rescue package.

The terms are much stiffer than those imposed by the creditors over the past five years. This, said the senior official, was payback for the emphatic no to the creditors’ terms delivered by the snap referendum that Tsipras staged a week ago. “He was warned a yes vote would get better terms, that a no vote would be much harder,” said the senior official.

The Eurogroup document said experts from the troika of creditors – the IMF, European Commission and European Central Bank – would be on the ground in Athens to monitor the proposed bailout programme.

While Greece’s fate was being debated in Brussels, in Athens the ruling leftwing Syriza party was showing signs of disintegration. Demands that the reforms be approved by the Greek government and put into law by Wednesday were described as “utter blackmail” by leading party members and met with disbelief.

Although sources close to Tsipras said the leader was determined to do whatever was needed to keep Grexit at bay, political tumult also beckoned. Insiders conceded that a cabinet reshuffle – removing ministers who had refused to vote the austerity package through parliament early on Saturday – could come as early as Monday.

By late Sunday night it had become clear that Tsipras’s U-turn on measures he had once spurned had produced a potentially far-reaching split. In addition to 17 MPs breaking ranks at the weekend – stripping his government of a working majority – 15 other lawmakers also indicated they would not approve the agreement in its entirety. The resistance raises the spectre of Tsipras being forced to call fresh elections – a move described as potentially catastrophic for the country.

Although billed as the last chance to secure “the ultimate agreement” on the Greek debt crisis, the prospects of a grand political bargain to keep Greece in the eurozone are far from assured.

Greece Nears Euro Exit as Bailout Talks Break Up Without Agreement

Greece's finance minister, Euclid Tsakalotos, left, with Christine Lagarde, the managing director of the International Monetary Fund, at a meeting of eurozone ministers on Saturday in Brussels. Credit Francois Lenoir/Reuters

THE GUARDIAN

Greece’s final attempt to avoid being kicked out of the euro by securing a new three-year bailout worth up to €80bn ran into a wall of resistance from the eurozone’s fiscal hawks on Saturday.

The finance ministers planned to reconvene on Sunday, just before European national leaders are scheduled to meet in Brussels for what they have said would be a final decision on whether Greece should qualify for a new aid package, a step aimed at determining whether the country can remain in the euro currency union.

The failure by the finance ministers to reach an agreement, after nearly nine hours of talks, belied the optimism that followed the approval early Saturday by the Greek Parliament of a package of pension cuts, higher taxes and other policy changes long sought by Greece’s international creditors.

It was not clear that the finance ministers’ meeting on Sunday morning would yield a consensus about how to proceed, increasing the possibility that they would leave final decisions to their national leaders, who are to gather in Brussels in the afternoon.

The Eurogroup, with its 19 eurozone finance ministers, has some outspoken critics of Greece. ,Finland rejected any more funding for the country and  [there are reports subsequently denied that] Germany called for Greece to be turfed out of the currency bloc for at least five years.

The last-chance talks between the 19 eurozone finance ministers in Brussels ended at midnight, as they struggled to draft a policy paper for national leaders at yet another emergency summit on Sunday that was billed as the decisive meeting.

With Greece on the edge of financial and social implosion, eurozone finance ministers met to decide on the country’s fate and on what to do about its debt crisis, after experts from the troika of creditors said that new fiscal rigour proposals from Athens were good enough to form “the basis for negotiations”.



But the German finance minister, Wolfgang Schäuble, dismissed that view, supported by a number of northern and eastern European states. “These proposals cannot build the basis for a completely new, three-year [bailout] programme, as requested by Greece,” said a German finance ministry paper. It called for Greece to be expelled from the eurozone for a minimum of five years and demanded that the Greek government transfer €50bn of state assets to an outside agency for sell-off.

Timo Soini, the nationalist True Finns leader, meanwhile, threatened to bring down the government in Helsinki if Alex Stubb, the finance minister, agreed to a new bailout for Greece. Stubb apparently came to the crunch meeting on a new bailout without a mandate to agree one.

“The hawks are very vocal,” said an EU diplomat. “It’s very tough.” Berlin also demanded stronger and more intrusive powers for outside monitors to police the economic and fiscal reforms that Alexis Tsipras, the leftist Greek prime minister, would need to commit to to secure the new bailout.

Saturday night’s talks were not to agree on a third bailout, but were negotiations on whether to launch more talks on Greece’s third rescue package in five years. The ministers faced formidable problems, said Schäuble, who argued debt relief for Greece, broadly seen as essential, was banned by the EU treaties: “Athens’s proposals are far from sufficient. The funding gaps are way beyond anything we’ve seen so far,” he said.

The hard line was echoed by Peter Kazimir, finance minister of Slovakia, who said that new austerity measures tabled by Athens were already past their sell-by date.

The eurozone has been united for five months in the negotiations with Tsipras, but with the stakes rising greatly in the last 10 days, major divisions have surfaced, with the French [and Italy] working tirelessly to save Greece and the hardliners now pushing Greece’s expulsion for the first time openly.

The European commission and the European Central Bank issued dire warnings that a failure to grant Greece new rescue funds of up to €78bn would put the country on a trajectory of complete banking and financial collapse.

The widening gulf between eurozone hawks and doves paves the way for an acrimonious summit on Sunday, with France and Italy lining up against Germany and the northern and eastern Europeans

Merkel is under intense pressure from the Americans not to “lose” Greece and is worried about her own legacy. But Greece fatigue is becoming endemic in Germany, and she faces growing unrest in her party ranks where Schäuble’s hard line is popular.

If the talks break down irretrievably and Greece is allowed to slide into even greater chaos, relations between Berlin and Paris will come under tremendous strain. Michel Sapin, the French finance minister, lauded Tsipras for putting his austerity proposals before parliament and saw the moves of the past few days as “positive”.

Tsipras won a sweeping majority with the support of opposition parties, but many in his Syriza movement defected, leading to speculation that he could either call new elections or ditch his hardliners and lead a new “national unity” government.

Germans Forget History Lessons on Need For Debt Relief in Greece Crisis

n 1953, Hermann Josef Abs, center, signed an agreement that effectively cut West Germany's post-World War II debt in half. Credit Associated Press

NY TIMES


As negotiations between Greece and its creditors stumbled toward breakdown, culminating in a sound rejection on Sunday by Greek voters of the conditions demanded in exchange for a financial lifeline, a vintage photo resurfaced on the Internet.

It shows Hermann Josef Abs, head of the Federal Republic of Germany’s delegation in London on Feb. 27, 1953, signing the agreement that effectively cut the country’s debts to its foreign creditors in half.

It is an image that still resonates today. To critics of Germany’s insistence that Athens must agree to more painful austerity before any sort of debt relief can be put on the table, it serves as a blunt retort: The main creditor demanding that Greeks be made to pay for past profligacy benefited not so long ago from more lenient terms than it is now prepared to offer.

But beyond serving as a reminder of German hypocrisy, the image offers a more important lesson: These sorts of things have been dealt with successfully before.

The good news is that by now economists generally understand the contours of a successful approach. The bad news is that too many policy makers still take too long to heed their advice — insisting on repeating failed policies first.

“I’ve seen this movie so many times before,” said Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard who is perhaps the world’s foremost expert on sovereign debt crises. “It is very easy to get hung up on the idiosyncrasies of each individual situation and miss the recurring pattern.”

The recurring, historical pattern? Major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be.

Nobody should understand this better than the Germans. It’s not just that they benefited from the deal in 1953, which underpinned Germany’s postwar economic miracle. Twenty years earlier, Germany defaulted on its debts from World War I, after undergoing a bout of hyperinflation and economic depression that helped usher Hitler to power.

It is a general lesson about the nature of debt. Yet from the World War I defaults of more than a dozen countries in the 1930s to the Brady write-downs of the early 1990s, which ended a decade of high debt and no growth in Latin America and other developing countries, it is a lesson that has to be relearned again and again.

Both of these episodes were preceded by a decade or more of negotiations and rescheduling plans that — not unlike Greece’s first bailout programs — extended the maturity of debts and lowered their interest rate. But crises ended and economies improved only after the debt was cut.

In a recent study, Professor Reinhart and Christoph Trebesch of the University of Munich found sharp economic rebounds after the 1934 defaults — which cut debtors’ foreign indebtedness by at least 43 percent, on average — and the Brady plan, which sliced debtors’ burdens by an average of 36 percent.

“The crisis exit in both episodes came only after deep face-value debt write-offs had been implemented,” they concluded. “Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings.”

Policy makers have yet to get this.



This is true even at the International Monetary Fund, which was created after World War II to deal precisely with such situations. Its approach to the European debt crisis, five years ago, started with the blanket assertion that default in advanced nations was “unnecessary, undesirable and unlikely.” To justify this, it put together an analysis of the Greek economic potential that verged on fantasy.

Even as late as March 2014, the I.M.F. held that the government in Athens could take out 3 percent of the Greek economy this year, as a primary budget surplus, and 4.5 percent next year, and still enjoy an economic growth surge to a 4 percent pace.

How could it achieve this feat? Piece of cake. Greek total factor productivity growth only had to surge from the bottom to the top of the list of countries using the euro. Its labor supply had to jump to the top of the table and its employment rate had to reach German levels.

The assumptions come in shocking contrast to the day-to-day reality of Greece, where more than a quarter of the work force is unemployed, some three-quarters of bank loans are nonperforming, tax payments are routinely postponed or avoided and the government finances itself by not paying its bills.

Creditors, of course, do not generally like debtors to write down their debt. But that’s not how Germany and its allies justify their approach. They rely instead on a “moral hazard” argument: If Greece were offered an easy way to get out of debt, what would prevent it from living the high life on other people’s money again? What kind of lesson would this send to, say, Portugal?

But the Greek economy has shrunk by a quarter. Its pensioners have been impoverished. Its banks are closed. That counts as suffering consequences. No sane government would emulate the Greek path.

Germany, in fact, understands moral hazard backward. The standard definition refers to lenders; covering their losses will encourage them to make bad loans again. And that is, let us not forget, exactly what Europe’s creditors have done. Their financial assistance to Greece was deployed to pay back German, French and other foreign banks and investors that held Greek debt. It did Greece little if any good.

Greece has done little to address its endemic economic mismanagement. But it has few incentives to do so if the fruits of economic improvements will flow to its creditors.

A charitable explanation of the strategy of Greece’s creditors is that they feared Europe’s financial system was too fragile in 2010, when Greece’s insolvency first became apparent, to survive a write-down of Greek debts. Greece, moreover, was not an outlier but one of several troubled European countries that might have followed the same path.

But Adam S. Posen, who heads the Peterson Institute for International Economics, says he thinks it has more to do with political cowardice. Greece’s creditors were not prepared to take a hit from a Greek debt write-down.

Even the I.M.F.’s economists recognize that there may be no way around a Greek write-down.

Yet Germany has not come around. It took a decade or more from the onset of the Latin American debt crisis to the Brady deal. Brazil alone had six debt restructurings. Similarly, the generalized defaults of 1934 followed more than a decade of failed half-measures. Does Greece have to wait that long, too?

WHAT NEXT FOR GREECE?

NPR

Greece and its European Union partners are beginning to sort out what's next after the country voted en masse to reject a German-led bailout plan that would have given the country more credit to pay its debt in exchange for tough austerity measures.

As The New York Times reports, now that the vote is in, the hard part begins. Using the vote as leverage, Greece will try to renegotiate more favorable terms for its bailout, but its European partners could insist on tough terms, which could ultimately result in Greece's exit from the European Union.

Meanwhile, the vote had its first concrete consequence on Monday when Greek Finance Minister Yanis Varoufakis resigned. Varoufakis went on to call the vote "splendid" and the "historic" moment in which Greece "rose up against debt bondage. I shall wear the creditors' loathing with pride," he said.

Prime Minister Alexis Tsipras of Greece, second left, before a meeting with other political leaders in Athens on Monday. Credit Petros Giannakouris/Associated Press

Ending Greece’s Bleeding

PAUL KRUGMAN, NY TIMES

...the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.

But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.


How come no one is suggesting that Greece be abandoned and let them 
Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?


Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.



Greek Crisis Shows How Germany’s Power Polarizes Europe

WALL ST JOURNAL

Ms. Merkel’s power after a decade in office has become seemingly untouchable, both within Germany and across Europe. But with the “no” vote in Sunday’s Greek referendum on bailout terms posing the biggest challenge yet to decades of European integration, risks to the European project resulting from Germany’s rise as the Continent’s most powerful country are becoming clear.


On Friday, Spanish antiausterity leader Pablo Iglesias urged his countrymen: “We don’t want to be a German colony.” On Sunday, after Greece’s result became clear, Italian populist Beppe Grillo said, “Now Merkel and bankers will have food for thought.” On Monday, Ms. Merkel flew to Paris for crisis talks amid signs the French government was resisting Berlin’s hard line on Greece.

Ms. Merkel’s popularity at home has remained strong through the Greek crisis, holding about steady at 67% in a poll at the end of June. She now must weigh whether to offer additional carrots to Greece to keep the country in the euro and preserve the irreversibility of membership in the common currency—at the risk of political backlash at home and the ire of German fiscal hawks. Only 10% of Germans supported further concessions for Greece in another poll last week.

Greece Is Just The Beginning Of The Great Austerity Backlash

HOWARD FINEMAN, HUFFINGTON POST

Now that the...world’s top dozen banks control $30 trillion in assets, the callous demands of a new and even larger “money power” is starting to spark a worldwide backlash.


Even the ever-cautious Obama has alluded to it. This past winter, he defended Greece, saying that “you can’t keep squeezing countries that are in the midst of depression” to pay off debt and warning that "eventually the political system, the society can’t sustain it.”

Europe, meanwhile, is likely to see the Greek anti-austerity sentiment spread -- in the first instance to Portugal and Spain, which have national elections this fall and winter, respectively. Governments in both countries are responding to heavy borrowing and debt with controversial austerity measures sure to be at issue with the voters. French and Italian national elections are much further away, but the leftist parties in each nation have been invigorated by the fight in Athens. Representatives of parties and movements in all four countries were on the scene in Greece this week, cheering on the Syriza party and trying to learn from its victories and mistakes.

The leftists face long odds despite growing evidence that what British economist John Maynard Keynes warned during the Great Depression (and what Obama said this winter) remains true: You can’t “squeeze” a country into prosperity. Just the opposite, in fact.

This was something the founders of the International Monetary Fund understood. Their original aim was to provide guidance to national governments in economic distress but also to feed in more money where needed, not cut it back. Today the IMF has become something akin to a collection agency, insisting on harsh measures that guarantee the repayment of loans made to vulnerable countries by private global banks.


Something has to change, as the Greeks declared with their vote this weekend.

GREECE TAKES IT TO THE LIMIT

lexis Tsipras, the prime minister of Greece, greets supporters after a rally of the governing Syriza party. Photograph: Sotiris Barbarousis/Sotiris Barbarousis/epa/Corbis

PAUL KRUGMAN, NY TIMES

It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.

Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.

But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls — limits on the movement of funds out of the country. It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” — the institutions representing creditor interests — for yet more austerity.

Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.

To understand why I say this, you need to realize that most — not all, but most — of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.

o why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.

And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.

So have I just made the case for “Grexit” — Greek exit from the euro? Not necessarily. The problem with Grexit has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled both by banking troubles and by uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.

But the troika was having none of it. It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years.

This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.

But they shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.

Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.

So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.




JOSEPH STIGLITZ, THE GUARDIAN


The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.

Of course, the economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.

We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.

But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy?

In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

hat concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. When Sweden’s did, Swedes said no. They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.

And, sure enough, what we are seeing now, 16 years after the eurozone institutionalised those relationships, is the antithesis of democracy: many European leaders want to see the end of prime minister Alexis Tsipras’ leftist government. After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.

It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.

By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.


THE GUARDIAN {EDITORIAL)

both sides in this clash have motives of their own, not all of them unconnected with democracy. The creditors point to some of Europe’s poorest nations, the likes of Portugal and Ireland, whose voters have endured their own austerity and who would look askance if Greece were now let off the hook. Even the reviled IMF can explain its hard line: given the bitter programmes it has imposed on countries from the global south, it can hardly now be lenient towards a European country that is, relatively, better off.

Greece’s woes are not wholly of others’ making. Witness the decades of clientelist Greek politics of left and right, the notoriously poor tax collection, and the fudging of statistics when the country joined the euro in 2001. Much of this predated Alexis Tsipras and Syriza, but it’s also true that the party won power in January partly by promising that less would have to change than, in reality, it would.




JAMES STEWART, NY TIMES

Greece is hardly the first nation to face the prospect of defaulting on its sovereign debt obligations. Argentina has defaulted on its external debt no fewer than seven times since gaining independence in 1816, most recently last year. But it’s Argentina’s 2001 default on nearly $100 billion in sovereign debt, the largest at the time, that poses a cautionary example for Greece.

Like Greece today, Argentina had endured several years of hardship and austerity by 2001. It borrowed heavily from the International Monetary Fund, the World Bank and the United States, all of which demanded unpopular spending cuts. The I.M.F. withheld payments when Argentina (like Greece) failed to meet its deficit targets. A bank run led the government to freeze deposits, which set off riots and street demonstrations. There were deadly confrontations between police and demonstrators in the heart of Buenos Aires, and the president at the time, Fernando de la Rúa, fled by helicopter in December. In the last week of 2001, Argentina defaulted on $93 billion in sovereign debt and subsequently sharply devalued the peso, which had been pegged to the dollar.

In addition to social unrest and a wave of political instability (at one point, the country had three presidents in four days), Argentina’s economy plunged into depression. Tens of thousands of the unemployed scavenged the streets collecting cardboard, an enduring image that gave rise to the term “cartoneros.” Dollar-denominated deposits were converted to pesos, wiping out over half their purchasing power.

Despite this trauma, the Argentine economy stabilized in 2002. The country was able to repay the I.M.F. in full by 2006. But the country has never re-entered the international debt markets. It has refused to comply with a ruling by a United States federal court judge that the country must repay in full private creditors who did not participate in the country’s debt restructuring. As a result, Argentina defaulted again last year, and the standoff continues.

Even without much external financing, Argentina’s economy has fared relatively well since 2002, leading some economists, notably Mark Weisbrot of the Center for Economic and Policy Research in Washington, to suggest that Greece should default, suffer the short-term pain and follow Argentina’s example.

Argentina’s economic recovery was largely driven by a fortuitously timed surge in commodity exports driven by demand from fast-growing Brazil and China. (Although the commodity boom is long over, and Argentina’s economy today is at best stagnating, those two countries still account for about 28 percent of its exports.) Soybean meal, corn and soybean oil are the country’s top three exports. Argentina had a population of over 41 million and gross domestic product of $610 billion in 2013. Although it’s a net importer of energy, it has vast shale oil and gas reserves that could make it self-sufficient.

Greece, by contrast, is heavily dependent on imports. Its top three are crude oil, refined petroleum and pharmaceuticals, all necessities. While its top export is also refined petroleum, it has to import crude oil for its refineries. Its only major homegrown exports are fresh fish and cotton. It would be hard to significantly increase sales of either product: The European Union has strict quotas to prevent overfishing, while cotton production is struggling from reduced demand for textiles and a lack of bank financing.

If the country left the European Union and brought back a sharply devalued drachma, they’d gain some from tourism, but they’ve already cut prices and tourism has gone up. But it hasn’t really helped because total revenue hasn’t gone up.

And compared with Argentina, Greece is tiny, with a population of just over 11 million and gross domestic product of $242 billion in 2013. Argentina is a resource-rich country that, if forced to, can live with its own resources. The economic viability of Greece on its own has never been tested since 1981, when Greece joined the European Union.

Everyone pretty much agrees that, if Greece could devalue its currency, as did Argentina, its economy would benefit. But it was also relatively easy for Argentina to devalue the peso by severing its link to the United States dollar, a tie that was self-imposed. Greece doesn’t have a currency that’s pegged to the euro: it has the euro. The practical challenge of disseminating a new currency would be enormous. Moreover, Greek savings now denominated in euros (and, in many cases, deposited in European banks outside Greece) can’t be converted to drachmas, as the Argentines converted savings into pesos.

Converting to the drachma would also be a crushing blow to the private sector, much of which finances its activities with euro-denominated loans from non-Greek banks. Greek companies have a lot of cross-border obligations. The European Central Bank has kept Greek banks alive. Its collateral would be worth only a small fraction if Greece leaves the euro. The Greek banks would be insolvent immediately.

Greece’s finance minister, Yanis Varoufakis, Credit Alkis Konstantinidis/Reuters

Yanis Varoufakis, Greece’s firebrand finance minister advocates standing up to the European Union’s demands, but, while conceding that leaving the euro would be a disaster, he still contends a Greek default would be manageable and give Greece more leverage in longer-term negotiations to keep Greece in the European Union and eurozone.

No matter how much worse it might be for Greece than Argentina, the outcome will ultimately be determined by politics, not economics. Economists are terrible at predicting political outcomes.

Do the Greek people know they’re playing with fire and might get burnt? It’s what they voted for, and they seem to have voted with their eyes wide open. Not everyone values prosperity the same way as people in the United States and most of Europe do.

For others, which evidently includes many Greeks, ceding national sovereignty to foreign lenders may be worse than economic chaos. As Mr. Varoufakis wrote, “I salute the Argentinian people for having toppled a regime, and more than one government, that tried so desperately to sacrifice a proud people on the altar of I.M.F.-led austerity.”

People in countries like Venezuela and Cuba have tolerated failed economies and low standards of living for years, and the Russians seem all too willing to follow President Vladimir Putin into recession. Populism and nationalism, are still potent forces.