Greece Quick Hits
Hit Number 1. One of Krugman’s stock arguments to defend deficit spending and the accumulation of massive amounts of debt is “don’t worry!: we owe it to ourselves.” (I will pass over in silence at the Ricardian implications of that statement, which undermine Krugman’s argument that deficits are expansionary.) Krugman is also cheerleading for a Grexit.
It is therefore beyond ironic that a major reason that Greece faces Armageddon is the debt Greeks owe to themselves. The immediate source of Greece’s peril is the impending collapse of its banking system. The banks hold about €11 billion in Greek government bonds and about €14 billion in Greek Treasury Bills, money, per Krugman’s formulation, that Greeks owe to themselves. Greek banks are scraping by only because the ECB has agreed to fund these bonds. If Greece defaults, this funding goes away, and the banks will collapse. And it’s not just sovereign debt. The remainder of the nearly €400 billion on Greek bank balance sheets is loans to Greeks, i.e., money Greeks “owe themselves.” Many of those loans are underwater too.
In other words, money Greeks owe themselves will almost certainly bring down the banking system, and with it the Greek economy, once the ECB safety net goes away. But I’m sure Krugman will find a way to say that’s a good thing. Or that the problem was that they didn’t borrow enough from themselves. Or something.
Hit Number 2. The game theorist likely behind the let’s-play-crazy referendum and negotiating strategy, Finance Minister Yanis Varoufakis, has resigned. But don’t get excited. His replacement is a hardcore Marxist. But no worries. The FT assures us that he’s a pragmatist. As if it really makes a difference whether a Menshevik or Bolshevik is in charge of economic policy.
Forget the debt issue. That will be resolved, for worse or for worser. The real reason that Greece is well and truly screwed is its statist, leftist, and frequently Marxist political culture. Greece needs to grow. Replacing one Marxist with another Marxist ensures that it won’t.
But look at the bright side. Now Venezuela has company.
You are being pretty disingenuous here. The Greeks might owe the money to themselves but unlike America they dont have the capacity to create new money to ‘quantitative ease’ the debt. Digging deeper into these paragraphs you also get the paradox of ECB’s valuations: “Greek banks are scraping by only because the ECB has agreed to fund these bonds. If Greece defaults, this funding goes away, and the banks will collapse. And it’s not just sovereign debt. The remainder of the nearly €400 billion on Greek bank balance sheets is loans to Greeks, i.e., money Greeks “owe themselves.” Many of those loans are underwater too.”
Greek banks are so far ‘not insolvent’ according to the ECB — because if they were the ECB has the capacity to trigger a resolution mechanism for them — because they ‘have’ an equity buffer of 18%. Greek debt on the balance sheets however is being discounted at 50% by the same ECB.
Your first post on this whole mess was better, everyone is fucking up in different ways.
Comment by d — July 6, 2015 @ 10:46 pm
Yes Professor, you are being completely disingenuous here. Krugman says the original sin of debt is borrowing in a currency you don’t control. Greece borrowed in €.Greece has no control over the ECB and can’t use monetary policy to manage the debt.
Comment by Ben — July 10, 2015 @ 8:45 pm