Back in 2011, and boy how time flies, we did a whole crapton of posts on Greece and the Eurozone. Basically the thrust of every single one of them was summed up nicely by Kevin Drum in Mother Jones in a nifty piece that’s worth reproducing verbatim here.
So, one more time, just as we did it here back on November 2, 2011.
Here it is;
Are the Greeks crazy?
No, they’re just at the end of their tether. Europe is asking them to adopt more austerity than they’re willing to bear.
Okay, but they’re spending too much money. Surely they know they have to cut back?
Now what, Angela? If Greece goes down, so do a lot of German banks. Then you get to bail them out instead of Greece. The German electorate is gonna just love that either way, right?
Sure, but the deals on offer are pretty unattractive. Europe wants to forgive half of Greece’s debt and put them on a brutal austerity plan. The problem is that this is unrealistic. Greece would be broke even if all its debt were forgiven, and if their economy tanks they’ll be even broker.
But that’s the prospect they’re being offered: a little bit of debt forgiveness and a lot of austerity.
Well, them’s the breaks.
But it puts Greece into a death spiral. They can’t pay their debts, so they cut back, which hurts their economy, which makes them even broker, so they cut back some more, rinse and repeat. There’s virtually no hope that they’ll recover anytime in the near future. It’s just endless pain. What they need is total debt forgiveness and lots of aid going forward.
That doesn’t sound like a very attractive option for the rest of Europe.
No, it’s not.
So maybe they should just let Greece default and wash their hands of them.
Here’s the thing, though: Greek debt is largely held by German banks that made the loans. [See update below.] If Greece has been irresponsible, so were the German banks that happily loaned out the money. So if Greece defaults, the banks go kablooey. But they’re too big to fail, which means the German government would be forced to bail them out. And guess where the bailout money comes from? Tax dollars.
This means that German taxpayers have a bleak choice. They can shovel lots of money to Greece to keep them from defaulting, or they can refuse, and then shovel lots of money into German banks to keep them from collapsing. Either way, German taxpayers are going to foot the bill. They just haven’t quite accepted this in their gut yet, and it’s hard to blame them. They’re pretty badly screwed no matter what.
Hmmm. Given that choice, they might decide they’d rather give their money to German banks than to Greek civil servants. What happens then?
Greece defaults. And that almost certainly means that Greece exits the euro.
It’s the growth thing again. If Greece defaults, nobody will loan them any money. That means huge cutbacks, which means the economy will tank, which means even more cutbacks, etc. The traditional way out of this spiral is a massive devaluation of your currency. But Greece doesn’t have a currency. It has the euro.
So if they want their economy to grow again, they have to (a) default, (b) exit the euro and readopt the drachma, and (c) devalue the drachma. This will cause massive amounts of pain, but it will also make Greek exports super cheap, which will eventually revive their economy.
So why not just let that happen?
It’s just too catastrophic to consider. German banks, of course, would collapse and have to be bailed out. Ditto for banks in other countries that have lots of exposure to Greek debt. But that’s not the worst of it. If Greece exits the euro, it will become terrifyingly obvious that other weak countries might exit too. Portugal, Spain, and Italy are the obvious candidates. Investors, spooked at the thought of their money being stuck in a country that might exit the euro and devalue all its bank deposits, would start huge runs on banks in those countries. The ECB would have to intervene and provide liquidity without limit. It would be a disaster.
So exiting the euro can’t be allowed?
But if there’s no exit, there’s no devaluation, and Greece is pretty much screwed forever.
So who wins?
It depends on who blinks. Exiting the euro would be no picnic for Greece. But they could decide it’s better than endless indenture and threaten exit in order to get a better deal from the Germans. Then the Germans have to decide whether to call their bluff.
Exactly. Wow. Everyone knows that somebody’s going to lose a huge pile of money over this. What’s really happening right now is a very high-stakes negotiation to figure out just how the losses are going to be parceled out. Stay tuned.
My own addendum to Drum’s excellent explainer was as follows;
Like I said, this is about Greece accepting the impossible so as to keep the confidence fairy on life support with regard to Italy, Spain and Portugal. And the idea of a democratic referendum impinging on those plans has the money wranglers running around like spooked church mice.
And they were running around like scared mice, and back then they didn’t get their referendum.
But just yesterday they sure did, and so now it comes to this; does Germany decide to support a bail out for Greece in a manner which would actually allow Greece to build a working economy (which would necessitate reeling much of the punitive austerity back in), or do they (along with quite possibly France and Switzerland) end up having to bail out their “too big to fail” banks if Greece defaults completely and exits the Euro?
Imagine that. Who could possibly have seen this coming?