Greece’s default, day one

National democracy at its Athenian birthplace crashes head-long into the distant technocracy of the wider European project.

On Tuesday night, Greece became the first developed economy to default on an IMF loan (though not its other obligations). The IMF loan was itself a bailout to repay other loans, including those the EU failed to stop years ago:

In a sense, like so many American homeowners before the end of 2007, Greece was given subprime loans it couldn’t possibly repay. Regulators and monetary authorities failed to perform due diligence ahead of the accession of Greece to the eurozone and then ignored the escalating danger as long as the rest of the global and European economy was doing fine. They only stepped in after the house of cards collapsed and then demanded round after round of budget cuts and other measures that hurt average Greeks who had nothing to do with the bad debt decisions that the rest of the Eurozone should have stepped in to prevent years earlier.

Greece now heads into a referendum (full story➚) on the bailout conditions offered by European leaders.

Here are a couple reactions since the referendum was announced and default became very likely.


“Joseph Stiglitz: how I would vote in the Greek referendum”:

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.
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.

That 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.

Paul Krugman, arguing no to additional austerity; no to the euro:

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.

On the other side of the debate there has been some sighs of exasperation, tongue-clucking, and then particularly disturbing responses that are clearly the wrong takeaway from the situation… Read more

Greece heads back to the polls on a big question

In less than one week, the people of Greece are scheduled to vote on a referendum on whether or not to accept the terms from the European Central Bank and European Commission leaders and the IMF to receive more help on meeting its debt obligations.

The terms are not particularly favorable (read: pretty terrible), and the government of Greece is urging a no vote. But Greece is also about to run out of money and go into default and probably be forced out of the eurozone, because the European leaders and IMF aren’t planning to change the terms or provide emergency funds even with a no vote.

So, there are likely to be brutal consequences coming either way the referendum goes. The average people in Greece will continue to suffer the most.

They were the victims of a lot of really irresponsible people — creditors and European leaders as well as Greece’s own past leaders — putting abstract finance and personal enrichment over human lives.

But within all the blame going around, I still remain most frustrated by the present-day handling of the situation from the European Union leaders. The lines below captured a lot of my feelings.

“The moral crusade against Greece must be opposed” by Zoe Williams for The Guardian:

The vision that Syriza swept to power on was that if you spoke truth to the troika plainly and in broad daylight, they would have to acknowledge that austerity was suffocating Greece. They have acknowledged no such thing. Whatever else one could say about the handling of the crisis, and whatever becomes of the euro, Sunday will be the moment that unstoppable democracy meets immovable supra-democracy. The Eurogroup has already won: the Greek people can vote any way they like – but what they want, they cannot have.
The euro was founded on the idea that the control of currency was apolitical. It has destroyed that myth, and taken democracy down with it.

These talks did not fail by accident. The Greeks have to be humiliated, because the alternative – of treating them as equal parties or “adults”, as Lagarde wished them to be – would lead to a debate about the Eurogroup: what its foundations are, what accountability would look like, and what its democratic levers are – if indeed it has any. Solidarity with Greece means everyone, in and outside the single currency, forcing this conversation: the country is being sacrificed to maintain a set of delusions that enfeebles us all.


A sinking feeling in Puerto Rico

Greece (full story➚) isn’t the only place staring down the barrel of an imminent major default, it seems. So is the U.S. Commonwealth territory of Puerto Rico.

“Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’” – The New York Times:

Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.
“There is no U.S. precedent for anything [in debt restructuring] of this scale or scope,” according to the report, one of whose writers was Anne O. Krueger, a former chief economist at the World Bank and currently a research professor at the School of Advanced International Studies at Johns Hopkins University.

Oh hell.


New York speculators are forcing an Argentina default, 1780s-style


Uwe Bott, Chief Economist at The Globalist Research Center, raised some interesting points in a new article on the latest Argentinian debt crisis, explaining how Wall Street hedge funders are abusing the Rule of Law to profiteer from Argentina’s chronic fiscal problems:

On Wednesday, Argentina is likely to default again on its sovereign debt. After its mega-default on some $100 billion in December 2001, it is now likely to default on those bonds that were restructured in 2005 and 2010.

Why is it that Argentina, once again, cannot pay? Well, that’s actually not the issue. Argentina can pay and has paid its semi-annual payment to the trustee of the restructured bonds, the Bank of New York Mellon.

Without getting fully into all the legal tangles – and they are mind-numbingly complex – there is a broader point to be considered in the battle of New York vs. Argentina. It concerns the role that New York-based hedge funds play in the global financial game.

Wolves in sheep’s clothing

In essence, they try to present themselves as sheep, while they really are wolves. Let me explain: Unlike most of Argentina’s bondholders, NML Capital and Aurelius Capital Management bought Argentine bonds in 2002 and 2003, after Argentina had already defaulted. For that reason, they were able to buy these bonds for pennies of their face value.

Why on earth would they do that, you ask? Because from the get go, they intended to use – or rather abuse — the legal rights of holders of bonds issued under New York law for one purpose only, to make Argentina pay the full amount at a later point in time.

Argentina managed to obtain restructuring agreements from its bondholders in 2005 and 2010 that paid them 30 cents for each dollar owed and over a much longer maturity.

The hedge funds rejected these restructurings. They knew that New York law was on their side.
But the issue left unaddressed is this: Is this really a question of the letter of the law — or is it a question of the intent of the law? Specifically, is this not a stellar example for “two wrongs don’t make a right”?

True, Argentina should have complied with its debt obligations and surely could have afforded to pay more than the 30% of face value to all investors. But the hedge funds’ exploiting the letter of U.S. law after buying defaulted bonds for pennies and then asking for full repayment flies in the face of what justice is all about.

This behavior is a longstanding and apparently proud American — or perhaps more accurately, New York City — tradition, dating to the earliest days of the republic.
Read more