Choose-your-adventure, Greek Debt Crisis edition

[Zamfir]

You can play here. It's pretty great. Even if you can quibble about the analyses, or the artificial constraints, it still captures something of the spirit.

Reading the media and blogs, it seems to me that left and right are united in the view that the Greek default is being handled appallingly, that the current attempts at a solution are childishly obviously wrong and that everything is the fault of someone, probably the Germans. My own view – that it is not at all clear what the direction of policy is, and that although I don’t agree with the troika plan, it’s recognizable as a good-faith plan made by conscientious international civil servants working under unimaginably difficult political constraints in an economic context that was irreparably broken before they got there – is, as always, unpopular.

I don’t have a solution myself – the more I end up discussing this with people, the more I am reminded of the London Business School proverb taught on some of the gnarlier case studies, which is “Not All Business Problems Have Solutions”. So, CT hivemind, what do you think the best outcome is? Below the fold, I note some talking points, aimed at preventing our commentariat from falling into some of the pitfalls and mistakes which appear to be dominating debate at present. Because the whole issue is a twisty turny maze which at times seems to consist of nothing but false moves, I am presenting it in the form of a “Choose Your Own Adventure” book. I would note at this stage that I could probably have presented it in a funky HTML way rather than making you scroll up and down, but I have convinced myself that this is a feature rather than a bug – the medium matches the message here, because international debt negotiations are cumbersome, inconvenient and irritating too. Also, it is probably easier than it needs to be for readers to end up at the wrong paragraph and get a confusing jumbled narrative which bears little resemblance to the decisions they thought they’d made. Again, this is a crucial part of giving you the authentic international financial diplomacy experience.

It then starts:

Welcome to Choose Your Own Troika Program For Greece! You are a junior member of the One World Government, and you have been given the job of coming up with a proposal to resolve the Greek crisis. You have also been given an advisor who will help you talk through the consequences of decisions. Remember that you have to consider the economic consequences of the various policy choices, but that there is no point in submitting a proposal which is politically unacceptable to either the Troika or the Greek government. Good luck!

1:
You are sitting in an office with your advisor, Maynard. You have been asked to come up with a workable solution for the troika and for Greece, which needs to be politically and economically acceptable to both parties. Maynard’s job is to take your ideas and turn them into a proper proposal to be submitted. He has a long list of decisions for you to make. “First of all”, he says, “we need to decide whether there is any more money on the table. Do you think that Germany (and Netherlands, Finland, etc) can sell any more fiscal transfers to Greece, given their domestic politics?”

If you answer “Yes, I know it’s going to be difficult, but we have to plan on that basis”, turn to 32.
If you answer “I think we have to plan on the basis that there isn’t”, turn to 47.

[Plasma Man]

Best response is in the comments:

A. Strange. Game. Professor. Falken. The. Only. Winning. Move. Is. Not. To. Play. How. About. A. Nice. Game. Of. Scottish. Secession?

[Jahoclave]

You mean the solution isn't gut social spending, sell off as much of the government to u.s. multinationals as possible, and lower taxes on the wealthy? After all, the poor burning down cities just means you can declare the land blighted and sell if off to redevelopers for cheap.

[johnny_7713]

You mean the solution isn't gut social spending, sell off as much of the government to u.s. multinationals as possible, and lower taxes on the wealthy? After all, the poor burning down cities just means you can declare the land blighted and sell if off to redevelopers for cheap.

German and possibly French multinationals in this case.

[Mittagessen]

You mean the solution isn't gut social spending, sell off as much of the government to u.s. multinationals as possible, and lower taxes on the wealthy? After all, the poor burning down cities just means you can declare the land blighted and sell if off to redevelopers for cheap.

Yes it is. Germany abolished social democracy ten years ago (ironically with a social-democratic/green coalition) and now we want everybody to be as miserable as the average German worker. If it means micro-managing Greece, Spain and Portugal all the better. Complaining and micro-managing our two national pastimes finally united in a scale never seen before.

[stevey_frac]

You mean the solution isn't gut social spending, sell off as much of the government to u.s. multinationals as possible, and lower taxes on the wealthy? After all, the poor burning down cities just means you can declare the land blighted and sell if off to redevelopers for cheap.

You do realize that Greece got themselves into this mess by massively overspending compared what they were taking in, and doing so in a way that was completely unsustainable? They got into this mess by having very low retirement ages, and a cultural belief in tax evasion.

It is not the responsibility of the rest of the world to support them through their screw-up. Right now, their best case scenario is 'Don't go bankrupt'. Because if they do... they are totally screwed. The measures inflicted will hurt. Quite badly. But it's better then a chaotic default. Once it's debt levels are reduced, and the world economy start recovering, they can start opening up the taps a little bit more.

This is a quote describing what happened to Argentina when it went bankrupt:

"Argentina’s millennial debt crisis is a great example of this… suddenly the power failed, the police stopped working, the gas stations closed, the grocery stores ran out of food, the retirement checks stopped coming, and the banks went under (taking people’s life savings with them)."

[Zamfir]

It is not the responsibility of the rest of the world to support them through their screw-up. Right now, their best case scenario is 'Don't go bankrupt'. Because if they do... they are totally screwed. The measures inflicted will hurt. Quite badly. But it's better then a chaotic default. Once it's debt levels are reduced, and the world economy start recovering, they can start opening up the taps a little bit more.

I think we can call Greece bankrupt by now, even if political and financial-legal reasons make people avoid a technical default. Their private creditors are getting their bonds replaced by new bonds at half the old value, at lower interest rates and with long maturity. The IMF is accepting losses on their bonds, and the ECB seems to be looking for a legal loophole that will allow them to accept losses on their holdings. The only bondholders who have a chance of getting out at limited losses are the Greek banks, because a collapse of the greek banks would only make things worse.

At the moment, Greece is dependent on the goodwill of outsiders to pay its running expenditures, and those outsiders can make very strong demands on Greek internal policy in return. But the irony is that this makes it far less attractive for Greece to implement measures. Every billion they squeeze out of somewhere goes abroad, but won't make them less dependent.

[Deep_Thought]

Exactly. Greece has essentially been bankrupt for years, but everyone only noticed after the Financial Crash of 2008. It's taken this long to find even a half-baked solution mainly because no-one had even half a clue how a default inside the Euro would work, let alone what the consequences would be. Now people/banks/the financial sector has at least had time to work out who owes how much to Greece.

Hence one of the few upsides of the current stalling-for-time plan is that supposedly Europe's major banks have had time to restructure and remove a lot of their exposure to Greece. If memory serves for something I saw on TV news, it's fallen from €220 billion to only €80 billion. I have no clue how they've made €140 billion evaporate (and frankly it scares me that it's even possible), but a default on that scale is much more manageable.

Hmmm, I reached ending number 10 in the game. After three tries at getting an outcome that was marginally palatable. Comment 346 is also interesting - Greece's structural deficit is almost entirely composed of Oil and interest payments.

[Mittagessen]

They got into this mess by having very low retirement ages...

Repeating this over and over again doesn't make it any more true. The average labor force exit age is higher than the EU average with 61.5 and pensions are low, especially taking the very high cost of living (and high indirect taxes) in account.

[Zamfir]

ME, have you tried to play the game? It's not holy writ or something, but it does a decent job of sketching out some of the dilemmas.

Or even if you don't want to go through it, perhaps you could take a stab at directly answering his 'what would you do' question. You seem pretty sure about your diagnosis of the crisis, does that diagnosis lead to policy prescriptions to solve it?

[Deep_Thought]

PS I liked that the advisor was called Maynard. Although I was imagining Maynard Keenan, not Keynes

[Jahoclave]

ME, have you tried to play the game? It's not holy writ or something, but it does a decent job of sketching out some of the dilemmas.

Or even if you don't want to go through it, perhaps you could take a stab at directly answering his 'what would you do' question. You seem pretty sure about your diagnosis of the crisis, does that diagnosis lead to policy prescriptions to solve it?

Well, it doesn't have restructure the entire world economy away from neoliberalism along with realign what is considered culturally important to create a better society less prone to the kind of crises generated by increasingly unregulated capitalism. So, I do believe I have to hack the game.

Which was generally what my sarcastic point was about--forcing Greece into increased neoliberalism isn't going to help them much in the long run.

[EsotericWombat]

I played the game and ended on 5.

“You’re going to take a lot of flak for this from some quarters, but it seems to me to be that you could do a lot worse”, says Maynard, finishing his tea. “In terms of consumption smoothing and reducing the fiscal adjustment, I don’t think you’ll do better – you’ve written down the debt and you’re getting structural current account funding. But there is not really much escaping from the fact that Greece is not going to get back to the levels of consumption (or more accurately, the gap between consumption and production) that it saw in the 2000s. A lot will depend on the gap between the maximum amount that is politically possible for the Eurocore to deliver in terms of fiscal transfers, and the minimum amount that is needed to prevent riots in Greece. Which is a parameter outside our control, unfortunately. But at least this plan sorts out the debt, and gets Euroland on the road to fiscal union. Let’s get it written up”.

THE END

[Zamfir]

ME, have you tried to play the game? It's not holy writ or something, but it does a decent job of sketching out some of the dilemmas.

Or even if you don't want to go through it, perhaps you could take a stab at directly answering his 'what would you do' question. You seem pretty sure about your diagnosis of the crisis, does that diagnosis lead to policy prescriptions to solve it?

Well, it doesn't have restructure the entire world economy away from neoliberalism along with realign what is considered culturally important to create a better society less prone to the kind of crises generated by increasingly unregulated capitalism. So, I do believe I have to hack the game.

Sure, but to stay in the spirit of the game: what hurdles will you run into with that plan? How are you going to pass the short term? Who do you need to get behind you to get this restructuring, especially paying and/or voting people? Why should they trust you, how do you safeguard that the money isn't going down a bottomless pit? And will Greece accept those safeguards?

The alternative to neoliberal cuts is hardly paradise. In the short run, it will be some form of 'the rest of Europe keeps giving money to Greeks'. Either from governments directly, from the EU, from the ECB, from private parties. Either to the Greek government, or bypassing the government and investing directly, or even directly funding Greek programs that would normally be funded by its government.

And with funding comes control. It's hard to imagine a situation without hard cuts, but also without a partial take over of Greece by the EU. Perhaps benevolent, but still.

[EsotericWombat]

also, restructuring the geopolitical economic paradigm is going to take rather more time than Troika has to work with. What's your near-term strategy?

[Jahoclave]

also, restructuring the geopolitical economic paradigm is going to take rather more time than Troika has to work with. What's your near-term strategy?

Watch the world burn. Moonbase.

I'll be honest, I haven't a lot of spare thinking time. Now if you want to know about critical theory, postmodernism, identity and political movements, I'm your guy.

[EsotericWombat]

Conveniently, an illustrative and not-all-that-time-consuming method of hashing that near-term strategy out has been prepared by someone who knows what they're talking about. Even more conveniently, you have been alerted to the presence of such a tool by a link in a thread on a forum that you frequent. Finally, by what must at this point be divine providence, you happen to be reading the thread where said tool is being discussed and has been linked to AT THE VERY MOMENT YOU ARE READING THIS SENTENCE.

[Jahoclave]

Conveniently, an illustrative and not-all-that-time-consuming method of hashing that near-term strategy out has been prepared by someone who knows what they're talking about. Even more conveniently, you have been alerted to the presence of such a tool by a link in a thread on a forum that you frequent. Finally, by what must at this point be divine providence, you happen to be reading the thread where said tool is being discussed and has been linked to AT THE VERY MOMENT YOU ARE READING THIS SENTENCE.

Which, you're missing the point about the fact that his near term strategy is about reifying the system which caused the problem in the first place. One I don't find worth saving. The assumption is then that, in lieu of this tools shortcomings, I must put up all the answers, which I don't have the time to do as I have more pressing things on my research and intellectual thought time--essentially asking me to master a theory of everything for a lot of things that can't even really be known at this time. Short term adjustments to capitalism hardly mesh with longer term methods of overcoming it. Alternatively, you could read this as, I'm not interested in playing the let's save capitalism one more time at even greater expense to the people game.

But your snippyness and insistence that I have to play within the paradigm is duly noted.

[jakovasaur]

Tl;dr - You like to whinge, but don't have anything productive to say.

[Lucrece]

Guys, this is Zamfir's thread. Don't make Zamfir mad by hijacking his thread with snooty exchange!

P.S. I got to 30 just picking what sounded better because I'm too ignorant to know if there's more money on the table based on German/Finnish national politics, and the impact of leaving the euro for Greece (which pushed me to "stay in"). Then, the decision for "tough it out" given that viewing what defaults do in other circumstances aren't all that great.

I feel so uninformed ;*(

[Zamfir]

Which, you're missing the point about the fact that his near term strategy is about reifying the system which caused the problem in the first place. One I don't find worth saving. The assumption is then that, in lieu of this tools shortcomings, I must put up all the answers, which I don't have the time to do as I have more pressing things on my research and intellectual thought time--essentially asking me to master a theory of everything for a lot of things that can't even really be known at this time. Short term adjustments to capitalism hardly mesh with longer term methods of overcoming it. Alternatively, you could read this as, I'm not interested in playing the let's save capitalism one more time at even greater expense to the people game.

But your snippyness and insistence that I have to play within the paradigm is duly noted.

Any vision of a different future in Europe has to grapple with the question how that future would deal with European integration. Should there be strong political economical and cultural ties between the countries, or should countries have a high degree of independence, and deal with their neighbours the way they would with more faraway countries?

And that inevitably means that the current European-wide institutions become relevant, like the EU and the euro. Even if you don't like them and see them as damaging parts of the current structure, there's still the question how to change that. Withdraw from them, break them apart, change them from within, replace them by something else?

Greece is currently a hinge in time, the decisions and outcomes here will be either be precedents for quite some time ahead if they end up stable (whichever way ), or else the start of drastic and possibly unpredictable changes in the structure of the European cooperation. Either way, the outcome will shape the the circumstances from which any vision of the future will have to start. We can't really ignore it and pretend we could go on in the same towards wherever we should be going anyway.

I can imagine that this is a bit distant when seen from the US. If you're not in Europe, it makes perfect sense not to want to spend time too much thinking about the details. But I don't think you can cast that as "I'm not interested in playing the let's save capitalism one more time at even greater expense to the people game." Europeans who don't want to save capitalism still have to consider what that means for now, and the answer is far from obvious.

The Dutch Socialist Party (who are to the left of the tradtional Labour party) takes a hard stance: no money to Greece, no power to a centralized Europe. If this blows up the EU, they consider it far too neoliberal in the first place. Their rough German equivalent, die Linke, wants to have centralized European taxes and bonds, with the money used for structural investments in weaker economies. Almost straight opposites, from sides that are about as anti-capitialist as you're going to find among parties who still have some power.

[stevey_frac]

They got into this mess by having very low retirement ages...

Repeating this over and over again doesn't make it any more true. The average labor force exit age is higher than the EU average with 61.5 and pensions are low, especially taking the very high cost of living (and high indirect taxes) in account.

Interesting. Thanks for pointing this out.

It seems as though, while Greeks CAN retire earlier, they do not on average. Early retirement in Greece is 55, as compared to 65 in Germany, according to the wiki page.


I found this paragraph in a CBC news story enlightening.

"There's a widespread image of Greeks as lazy people who were living off the state, which was in turn living off the foreign lenders. But, in actual fact, Greeks work nearly 50 per cent more hours per year than Germans. And while the official retirement age was 58 and certain groups were even allowed to retire earlier, the average retirement age for Greek workers is higher than the average retirement age for German workers."

[Nylonathatep]

I choose:

If you answer “I think we have to plan on the basis that there isn’t”, turn to 47.

If you reply “Well, tough it out it is then”, go to 35.

If you reply “Out”, go to 43. (Out of Eurozone)

and then I get this:

43:
“I was joking”, Maynard says, a somewhat concerned expression on his face. “Greece can’t leave the Euro and plan to stay current on Euro-denominated debt. Shall we back up a few stages?”

Go to 47


Help I'm stuck in a time-loop!!!

Why can't Greece leave the Eurozone, print a lot of money to pay off their debt, and devalue their new currency? It's a painful solution but 1) because they are not in the Eurozone anymore, only the new currency of Greece will be affected, 2) Most Greece debt holder already count their investment as a lost anyways so they might as well, 3) they can finally stop with the austerity measure and people can finally get back from rioting and start producing again.

Maybe I'm thinking too simple here, can someone enlighten me why it's a bad idea?


I think the problem with Greece is not the retirement age, but previous government promising too much for retirees or basically... their pension plan is unsubstainable and eveuntually the government ran out of money to fund their pension plan. I also think the best chances for Greece to the road of recovery is through their tourist industry. The land of Greece is full of history and that itself is a great draw for tourist. You can also add to the usual nice weather and scenary to the Greece appeal and make it an attractive tourist paradise. On top of that you can literally draw capital in by relaxing financial standard and oversight. Run it like a 3rd world Caribbean Island!

[maybeagnostic]

'Tough it out' means pay the full debt in euros. Leaving the eurozone and printing their own money is a form of default.

P.S. Why is default by leaving the eurozone and devaluating the new Greek currency a bad idea? Well, it leaves Greece out of the eurozone which is likely worse for them in the long run but it is disastrous for the eurozone because investors will panic and Italy, Portugal, Spain, and Ireland will soon follow Greece. Anyway, you can see variations on 'leaving the euro behind' under the disorderly default option in your second choice.

[Lucrece]

Also, to anyone who holds the notion that you can just retire and live off state pension, you need to be slapped. In most countries, the state pension will barely get you by and will most certainly not covered for the luxuries you're accustomed to.

Retiring at 55 means you have to possess enough savings to maintain your current lifestyle for at least 20 years, allowing for circumstances like vacation or travel, let alone some pocket money for expenses that the state might not cover. That's a crapload of spare money you need to have around, and only upper middle class/wealthy people can afford that for the most part.

There's also the psychological impact of early retirement. Many people derive purpose from the work they do. It keeps their mind and body active as well. You don't see old men wrapping bags in Publix just because their pensions are miserable, but also because staying in their house spells stupor and decay into depression oftentimes.

[firechicago]

To expand on maybeagnostic's answer:

One way of formulating the problem here is that the Greek government is having a hard time to get enough Euros to pay its Euro-denominated debt. In fact, it's currently dependent on what amounts to charity from larger and healthier economies in the Eurozone.

Leaving the Euro while keeping the debts denominated in Euros would make this problem dramatically worse. The other economies of the Eurozone would no longer have an incentive to bail Greece out, and at least initially, no one will be willing to trade Euros for the new Drachma, no matter what exchange rate you offer them. Trying to keep paying Euro denominated debt while leaving the Euro would be like saying "You just barely managed to swim across the river in your bathing suit, so now we're going to tie rocks to your ankles and send you back across."

The debt could be redenominated in Drachmas (or whatever the new Greek currency would be called), but whatever the official peg between the Drachma and the Euro, the actual exchange rate will certainly drop like a stone, which makes this just another way of defaulting. (If you owe me 100 Euros, but you pay me back 100 Drachmas, and the exchange rate is 1 to 100, then I'm not any better off than if you just told me that you can only afford to pay me back 1 percent of what you owe me.)

[Seraph]

Also, to anyone who holds the notion that you can just retire and live off state pension, you need to be slapped. In most countries, the state pension will barely get you by and will most certainly not covered for the luxuries you're accustomed to.

Greece isn't "most countries". The fact that we're talking about a Greek debt crisis and not a "most countries" debt crisis should be evidence enough of that.

Before the pension reforms back in 2010 the average 20 year old Greek worker could have expected a pension equivalent to roughly 95% of his average lifetime salary if he retired at 65 and stayed employed. If you compared the pensions being paid to the salaries being paid to people working the former was about 94% of the latter.

[Deep_Thought]

if he retired at 65 and stayed employed

Can you clarify this bit please? Retiring usually means you stop being employed (mostly).

[userxp]

I'm not going to pretend I know enough about economy to discuss this, but I want to leave my naive opinion(/rant) here:

Euros are supposed to be for the convenience of the people. They mean you can cross the border to France, Germany, Italy, or whichever country you are closest to, buy a can of soda in the first vending machine you find and go back to your country without having to even think about exchanging currency. This should (in an ideal world) be more important than which strategy will banks and governments follow when agreeing with each other's money amounts.

[Nylonathatep]

if he retired at 65 and stayed employed

Can you clarify this bit please? Retiring usually means you stop being employed (mostly).

I think what Seraph means, (and please correct me if I'm wrong on this one), is that your pension can pay you 95% of what you would be getting of the average amount of salaries that you've received during the years that you've been employed.

Basically Seraph brought up that point to address to the fact that, before the pension reform, a person could literally live off his pension if he chooses to retired, where as people in other countries relies on Saving plans such as 401k or RRSP to suppliment their income aftre retirement.

I'm not going to pretend I know enough about economy to discuss this, but I want to leave my naive opinion(/rant) here:

Euros are supposed to be for the convenience of the people. They mean you can cross the border to France, Germany, Italy, or whichever country you are closest to, buy a can of soda in the first vending machine you find and go back to your country without having to even think about exchanging currency. This should (in an ideal world) be more important than which strategy will banks and governments follow when agreeing with each other's money amounts.

That was the whole point of having the Eurozone in the first place and it's an excellent idea. Not only does it save money by reducing currency fluctuation, that unified currency is stronger being backed by all the countries in the Eurozone. However there's incentive to cheat in this system: Participants in the Eurozone could just keep running a fiscal deficit, printing money and issuing debt. It's very similar to a Prisoner's dilemma where your optinam choice is to go down in debt at the experience of every other country in the eurozone.

[Mittagessen]

if he retired at 65 and stayed employed

Can you clarify this bit please? Retiring usually means you stop being employed (mostly).

I think what Seraph means, (and please correct me if I'm wrong on this one), is that your pension can pay you 95% of what you would be getting of the average amount of salaries that you've received during the years that you've been employed.

If that is what he meant it's even more wrong than the claim of ridiculously early retirement age. Under the old system the maximum replacement rate was 70% for workers retiring at age 65 (the nominal age). Working after the age of 65 with 35 or more contribution years bumps that up to a maximum of 80% which seems to be a perfectly fine full government pension scheme as created by almost all countries in Europe. Even accounting for additional private pension schemes the gross pension level in comparison to gross earnings is at 81.4%.

EDIT: Additional pension schemes like US 401Ks utilizing capital markets are relatively uncommon in continental Europe. Until recently everybody expected to be able to live comfortably from their government pension.