Bickering creditors and the role of the ECB

Frances Coppola has written a nice analysis of what the ECB has done recently, and how that has helped or hindered the Greek situation. On the one hand the ECB should provide liquidity to the Greek banking system, on the other, as part of the Troika, it is enforcing harsh rules on Greece.

That is not good:

It is the conflict of interest between ECB-as-creditor and ECB-as-liquidity-provider that makes the ECB ineffective as a lender of last resort. And because NCBs [national central banks] are controlled and restricted by the ECB, they too cannot act as lenders of last resort. So the Eurozone banking system effectively has no lender of last resort.

I think we should go back to first principles. A central bank was never “Dealer of last resort” or “Creditor to the a Sovereign in difficulty of last resort” in the past. These are new roles, only with QE has the Central Bank become a dealer, only with the purchasing of Greek bonds a creditor. These functions were completely absent in in the past. For the ECB they became necessary after the 2008 financial crisis. They were certainly not envisaged when the Euro system was set up. And certainly not roles traditionally assumed by central banks

Why not go back to a position where the role of a central bank should only be lender of last resort to commercial banks with liquidity issues?

In her conclusion, Frances says, “the “doom loop” between sovereigns and banks must be broken: the funding of banks must be separated from the solvency of sovereigns…”

But is this true? Should banks and state be indeed separate? Maybe the two should be intricately linked, as a government borrowing in its own currency from its banks can never be insolvent, as long as banks provide credit. So the commitment of the ECB to provide liquidity for whatever reason should be absolute. Even if the commercial banks support the sovereign.

That would mean in practice, that as government bonds become expensive to issue, and doubts over its insolvency grow, it is the NATIONAL private sector banking system which provides finance to the state. Why not? As the ECB is lender of last resort to the banking system it would have to support that. As long as commercial banks are solvent, that liquidity should be provided. The ECB would not have any concern about the solvency of the sovereign. It would be assumed to be always solvent.

So that is exactly the opposite what Schaeuble and German economists (council of economic advisors) argue, they want Grexit, and agreed insolvency procedures.

But if we do not want that, we would a system by which it is impossible for countries to become insolvent, by commercial banks stepping in as lender of last resort to countries.

Now this is not such a new idea. France and Canada successfully financed their respective state spending in the past like that. Greece should arguably do so now.

Here is a revolutionary idea: Let the 240bn loan from EU institutions/countries and IMF be repaid by the Greek private sector banks who grant a loan to Greece.

Move all 240bn funding from European public sector creditors and IMF to the Greek banking system. What would that mean? The Greek private sector banks increase their total balance sheets by about 60% by granting total loans of 240bn to the Greek state. In return the Greek banks could grant the Greek state extremely beneficial rates on their loans, even lower than the rates currently being granted. Just by splitting the difference of the interest cost saved (which comes to, say, about Euro 4bn) between the commercial banks and itself, both the banking system and the country would benefit from a repatriation of the loans.

Greece would save about 2bn of interest per year it currently has to send abroad, more that 1% of its GDP. These foreign transfers lead at the moment to a deterioration in its current account balance, which would now improve. On the other hand, the Greek banking system can book in 2bn more profits each year, which would increase its capital base from retained profits. If the Greek private sector retained the profits for a few years, the need to re-capitalise the Greek banking system would go away.

The only drawback is that the ECB would have to agree to take on Greek state risk as collateral for further funding. It should do so, and increase ELA by 240bn, from its current level of 90bn, if need be.

The total risk to the EU from Greece would not change, the ECB now taking on the risk from the other public creditors. So in future the Greek banking system has only one creditor, the ECB. The Greek sovereign is only indebted to its banks, rather than about two dozen creditors (if each country is counted, plus the institutions). It is the current multitude of lenders to Greece which make the existing arrangement unworkable, as different lenders seem to have different agendas. All creditors have to agree to one common way forward, which they are unable to do. This uncertainty is deadly for the Greek economy, as the threat of Grexit always looms large.

Arguable, an arrangement of Greek banks lending to the Greek state is similar to what was in place before the Eurocrisis started in 2009. The only public sector risk to the ECB then was the Greek banking system, before the risk of Greek insolvency in 2009/10 changed all that.

But that banking system originally suffered because private sector funding for the Greek banking system, European interbank-lending and bonds, was withdrawn after there was doubt about Greek’s solvency. European banks withdrew their funds from the Greek banking system, Greek government bondholders sold their bonds, European banks withdrew even more funds from Greek banks, etc., until much more recently it was the Greek savers withdrawing funds.

Now clearly the solvency of Greece is not in doubt any more, or would Europe otherwise have offered Euro 86bn in re-financing?

So if taken on a national level, the linkage between banks and sovereign solvency is not a “doom loop”, as Frances puts it. In fact it could be a “virtuous circle”. The ECB allows Greek banks to finance the Greek state. Everything else now becomes redundant: All the creditors currently arguing with each other (e.g., Germany vs IMF over debt relief) would become friends again; other institutions like ESM/EFSF would not be needed; all the EU countries countries not really wanting to lend money to Greece could breath a sigh of relief. Everybody would get repaid and get their money back! The ECB takes on all the risk, via the banking sector.

Given the current heated discussions among creditors, and their inability to come to any kind of useful settlement which would include granting debt relief, that has to be a better option. So therefore the best way forward is linking the state with the national banking system, which would grant debt relief (in terms of halving interest rates), provide further funds for re-capitalising Greek banks, and makes it much easier to negotiate as there is only one creditor now.

Now, what about the supervision of the Memorandum of Understanding, the Greek credit agreement, who would police that, if a troika becomes redundant? Do we want the ECB then to police this memorandum?

Now here, of course, politics comes in again. Do we really need a troika to set precise terms of macroeconomic management, or is it sufficient to make sure that Greece sticks to an agreed repayment plan on the 240bn loan, while also agreeing to not to take on any more debt? The 240bn would become like a mortgage, to be repaid over, say, 50 or 100 years. At 1% interest rate, or less, whatever the Greek banks, Greece, and the EU decide is appropriate. After all in a commercial loan environment to companies, that is what happens, some financial rules are set, (like the Maastricht criteria, for example) and financial penalties ensue for the borrower, if they are not adhered to. We never, ever have bankers go into companies saying that cost of pensions contributions are too high, or a price increase should be implemented. The managers know best, and that must be the assumption for each new government elected in a country, also in Greece. The people there have spoken, and they want Syriza to govern.The EU should not interfere, as long as loans are repaid, and no further loans taken on, the Greek government should do what it likes.

In summary, that is what a new Memorandum of Understanding would look like:

So the EU, probably the commission, and Greece, just set come covenants, like in a commercial loan agreement, and make sure, that repayment will happen, and if not, some sanctions will take place. The covenant would say, each month the amortising loan is to be repaid by x. The financial penalities could be, for example, the withdrawal of funding from the EU agricultural aid fund, or the inability to access the EU structural growth fund. They make up about 6bn of funding for the Greeks per year. Arguably it was the threat of losing these funding sources for the Greek state which made the Greeks sign the harsh terms on the 13th, which they are now trying to implement.

So, the EU and the IMF could save themselves a lot of headache, meetings, controversy and ultimately failure, by pushing that big monkey, the 240bn debt, which is sitting on their shoulders, onto the shoulders of the Greek banking system. It would be good for the Greek banking system (increased capital through certain profits), and the Greek state (lower interest costs), good for the Greek current account balance, and in fact provide some debt relief which would otherwise be impossible.

And good for the creditors, who, in fact do not provide direct loans any more, over which nobody can agree. The bickering would stop.


Competitive blogging for Europe

Smithpeter999 had previously written a reply to my blog post about the economics of blogging, where I asked people to send £5 or Euro 5, and finance my efforts through crowd-funding. I zapped Peter’s reply to my post by accident, so let me repeat it for you here.

Peter had said that he considered sending a fiver, but decided otherwise, as he did not want to worsen the Spanish current account deficit (as he lives in Spain).

I can only say in response that he could have sent the money to my UK account, as the UK current account deficit is much worse than the Spanish. As a non-European (I do not know what nationality Peter is) he should not have taken sides which European country has a worse or better current account deficit, but tried to balance the worst situation possible, and that is the UK now.

He then suggested if I was short of fivers I should, when I mow my lawn (which my wife said needed cutting), offer to do the same for the neighbours and ask them to pay me £5 instead.

In theory that is a good suggestion, however, I have the following problem. If I take a job, even at the minimum wage in Britain I will earn about £50 a day. Now, I do not have 10 neighbours to cut the lawn, I only have two. So the maximum I could earn is £10.

Even if I offer to cut the grass in the whole street, I doubt that 10 of the people in my street would want their grass cut EVERY DAY, which I would have to do, if I were to be able to earn £50 a day!

Now, the “crowd-funding appeal” post was about blogging, not gardening, and what are the economics of that? I get about 50 to 300 clicks on my blog per day. Let us call the average 100, to make it easier. That is about 35,000 clicks a year. That is if I keep the work-rate up, because people will only come to your blog if you have something interesting to say.

To be able to earn the minimum wage per year (about £12,500) every click should cost the person visiting my website about 30 pence. So I could install some kind of pay-wall, visitors are only allowed to read my stuff, if they pay 30 pence of 40 Euro cent for each click. I do not know of a system where such micro payments would work, but even if it were technically possible, I know what would happen: I would get nobody reading my stuff any more.

The work I have put in the blog posts, though, is analytical work which I know, if offered elsewhere, (banks/management consultancy/IT) would pay at least 3-4 times the minimum wage. Surely somebody should recognise the value of that, and the fact that they would improve the Greek crisis.

So the only thing to do, is to apply to reason and crowd-funding (charity), if people think the work is good enough, they should donate, as they donate to other charities.

The problem though then is, that people think, hey, this is not a charity case, the guy can, if he wanted to, cut lawns, or if he is smart enough, as he obviously is, get a proper job in an office!

So the appeal to crowd funding will fail, as it did with my appeal here: Nobody donated a cent or a penny! I just checked my bank accounts.

Ultimately the only way this kind of work for the public interest can get funded is by the government, or voluntary organisations which have a lot of money to spend on grants, through endowments. As Richard Murphy does with his Tax Resarch UK website. That also makes sense, as the benefit of the proposals which I have, will ultimately benefit the government, all European governments, in fact (All proposal in my website have the aim: Greece is being helped to pay money back to other European countries.)

So maybe, there should be a Juncker Fund for websites, funding blogs and good ideas on how to get out of this European mess. The best proposal should then be submitted to a vote of the European electorate.

The problem with the current suggestions for Europe is are that they are simply based on the thinking of the political elite, no competition. Competition improves economic outcomes, and there should be competitive proposals to change the governance of Europe.

Varoufakis had such an idea, with “A Modest Proposal”, which you can find on his website. Just as an example. Now the current elite in Europe do not like Varoufakis’ ideas, but what do the people think, why do we not ask them? Why can the Europeans not be like the Swiss, who have direct democracy and can vote on proposals for government? Why can we in Europe not vote on it? A public vote on the TTIP proposals, for example, I wonder what the result be of that?

There must be others with good ideas, to leave strategic thinking about the future of Europe to a 72 year old German finance minister, just because Germany is the most powerful country in Europe, is frankly crazy. Where else do we follow 72 year olds in their thinking?

It is not very democratic, so why do we not use the web more to further democratic ideas, and alternative proposals?

And use it to vote on them, as well. Again, competition will always improve economic outcomes, and it would here as well.

Mission Impossible? Cui bono?

So, everybody will have heard the tape, or read the transcript. Who will benefit from this story? Why did Varoufakis give us further details of his plan B?

(That provided, of course, the perfect opportunity for George Osborne, the British chancellor, to sneak a hedge-fund manager onto the Bank of England monetary policy committee. Just in case there was any doubt, that the hedge-funds not only control British politics (they finance the Conservative Party), but in effect also now help to set interest rates. Well, hedgies, like lefties, like low interest rates, so we can guess that on balance then that this will be good for the economy, although opinions vary.)

So back to our James Bond story. Why do we get to know about it the way we did? And what was in it for the main protagonists. How did they, or will they, benefit?

Let us first look at the big storyteller himself, Yanis Varoufakis. Then at the hedge-funds and investment managers, and finally, what is in it for Greece?


Varoufakis generally does not like explaining anything without a big story. Current account imbalances are bad for the world? Greek mythology is used to explain the concepts. The Global Minotaur America running large trade and budget deficits and thus consuming output from all over the world, as the Minotaur did when it devoured human sacrifices. In a new book (only available in German so far) Time fo Change: How I explain economics to my daughter, he again employs examples from the ancient Greeks: Achilles would not have traded in his sword for money. That was his life. But we are living in a market economy now. And Greeks are about to sell everything they have, as the relentless march of capitalism has brought one of the weaker economies to its knees. An inevitability by the system.

So, if you are already know the economics of his arguments, you might still want to read the books to learn something about Greek mythology.

In the interview with investment managers, Varoufakis used a different tack. He knew that these metaphors are old, so he put together the following narrative: hacking into government computers, copy secret code from offices controlled by foreign powers, turn tax system into banking system by plugging in lap-top and giving everybody PIN at the touch of a button.

The hedge-funds lapped it up. They might not know Greek mythology, but they certainly know James Bond. “This is truly shocking, Yanis” said Norman Lamont with empathy, as he he was the only other ex-finance minister in the meeting who knows exactly what it is like to be taken for a ride and driven into virtual bankruptcy by dark foreign financial powers (in his case George Soros, who forced former chancellor Norman Lamont to abandon its exchange rate peg to the Euro pre-decessor Ecu.).

Now, my view on this is that Varoufakis wants us to know all this, and leaked the tapes to Kathimerini. His news management is first class. If he has learned anything in the last few months, it is how to handle the media with aplomb. That is why the other finance managers in Europe wanted him out, as he had the better stories as well as the better economics. The journalists are flummoxed. One German one e-mailed him with a request for an interview, Varoufakis said no, but he would write an article, which a couple of hours later was there to be included into the next edition of the paper. The journalist was impressed (it will take months to get anything out of Schaeuble), as was the editor, who mentioned it in a TV talk show in Germany. Varoufakis knows that if you control the news, you control the agenda. And that is what he is trying to do here.

As previously nobody took notice of his plan B, take over central bank, issue parallel currency and default on the ECB debt. He told us what it was in the New Statesman interview. The currency system idea, he claimed yesterday in the FT,  was discussed at this hand-over to Tsakalotos. We discussed here previously what it means to have the power to run the central bank. (Greece could be like Montenegro, have the Euro as currency but be outside the Eurozone.) But we dismissed the currency idea as not having been there. Varoufakis tells us we were wrong. And in effect the plan for a parallel currency system is a good one. It will be used as a stand-by system just in case the ECB shuts the banking system down. The transactions would run on the backbone of the tax system. And I bet his ECB default plan is a good one, too. We come to that later.

Just imagine the Greek banking system shuts down completely, pending re-structuring. Greece could credit every taxpayer in Greece 500 Euro, and even though the banks will not work, every financial transaction can take place via the new system. Afterwards, that advance from the government, that tax credit which would be needed if banks closed, could in time be repaid from taxes. Companies could, of course, get bigger tax credits. An ingenious solution. And entirely feasible. If Varoufakis had just told us about that, nobody might still not have taken any notice, now add a bit of glamour and panache: Hack system, no control over my own ministry, as soon as these words are uttered everybody sits up and listens.

The previous Machiavelli of news-management, the combative Alastair Campbell, the spin-doctor for the Blair government, would have been impressed. Compared to Varoufakis, if my theory is correct, Campbell looks like the PR department of the local girl-scouts group.

In a further bizarre move, the European Commission was forced to deny that they are not in charge of the tax authority in Greece. If that were true, that would be virtually the only government department over which the Troika have no control. Troika inspectors arrived just this week to take hold of the reins again. Because that seems to be what the Greeks signed up to on the 13th of July.

But talking about the controversies is good, as now everybody will talk about the new payment system, and what that could do. Varoufakis says that now there are high treason charges against him. Previously nobody cared. Varoufakis does not like to be scape-goated for the situation in Greece, and will make sure that everyone will have heard of his plan B in the end.

The hedge-funds and investment managers

The 80 or so listeners to the meeting, which was strictly confidential, as organiser David Marsh reminded everyone, “Do not profit from or broadcast what you have heard, this is not the BBC”. Now this tape has reached greater notoriety than any BBC program ever could have garnered, and the investors were there, of course, only to profit from what they have heard. David Marsh, will know that money can be made from early information about currency intentions. He wrote about it in a book, as that was what happened previously under the ECU peg.

Clearly the hedge fund managers wanted Varoufakis to say, our plan is for a Grexit on the week-end of 15th December, or something like that. So that they could have bought Euro, which would then appreciate. And then be ready to pounce on Greek assets, once Greece has devalued. Varoufakis clearly could not tell them anything about that, but they might have wanted to see whether there would have been any clues. I think they will have been disappointed. Because although there is a way to implement a parallel currency, there is no government plan to do so.

The Greek economy

Now, it really helps if proposals such as Varoufakis ideas get further discussion. Yesterday in the FT Varoufakis gave us some further details, and indeed, the ideas of using tax credit as money, as that it is what it boils down to, were discussed. Clearly, as any newspaper comments, sometimes things get off track somewhat, but here is my comment to get everybody to focus again, and it worked.

Obviously the lynch mob is out. Nobody is commenting on the article. Are people too thick to understand it?  This is the FT, guys, try to understand what Varoufakis is trying to tell you here.

Maybe we can stick to the issue here. Is this system as proposed a good payment system to allow the crediting of tax credits, as proposed above?

Undoubtedly it is.

Then, what does that actually mean? It means that the government has the means to influence the output of the economy by means of tax credits.  Issue tax credits, people can use them to pay taxes, and have their Euro for spending purposes.

Alternatively, people could use tax credits to buy goods and services directly, if shops were to accept them. That is where the payment system comes in handy. Smartphones and citizens cards could be used to pay in the shops.

Will that not lead to increased government debt? No, tax credits do not count as debt.

So increasing output, without increasing debt. Great idea. GDP growth in Greece will take off. Can all be done without changing the currency of Euro, can all be done while sticking to the austerity plan.

What is there not to like?

A good discussion ensued, and that is important as you want to know whether the ideas work.

And as they are pretty close to my ideas, I automatically got some feed-back for what I have said here on the various options for parallel currencies. Feed-back I have not yet had here, so that was good.

The Greek government has come out and said that the proposals of Varoufakis were not official policy. That is correct. But they will have to look at them in detail and will consider them.

There is now the opportunity to discuss various parallel currency ideas again.

The discussion will not happen in the big media houses of Greece, they see this as an opportunity to kick Varoufakis.

So now the last bit. Apart from parallel currency and independent central bank, Varoufakis had the strategy to default on the ECB. What would happen if ECB loans to Greece were defaulted upon? Now, previously we said that the justified fear was that the ECB would then close the Greek banks down completely. So the Greece government default on the ECB, and the ECB in turn cancels the ELA arrangement allowing Greek banks liquidity.

But let us think about it again. If Greece took full control over the central bank, the ECB could not close the banks any more. In turn, if Greece wanted to, it could now have its Central Bank default on the liabilities to the ECB. That is 120bn.

The Greek Central Bank could then in turn release the Greek banks of their 120bn of liabilities. The Greek banks would be the best capitalised banks in the world. The Greek banking crisis would be over in a flash. That is a viable solution, and Thomas Mayer, the former chief economist for Deutsche Bank talked about it a few weeks ago.

So, it is all a very credible, the plan B of Greece. Other aces can be played at any time, of course, in case Greece gets sick of austerity.

But Greece has to embrace that parallel currency idea and make it into a detailed plan, to be able to discuss it in public, implement it, and eventually issue it.

The economics of blogging on Greece

Economic blogging

How about the value of economic blogging then? Let us compare some of the stars of the UK blogging scene. On the one hand you have the academics, like Simon Wren-Lewis and Steve Keen. They use their blogs to explain to the world how economic theories work, or don’t work. Or explain what models should be used instead, to make sense of the world. However you do not have to be an academic to chip in into the economic debate. Many others do, either with the help of others as a small economic think tank (Prime Economics), or as valiant fighters for the truth and diggers-up of complicated back-ground information, like Frances Coppola. Generally, I think, they are on a public service mission, to educate and inform, and the only pay-back they will get is the number of clicks or decent comments on their blog pages. Financially, I would think the rewards are 0. Although Frances Coppola and Steve Keen blog for the FT and Forbes, so I guess that will now be paid.

Increase in GDP: 0, or minimal per blog post, I guess

Tax Research UK

Now, I genuinely thought Richard Murphy with his blog Tax Research UK falls into the same category. His mission is to change the tax laws to get mainly corporate tax evaders to pay their fair share. I guessed he had other income, as the bloggers above, from which to subsidise his blogging. I was therefore a bit surprised, to read that he is sponsored by various public bodies, and has been for a while. So he has always been very open about it, I just missed this information, and the view now is of the sponsoring bodies that he should receive the equivalent in sponsorship as a university professor. “Good on you, Richard, let somebody pay for your valuable work.” I did, however, miss a trick there, and should have called my blog “radical economic research” as that obviously seems to help to get sponsorship!

Increase in GDP: Professor salary (£65,000+ ?)

Columnists in Media

Arguably, bloggers do not do anything different from newspaper reporters or columnists. Good ones, like Ambrose Evans-Pritchard from the Daily Telegraph can obviously command top rates. His columns are always trenchant, thought-provoking and entertaining. You might not agree with a word he says, but you will have enjoyed the ride, as he takes you through his usually provocative train of thought.

Increase in GDP: £100,000+ columnist salary?

Free Lance Reporters

On the other hand you have the reporters doing digging around on the ground. Paul Mason, the Channel 4 economics editor, seems to have moved to Greece permanently, but others have to travel there and spend sometimes their own money to write lengthy reports on the background to the Greek crisis. The Austrian blogger Robert Misik at the beginning of his excellent piece says that money is needed to allow him to research and write the report. I have sent Euro 10 because I think it is worth it. Unfortunately it is only in German.

Increase in GDP: Crowd Funding?

The German Ministry of Finance

Now, let us take another organisation providing economic analysis on the Greek crisis. The German finance ministry. If we look at the output over the last 5 months, the only thing which obviously springs to mind is the Schaeuble plan, which miraculously appeared on the week-end of the final negotiations with Greece, on the 12th July. So after five months of detailed negotiations and having looked at Greece for five years, the only thing the German Finance Minister could propose to end the Greek crisis was contained in one A4 piece of paper, the total of perhaps 500 words. (Sad, isn’t it. In contrast my total detailed analysis of Greece here on this blog in tightly argued and substantiated proposals: 40,000 words. Written in 6 weeks.)

The details of the Schaeuble Plan you can read here, or if you cannot be bothered, I have summarized it for you:

Ve vill have all your assetz in ze Trust Fund governed by ze German Finanz Minister zet up in Luxemburg, or Greece vill have to leave ze Eurozone for 5 yearz on a temporary Grezit!

Now, that was in total the German economic solution to the Greek question, and that was then used to pummel Greece into submission. The Schaeuble plan, the economic equivalent of the Schlieffen plan, a German plan to allow military dominance in Europe prior to WW1.

Now, it would not have been so bad, if there had actually been an economic value attached to this piece of paper. But unfortunately it is otherwise.

Decrease in GDP: The asset sales, although now governed from Athens under troika control, will sell in a depressed Greek market, therefore well below value. If there is indeed 50bn of assets to be sold, they would only fetch about 25bn or less. So there is a loss of value of 25bn attached to this plan. This loss is from the taxpayer to subsidise to the private sector buyer of the airports or harbours being sold.

The loss of value through Grexit, which is still preferred by Schaeuble, is even greater. The loss will be 320bn of unpayable Greek debt, plus 120bn Target 2 liabilities for Greeks banks. The European taxpayer will lose out, ultimately it will be the Greek’s taxpayers’ gain.

So a loss of Euro 25bn to Greece (asset sales), and/or a loss of European tax-payer money through of Euro 440bn.

Radical Economic Thought

So we come to my blog. I try to provide some thoughtful ideas to help Greece out of the current impasse. All of the ideas could work and would, in contrast to the Schaeuble plan, actually increase Greek GDP. My blog does not cost anything to run, but it is not cost free. The economic concept of opportunity cost comes into it, and it is probably best if my wife explains that to you, as she explains it to me:

For goodness sake, come off that computer and do something useful! The grass needs cutting, the garage needs to be tidied up, the kids need to be taken to the park/swimming-pool/tennis court, and you still have not started getting things together for next week’s holiday. Or, at least find a job and stop wasting your time with your silly ideas about Greece!

Clearly, she has a point.

So, in an effort to bridge that gap between my wife and myself, can I suggest the following? If you enjoyed reading my blog over the last 6 weeks, found something interesting, or learned something, or even if you thought it was all ridiculous nonsense, look up my account number in the “About” bit on the top of the page, and transfer a fiver into my bank account.

This is strictly by income, though, and if you happen to belong to the 1%, I suggest an appropriate amount of crowd funding would be 500, either, Euro or £, both payment options are available.

If you are out of that league, and George Soros, or equivalent, I suggest 50,000 would be a fair amount.

(And if you have a holiday place in Italy, which for some reason is still free in the beginning of August, you can throw that in, too, as we are looking for something!)

What if you are the Greek government reading this and possibly thinking to implement some of my ideas?

Well, it is all out there, the Greek government can of course just take the ideas and run with them. Or I will explore them further, and there is other ideas, and I will continue this blog as and when I can, the pace will slow down, somewhat, though.

If the Greek government decides, I should be paid 1 Euro for each 1,000 Euro of benefit my proposal brings to the Greek state, I would settle for that. Again, none of these proposals are completely unworkable, even the most ridiculous would be completely sensible when compared to the Schaeuble plan. For example I suggested right at the beginning of these series of blogs, that Greece could pay all its money Euro 240bn to its public sector creditors back over a 12 year time frame, as long as the European creditors buy things from Greece. So Europe contracts into an arrangement to buy goods and services (ie, mainly holidays) from Greece of Euro 20bn a year more, in addition to the current level.

Increase in GDP: 20bn a year, through increased exports (My share would be 20 million if I take 1 in every 1,000)

Or my idea to run with parallel currencies, and introduce the G-Euro:

Increase in GDP: at least 8bn (so my share would be 8 million)

All other ideas in my blog will have a positive economic value attached to them. And anything which will help Greece will in the end help Germany, as Greece can pay its money back, A win-win situation.

Clearly, all of this is pie-in-the-sky thinking, but that should not mean that nothing will ever come of this. And other people have got crowd funding, even Greece. So if you want me to be able to convince my wife that I am not wasting my time, send some money!

If not, in the end it will have to boil down to the normal sources of finance, here. It will be like the Greeks, who will also have to live from the pensions of their parents if they are unemployed.

Mum and Dad, do not say you have not been warned! I will see you in a couple of weeks!

Tax Credits and Parallel Currencies

When the Labour party in Britain was last in power, one of its aims was to reduce child poverty. The instrument it chose was tax credits, mainly going to families with children. (Well, they are called tax credits, but even if your income is too low to pay taxes, recipients get the money in transfers from the government, in which case tax credits should really be called a negative income tax.)

This had all kinds of good effects on the economy. It provided a decent minimum income for families, allowed workers to take on work at the minimum wage, knowing they would get supplemented, and it was a very good tool to fight inequality.

No wonder the current Conservative administration is against it, then. Chancellor Osborne believes it is too costly, has recently cut back on the level paid out, and wants to increase the minimum hourly wage over the next few years quite rapidly from £6.50 (Euro 9.20) now to £9 (Euro 12.70) by 2020. That means employers will have to pay higher wages. That will then lower the tax credit bill even further for the government.

But, it also means more unemployed, as it will now be cheaper for companies to substitute machines for labour, as the wage bill will rise with increasing minimum wages. Businessmen will already be making calculations, by how much wage bills will increase, if the UK government’s plans were followed through, and which machines they would buy, to substitute the workers. More unemployment will result from the cut to tax credits.

Greece has of course enough unemployed, so ultimately Greece should look at some tax credits, because, tax credits help people to find and keep jobs.

The Greek government definitely has not got any money left, even less that the Brits, who at a push have an independent central bank to help them out. Compare and contrast to Greece which has to rely on the ECB, which seems to be in the process of destroying Greece. So tax credits are out of the question. Unless, of course, they can be issued in another currency in Greece, a parallel currency perhaps.

Tax credits as currency are suggested for the following reason.

1) Just issuing money is not allowed by EU Lisbon Treaty – Art 128

That is a shame, as that is quite a useful way of financing public infrastructure, and the channel island of Guernsey has long used its own money to supplement the British money to finance infrastructure projects.

One of the most successful illustrations of a parallel currency today operates on the island of Guernsey in the English Channel with a dual exchange in British and Guernsey pounds. Guernsey began issuing interest free public credit money around 1816 in the amount of 6,000 pounds for various public works projects. Guernsey has continued the issuance of public credit money for roads, sea walls, public markets, churches and colleges, funding all of these projects with no debt accumulation. As recently as 1990 there was an issuance of 13 million pounds in State issued notes. Like the Colonies prior to the War of Independence, Guernsey has very low unemployment, a relatively high standard of living and low taxes. And as is the case with all parallel currencies they are not just lent into existence, but spent into existence as well, funding public works projects.

2) Tax credits do not count as loans

Greece could issue zero-coupon bearer bonds, IOUs, but these would need to be counted as part of the government debt. The level of Greek debt is high enough already, so a proposal to issue them is not being discussed here, we will only deal with tax credits.

3) Tax credits allow you to have a float of money available

Just imagine your £3,000 salary would be paid at the beginning of the month, rather than the end. You still have the same annual salary, but you effectively have £3000 more to spend, than if the salary had been paid at the end of the month..

Tax credits work on the same principle, they allow you to spend an advance, which has not to be paid back until much later.

4) Tax credits get their value from the fact that they will be accepted 1:1 at their nominal value for tax liabilities in the future.

So 1 Euro of tax credits will be pretty close in value to 1 Euro, if not exactly the same.

Now, there are 4 serious proposals that I can find having been discussed in the last months: 

If you have not read any of them, hopefully I can explain the salient features below. So only click on the details, if you want further information. You might want to go an get a cup of coffee, though, because this is a rather lengthy blog post.

1) Tax Credit Certificates (Bassone, Cattaneo)

A detailed overview, and an explanation. And the Italian website, with an English explanation.

2) The Future Tax Coin –  FT-Coin (Varoufakis)

A proposal from 2014 from the blogger Varoufakis’ website

3) The Tax Anticipation Notes (Parenteau, Andresen)

Two explanations from the Naked Capitalism website, here, and here by Parenteau, and one summary proposal by Andresen, here.

4) The G-Euro (by myself)

An quick explanation of the miracle currency from this blog.

I will not go into any technical discussion about any of them, they would all work. I will, however address the following issues:

1) Advantage for Greece: What are the main benefits for Greece

2) Addition to money supply: does the proposal add to the money in circulation, or substitute parallel currency for Euro?

3) Use for payments: Can you actually go into a shop and pay with these parallel currencies?

4) Drawbacks: What is not to like?

So, let us start the review:

1) Tax Credit Certificates – TCC (Bassone, Cattaneo)

Advantage for Greece: This proposal suggests that Greece issues Tax Credits Certificates (TCCs) of 10, 20 and 30bn in the first three years of introduction into the Greek economy which currently has a GDP of 180bn. The beneficiaries are workers and companies, roughly split half and half. Workers will get extra spending power, companies will be able to reduce prices, making them more competitive against imported goods, and helping exporters to make their products cheaper.

In terms of cash flow, the addition of the TCCs (minus their cancellations) will bring, over the first four years of introduction a net increase of billion 8bn, 16bn, 16bn, 8bn respectively into the economy. That is assuming a fiscal multiplier of 0.8.

That is about Euro 2,300, Euro 4,600, Euro 4,600, and Euro 2,300 per Greek worker (workforce 3.5 million) in the first four years of introduction, split half in subsidies to the companies per worker, and paid half to the workers as extra spending power. Then the benefits will peter out. So it will give Greek industry a four year window to become more competitive, by decreasing costs per worker for the companies. That will allow companies to increase their exports and substitute for imports. The workers will increase their spending power. All paid for by the issue of these tax credits.

Addition to money supply: The addition to the money supply is huge. Even if each additional Euro of TCC spending only creates an additional 80 cents of additional GDP (Bassone and Cattaneo’s conservative assumption: fiscal multiplier of 0.8), the GDP of Greece will increase from 180bn to 221bn over a 5 year time frame, based on the original 48bn spending in the economy over the first 3 years. (8 + 16 + 24).

If the fiscal multiplier were higher, at 1.3, then GDP will increase to 246bn, putting Greece back to where it was 5 years ago.

Use for payments in shops: No, the TCCs will have to be sold by the recipients at a discount (estimated 80% of face value) to buyers for Euro, wanting to obtain a discount for their taxes in two years time. It is estimated that 90% of TCCs are sold on by the recipients. The rest will be kept by the recipients to be used by themselves in 2 years time. Presumably easy government exchanges via computer websites would allow these deals to take place.


Some difficult political decisions have to be taken to do this. These TCCs have to be allocated to some members of society, instead of others. This is a huge subsidy for industry and their workers. Much is in the hands of oligarchic structures in Greece. Other members of society, not working for industry, the unemployed, the health sector, might lose out, depending how exactly it is structured. Arguably, if it is successful, it will be a way to build up a successful export industry and create a lot of competitive jobs for Greece.

The increase of spending power in the four years after introduction will lead to higher tax revenues now, and smaller ones later (as tax certificates are handed in, instead of taxes). There might be a shortfall, and additional adjustments can and should be made, say the authors, so that tax revenue is ensured. Given the good projected growth, that should be easy. So it probably takes a “Ministry of TCCs” to micro-manage the implementation and possible adverse outcomes.

The TCCs could be too successful, in a way. If the authors more positive scenario (1.3 multiplier) came to pass, the Greek economy would grow on average by 6.3% nominally. Whether all the goods and services to meet that Greek demand could be produced in Greece, or whether that would not create a huge demand for imports to Greece, despite the TCCs export-enhancing effect, remains to be seen.

The proposal of the two Italians is probably much better suited to Italy, for which, I presume, they have made a similar proposal in their book, La Soluzione per L’Euro,  which unfortunately is only available in Italian, which I cannot read. (But it says, create 200bn of spending, reduce taxes, and create demand for relaunching the economy.)

The Italian economy is different from Greece, much more industrialised, with huge food processing and car industry and lots of export orientated family owned SMEs. All of which Greece does not have, or only has to a limited extent. These Italian existing industries would become much more competitive with a similar plan for Italy. Greece, on the other hand, will never, say, build a car plant based on these proposals, although it would help a fledgling food processing industry.

Are Bassone and Cattaneo wrong to suggest it for Greece? No, not at all, it would make sense to try out an idea such as that in a country which is ultimately in worse shape than Italy. Italians are, of course, rightly worried that that crisis will spread to them. Only Greece has higher government debt than Italy.

These are good proposals, and anything which alleviates the crisis should be tried. TCCs is one of the options the Greeks should seriously consider to strengthen their industry and increase their GDP.

2) The Future Tax Coin: FT-Coin (Varoufakis)

Advantage for Greece: Basically, the idea here is that members of society who know that they will have to pay taxes in two years time, can already pre-pay them at a huge discount. Varoufakis suggested 33%. Only a limited amount of these FT coins would be available.

This was originally discussed by Varoufakis in his blog one year before he became finance minister. Since then he has not mentioned it, so it was never a policy proposal of the Syriza administration.

Arguably, it would make sense to offer these tax credit FT-Coins to tax payers whose tax bills to the Greek state are currently disputed. Rather than litigating against them, the Greek government could offer these FT-Coins as a settlement for outstanding, and not yet paid, tax liabilities, which allegedly run close to 80bn Euro in Greece.

Addition to money supply: No, it is just a pre-payment to the Greek state.

Use for payments in shops: No. They could be offered on government owned exchanges, though. If they were offered to everybody, that would allow the discount to be determined by an auction system. It would be much lower discount to nominal value than the 33% proposed by Varoufakis.

Drawbacks: Offering tax discounts now for future taxes later will produce a hole in tax receipts in later years. But it will give the Greek State money now to remedy problems now and to generate growth. That growth would result in increased tax receipts now.

3) The Tax Anticipation Notes – TANs (Parenteau, Andresen)

Advantage for Greece:

The proposal is to have a part of state expenditure paid in Tax Anticipation Notes (TANs) rather than Euro. TANs is a parallel currency which would only be available electronically. It would be paid instead of Euro to government employees, for government contracts and to transfer payment recipients. For this Greece would be issuing TANs from the Greek TAN depository (the Greek TAN Central Bank). Recipients of TANs would receive part of their Euro payments in TANs into a yet to be set up TAN account, which would be issued 1:1 with the euro.

TANs would trade at a discount to the Euro on the free market, the authors believe, but close to the value of the Euro. The government would accept TANs at any time in payment for taxes, at a value of 1:1, therefore underpinning the value of the TANs.

Addition to money supply: Not initially. Although if, say, 25% of government expenditure was now paid in TANs rather than Euro, the government would have 20bn of additional expenditure available to spend into the economy. So 25% of money will provide the money float to Greek’s budget system. That is a huge amount, amounting to a one off increase of GDP of around 14%.

The advantages of using TANs as government spending is that taxes paid in TANs could now be set against TAN expenditure. So all the Euro saved in expenditure could potentially be used to stimulate the economy. without creating additional holes in tax receipts.

Also Andresen proposes that loans could be given in a combination of Euro/TANs to potential borrowers, if the banks were to offer them. This is an important consideration if the banking sector denominated in Euro is having problems.

Use for payments: Andresen proposes a mainly mobile phone based payment system, which would allow buyers to use their TANs as part payment for purchases, as long as the supplier accepts these. Apparently, a system is envisaged, by which goods are partly priced in TANSs and partly in Euro.

Drawbacks: Mr Andresen’s headline: “Summing up: Far better than the bleak alternatives”, seems to acknowledge there are some drawback. I would agree. Just to list a few:

a) TAN recipients are in the main state employees, contractors or welfare recipients, who are obliged to accept below value TANs instead of 100% value Euro in payment by the government. Recipients of TANs will feel, rightly, like second class citizens.

b) Retailers are expected to receive payments partly in TANs and partly in Euro for the same item. That makes a pricing structure virtually impossible. That could possibly mean 3 different prices for one item, depending whether the item is paid for in euro only, in Euro/TAN mixture, or TANs only

c) Andresen also mentions that wages in the private sector could be paid in TANs:

Employers and employees may negotiate the share of wages being paid in TANs, based on private portfolio preferences and speed of adoption of TANs. Workers that accept a larger share of TANs in their wages are likely to find it easier to get a job.

Really? Do we really think private sector employers will start employing people to be paid partly in Euro and partly in TANs? Or people will find a job more easily if they accept TANs, rather than Euro. I do not think so.

d) They would not be accepted that easily by importers, because importers do not have that many tax liabilities to pay, to be able to redeem their TANs. What is the solution? Andresen:

But there will also be a mechanism at work that is pushing in the right direction: when TAN use has reached a significant level for other consumer items, for instance food (where domestic input factors are significant), import-based firms can negotiate a larger wage share being paid in TANs and the rest in euros, hence allowing also such firms to accept a share of TANs in the items they sell.

I do not really understand that sentence, but I am not trying to. My point here is, that if it is that difficult to make the TANs work for an import based firm, the whole idea of TANs are dead on arrival. They will not work.

e) Or let us take another thing. Parenteau describes the TANs as a financing mechanism similar to the infamous MEFO bonds, which allowed Germany prior to World War 2 to artificially increase its money supply and finance its state expenditure. There might be similarities with the TANs to MEFO bonds, I personally see rather a lot of differences. The point is, that it is unlikely to be viewed favourably by the Greeks, to use a similar mechanism to Nazi Germany in financing their state expenditure.

f) At one stage Mr Parenteau says, “suppose the exchange rate is 1:4 Euro to TANs”. Now, this is never, ever going to happen, if used appropriately. So what is the point of undermining your own proposal?

e) Further, the whole idea smacks of desperation, a purely highly defensive move, to otherwise avert certain insolvency. When Parenteau says “Get a TAN, Yanis” it is a nice play on words, (and Mr Parenteau is actually very funny), but the situation is not as desperate as the advocates of the TAN make out. “Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika.” says Parenteau.

There is no need for Greece to have this supplementary currency of a TAN, if there is always the possibility of default. And the Greeks have since demonstrated, that they are happy to play that card when they did not pay the IMF at the end of June.

g) In the introduction of Andresen’s paper written on 20th May he said “The premise for the proposal to be presented in the following is that the Syriza has, at best, a breathing space of – say – three months to half a year before it must introduce a complementary (or “parallel”) electronic currency in order to achieve macroeconomic stabilization of the Greek economy” will set you up for failure straight away.

That would give Syriza until at the very latest 20th November to introduce this currency (or an alternative). That is not likely to happen, unless the Greek government is secretly working on it. So what now? Can we assume the TAN idea to be dead?

h) Finally, at no stage do the authors of this proposal say what could be done with the money available through the introduction of TANs. How much is Greece to spend in TANs and how much in Euro? 25%? Or 10%? Or 50%? We do not know, none of the papers by Andresen or Parenteau say. Let us presume 25%. What should Greece should do with the 20bn Euro it now has because it used 20bn TANs to pay for 25% of its annual expenditure?

Only a couple of sentences address that issue in Andresen’s paper: “The TAN tool allows the government to instigate emergency employment schemes by spreading its available euro spending flow also to the unemployed. ” And, further: “TAN-financed government spending, and private sector TAN circulation will directly and indirectly stimulate domestic production.” True, but a few more details would have been nice.

Now, surely there is no point of panning an actually quite good idea, unless you have an idea on how to overcome its main drawback. That main disadvantage of TANs, as I see it, and as it is proposed here, is that government payees, retailers, employees, banks are all to issue bills, pay-slips, loan arrangements in a combination of Euro and TANs. That is never going to work, in my view. Just the accounting for that would be too difficult. Moving from double entry book-keeping to quadruple entry book-keeping! And there is that stigma attached to the TANs, that it is somehow second best, and only the poor people getting money from the obviously insolvent government are paid in TANs. Not great for lifting the mood of depressed Greeks.

Having said all that, if all these issues can be overcome, the TAN idea is not too bad. And the authors have promoted the idea of TANs, so that they are actually being discussed – which is more than can be said for my proposal.

So, before we move to my proposal, just a quick reminder what makes, at least emotionally, a successful currency. You could have something like the Pound Sterling, around for centuries, and never having defaulted, even tough they had higher debt after WW2 than Greece has now, as a percentage of GDP. Well over 200%!

The British took, of course, the right choice of not trading their currency in for the Euro, when they had the chance, and they thank their lucky stars that they are out, rather than in the Eurozone. They would possibly be seen as one of the problem countries now.

Or you could have something like the Deutsche Mark. The success of which is viewed as synonymous with the growth of a devastated economy after WW2 to the economic power-house of Europe today. The economic miracle can be traced back to one day. The 20th June 1948: that was the day when everybody in Germany received 40 Deutsche Mark to start off with. Everybody received the same amount. That is how a successful currency was started. And a few years later, Germany had the biggest economy in Europe. No wonder the Germans liked the Deutsche Mark.

So, now to the final parallel currency under review:

4) The G-Euro (my idea)

Advantage for Greece: The aim of the G-euro is to get 566,000 into employment. The G-Euro would do help to do that as follows.

(1) It would create a very small minimum income for each citizen of Greece in G-Euro, a purely electronic currency which would be issued by the G-Euro Bank at 30 G-Euro a month. Everybody receives the same amount. That would create GDP growth of 4.4%. That would be sufficient to create about 66,000 jobs in the private sector. (The Greek government assumes each 1% of GDP growth will create 15,000 jobs.)

(2) Once G-Euro was universally accepted, the Greek government could create an employer of last resort programme for 500,000 of the unemployed. They would all be paid in G-Euro.
Retailers would all accept G-Euro at the value of 1:1 for the Euro.

G-Euro would be accepted in payment of taxes from retailers and other businesses only, not from individuals.

G-Euro could not be used to be paid in taxes in the year of issue, but only in the year following issue

The G-Euro’s value would be guaranteed to non-taxpayers by the government. The government would offer to buy G-Euro from non-taxpayers (importers) at 90 Euro cent per G-Euro. The government would then sell these G-Euro to Greek parties having Greek tax liabilities at 95 Euro cent for each 1 G-Euro worth. In effect allowing Greek taxpayers a 5% discount on their Euro tax liabilities, while making 5% for the G-Eurobank itself.

So the Government sets the lowest market value of the G-Euro, setting in effect a floor. In practice other businesses will offer to take G-Euro off non-taxpayers at automated exchanges at a value very much closer to nominal value.

Euro could always be moved into the G-Euro account of an individual, but G-Euro transfers to Euro accounts would, of course, not be allowed.

(The G-Euro could be used only until Greece has recovered from the slump, or it could get evolve the G-Euro to allow it to be used for specific purposes. Money just to spend on solar panels, or further education, for example. It could also be used to cancel debts.)

But: The G-Euro would not interfere with the existing economy, It would leave that to the Euro. All the G-Euro would effectively do is provide additional economic growth and more jobs, to kick-start the Greek economy.

Addition to money supply: Only about 7bn G-Euro would be issued (only about 4% of GDP), but a mulitplier of 2 would mean a one off GDP growth of 8%.

Use for payments in shops: The G-Euro would be issued 1:1 with the Euro. It would always have the same value and would be accepted at that value by retailers voluntarily, although it is not legal tender. Universal issuance to everybody would lead to universal acceptance.

Payment would be through a unique payment account at the G-Euro Central Bank. It would work just like a bank account but could only make payments to other G-euro accounts at the central bank. The unique account would be linked to the ID card of a Greek citizen. In fact, that ID card would be the only item needed to make a payment. The retailer could verify the transfer of funds by mobile phone, webpage, or phone, if required. The customer would need to verify with a PIN number.

For the retailer, the only thing he needs to do is set up an account at the “G-Euro Central Bank” into which the funds could be transferred.

So if an item was on sale in a shop, it could be sold for either

Euro 20 cash, or
Euro 20 in a credit card transaction (two options which exist already) or
G-Euro 20 in a G-Euro bank transaction,

depending on the customer’s wishes.

Drawbacks: The G- Euro makes the assumption that 7bn of one off spending would, through a multiplier of 2 create 8% one off GDP growth. It also assumes that it would be tax neutral, that is pay for itself, assuming that taxes make up 50% of GDP.

If we assume, that only 44% of GDP is recovered in taxes (that figure is used in the proposal for TCC above) then there is a need to find another 1bn in taxes to finance the shortfall. But an additional 8bn of GDP will have been created, so finding 1bn of taxes should prove easy..

So the final summary, and then we are done:

1) Tax Credit Certificates (Bassone, Cattaneo)

Issues a total of 48bn into the economy over 4 years, mainly trying to help businesses and their employees. That will be an increase of over 20% over current GDP. This will allow for a lengthy 4 year strengthening of export (and import substitution) businesses, giving them great cost advantages over its European neighbours. After the four years they better be competitive. If we assume that the Greek government’s assumption is correct, that 1% increase in GDP creates 15,000 jobs, the proposal could in fact create up to 350,000 jobs.

2) The Future Tax Coin –  FT-Coin (Varoufakis)

This is simply a means of capturing future tax revenue early. Useful if the government is really short of money, or for settling outstanding disputed tax claims.

3) The Tax Anticipation Notes (Parenteau, Andresen)

This is a proposal to pay Greek government expenditure as a percentage in TANs instead of Euro. We do not not how high the percentage should be. We have, after introduction apparently everything denominated partly in Euro and partly in TANs (government salaries, prices, bills, private sector salaries, loans) – a system which will never work. Further it discriminates against the recipients of TANs who are unlucky enough to work for the government or get transfers from them, in a perceived second rate currency, the TAN. I think this proposal still needs some work.

4) The G-Euro (by myself)

The final proposal produces the highest number of jobs for the lowest amount of spending. It is a much needed job recovery program. For only 7bn G-Euro spending, created out of nothing from the G-Euro Bank, this proposal allows for more than half a million of jobs in one year. Admittedly, there are only about 66,000 private sector jobs which could be created from the creation of the 30 G-Euro monthly spending power, a very small minimum income. A further 500,000 would be employer-of-last-resort jobs. However, it would provide an important signal, that Greece is on the way up quite quickly, and other private sector jobs could and would follow.

It would also create a neat payment system, controlled entirely by the government, and completely outside the capture of potentially insolvent Greek banks. A useful thing to have in your armour, just in case the ECB wants to shut your banking system down.

Something to remember from this:

All the proposals above have some good features, and a combination of the proposals would make a new parallel currency a very powerful weapon for Greece to relaunch its economy.

At the same time, Greece could stay as much as possible committed to the austerity agreement imposed by the Troika. And firmly in the Euro.

So tax credits and job-creation seem to go hand-in-hand. Something we also said at the beginning of this marathon blog post – if you can still remember!

(The next post will be shorter, promise!)

The Greek Free Lunch Conundrum

One of the great short hand expressions for any government to justify restrictive spending on its population is that “There is no free lunch”. (The other great economic wisdom, of course, that money does not grow on trees)

Now, everybody seems to believe that, even though for the first 18 years of their live they only had free lunches. It means, of course, eventually you will have to work for your lunch, ideally until you retire, and that seems for some to be the whole purpose of life.

However, even then free lunches continue sometimes.

There seems to have been one recently when the Greek in the office invited his fellow workers to celebrate his birthday at the local restaurant. All 18 co-workers (from different European countries) agreed enthusiastically. Everybody enjoyed their meal and their drinks, everyone had a good time, and then it was time to pay. We will all be familiar with the situation.

The bill arrives. Euro 440 for all. That is 120 for the drinks, 320 for the food.

The Greek insisted, as he had invited everyone, that he would pay.

“Oh no,” everybody else said “it is your birthday, we will all pay your share.”

Note, of course, that in this negotiation everybody insists that the other should have a free lunch!

Finally, the Greek says: “Ok, I will let you pay for the Euro 120 drinks, and I make sure that I pay the remaining 320!”

Sadly, we do not know the outcome of the negotiations. At that point, negotiations stalled. They still seem to be in the restaurant, making up their mind, who should pay.

(In fact in real life, in this situation, we have now international arbitrators arriving from the US, Treasury secretary Jack Lew last week, insisting that the drinks bill should definitely be paid by the others! As the Greek cannot possibly pay for it, even if he is given years to pay in installments. The whole cost of the meal will otherwise land on the 18 other countries, and the Greek will never want anything to do with the rest of the 18 Europeans, trying to find friends further East. Jack Lew would not like that.)

Clearly not everybody is that reserved when it comes to enjoying a free lunch.

“Default is the weapon of the poor” says Lapavitsas “We will not pay anything back.”

It is worthwile to watch this video of one of the main supporters of the Grexit (traditional style: new currency with devaluation – other Grexit options are available), University of London Economics  professor Costas Lapavitsas. It is all in English, he is pretty angry, his analysis worth listening to in the 30 minute speech. We now do not have to worry, that the Greeks do not understand that the agreement they have voted on will mean anything else but pain, Lapavitsas tells us. An agreed 2%-of-GDP increase in taxes will lead to a further fall in output and increase in unemployment. He also knows what we know the “alleged 86bn bail-out” is nothing of the sort. No new money for Greece. The only new money is 25 bn for the private banks.

But the private banks will get further funds. The trust fund under foreign control to privatise state assets will sell them and then use the money for a further recapitalisation of the banks. The first 25bn from privatisation is to be used. Lapavitsas says it will only make 25bn, in which case there are no further funds from it to reduce Greece’s debt. Greece will also be under the full control of foreign powers, who will make sure that the country is fully compliant with all terms and conditions.

That is no Brest-Litovsk peace, as there is no time to regroup for the left wing forces.

Lapavitsas therefore advises Grexit, a new currency. He also says that no money should be repaid, default is the weapon of the poor. This default for the Greeks will lead of course to the free lunch, as losses of 440bn (120 Target2 liabilities and 320 Greek govenrment debt) will then not be repaid. Europe will pick up the bill.

Lapsavitsas says that there will be some pain, for the first few months.

Greece will need plans to deal with petrol/pharmaceutical/food issues, he will want to nationalise the banks, replacing management as soon as possible.

So, a new currency is be issued 1:1, eventually he thinks the currency will be about 15% lower compared to the Euro, having lost more value immediately after a Grexit, but then recover.

In general his analysis is pretty good.

So there is one free lunch fan, Costas Lapavitsas, but he has been, and he still is, the minority view in the Syriza administration. The Greek government is still in negotiations trying to pay for the lunch.

Are there any other ways to describe a Greek Exit?

The whole thing has, of ocurse, not come unexpected. Even in 2011 there was talk about a possible exit strategy, in fact the Wolfson prize of £250,000 was awarded to the describing the least disruptive way of a Greek exit from the eurozone.

At the time I seriously thought of entering, alas I did not, thinking that it would be a waste of effort, as my credentials were not sufficiently sound to be taken seriously, even though my ideas would have been better.

In the end the former chief economist of HSBC and UK treasury advisor Richard Bootle won. (Hey-ho, as if he had needed the money!) So let us have a look at the proposal. It is often now touted about in Britain as the blue-print for a Grexit. A straight forward proposal to issue your own currency, devalue by 40% and default on 80% of government debt. It takes about 180 pages to make that point, although, to be fair, there is lots of useful background information in that paper. (How long does it take to print a new currency, possible timetable for Grexit towards exit day, how to deal with assets and liabilities, who wins, who loses, etc.)

But nothing revolutionary in that paper. In fact the 80% Greek government debt default suggested comes to about 250bn. Well, Bootle received £250,000 to suggest to the Greeks that they default on 250bn of Greek debt. And stuff their creditors. Another example of a free lunch, I think.

The jury seemed to think that a quarter of a trillion debt write-off is not disruptive. Well, I am not so sure, and I would not like to try!

Now, I have said this before, when I first on this blog took issue with Bootle’s suggestion, Greece does not need to devalue its currency any more, as it has now a balanced current account, and much lower wages than in 2011, when this proposal was originally written. Thanks to previous years’ devaluation it is competitive on world markets on a cost basis now, its exports are slowly rising! So a devaluation of its currency is not necessary.

So Mr Bootle’s plan is well out of date and should be scrapped.

So what if a another 250,000 prize was put up, by Mr Schaeuble this time, for an updated plan to allow Greece to exit from the Eurozone with its own currency?

What would my plan be?

I would suggest that Greece should just start issuing its new currency the Drachma at 1:1 to the Euro.

So the Greek government should announce that all state employees would now be paid in Drachma from 2016 onwards, all new contracts would be paid for in Drachma, and that all tax could be paid in Drachma and Euro.

Everything else stays the same, all monetary value in Greece is still expressed in Euro. All state employees need a drachma account at their bank, of course, and everyone who wants to sell to them, too. That would allow retailers to accept the Drachmas these employees will have to spend when they receive them from the government.

Greece should also, before a new currency is printed, issue about 30% of the salaries as a cash substitute.

These cash substitutes for Drachma notes would be issued, for example, as 100 Drachma Future Taxnotes. They would look similar to a 100 Euro Note. These will have a redemption value for tax liabilities in 2 years’ time of 102. So the 100 Drachma Future Taxnote would say something like this: “The Greek State accepts this note as payment of taxes from January 2018 to the value of 102 Drachma or 102 Euro.”

So, what would happen? The new currency Drachma would keep its value to the Euro. Any shop will accept it.

The shop might

(a) use it to pay its employees or suppliers,
(b) keep it until 2 years time, when its taxes are due.

That would be it. That would be the plan. Nothing else.

And who would pay for the Greek lunch would still be unclear, in a situation like that. Probably less disruptive than what Bootle suggested.

I think my idea is easily worth 250,000! Although, of course, slightly shorter than 180 pages.

Well, time for my lunch now. Paid for, of course!

Bank rescue? Advice to Greece: Follow the Germans

Germans like building cars, putting their towels on European sun-lounges, and winning the World Cup. That seems to be the three comparative advantages, upon which Germany built its reputation as the strong man of Europe. Until the 17 hour marathon negotiations last week-end, of course, when the Germans took that title a little bit too literally. They showed that they are pretty adept at financial waterboarding too, a crown previously held exclusively by the IMF.

What else are the Germans good at? Selling drugs in supermarkets maybe, a crucial component, the Troika thinks, in helping Greece repay the 320bn of debt? Far from it, drugs like aspirin and paracetamol are about 5 times more expensive in a German pharmacy than in a UK supermarket. And you are not allowed to buy drugs in a supermarket in Germany. It is against the law. You do, however, get friendly pharmacists, and glossy TV guides and health magazines at German pharmacies, for free.

How about liberalized markets, companies like Uber and Amazon, the rent extractors of the internet, must be laughing in Germany, the neo-liberal paradise. If only Greece was like Germany in that regard – and liberalised, maybe Greece would have 6% unemployed, instead of 26%, seems to be the IMF’s thinking!

Not quite, despite its German looking name Uber is strictly verboten in Germany, as it would undermine the regulated taxi market; and Amazon, although it does a good trade in Germany, has no competitive price advantage over a book store, as there is a fixed price book agreement. So no liberalised market for books. Thus thankfully, even in little towns you still have independent book shops, which in other countries, which do not have fixed-price agreements, have long since disappeared.

Could it be, perhaps, that the IMF with its liberalized markets and bizarre ideas of supply side reforms is suggesting the wrong thing?

And could it be, that the idea of putting 25bn into Greek private sector banks to add to their capital base (the only new money available in the “alleged 86bn bail-out“) is also the wrong thing as far as bank rescue is concerned?

Rather than doing that, it seems that with bank-rescue, as with pharmacies and book-shops, it would be wise to follow the Germans:

Option (1) Follow German actions: Create a Bad Bank

Option (2) Follow German words of wisdom: Use Quantitative Easing for what it was intended for – Purchase of Bad Debt

Option (3) Follow German writings: Continue to provide liquidity, even if insolvent

So let us examine the first option:

Option (1) Create A Bad Bank: Hypo Real Estate and its Bad Bank FMS Wertmanagement

The biggest and most expensive financial bank disaster ever in Germany is Hypo Real Estate, a bank which got badly caught in the financial tsunami of 2008, leading to massive losses and bad debts. In 2008 Hypo Real Estate was a bank with consolidated assets of 420bn Euro. Because it was unable to find lenders to refinance itself during 2008, (it had borrowed short term, but lent long term, but looked also extremely weak) it had to look for state help. Following the collapse of Lehman Brothers the German state had to support the balance sheet of Hypo Real Estate with ultimately a 10bn capital injection to allow it to continue trading. It also needed further guarantees of 120bn from the German government so that lenders would fund it. In 2009 it was taken over by the German government. In the beginning of 2008 shares had traded at 30 Euro, but when Germany nationalised the bank, it got a majority shareholding by offering to buy at just over 1 Euro a share.

When all dodgy loans were finally totted up in 2010 it came to a cool 173bn in bad debt. The biggest losses of any bank due to the financial crisis in Germany. And, incidently, more that the hole in Lehman’s balance sheet which started the melt-down.

173bn which would have to be written off, which would of course not only have sunk the Hypo Real Estate, but a good selection of other banks which lent to it. The whole German banking system would have been in peril. A disaster.

(That 173bn is about half the size of the total debt of the Greek government, one little bank, which I previously never heard of before it went bust, makes bad loans, of that magnitude. That makes the bankers to Greece look like paragons of financial virtue, comparitively. Or, looking at it another way, of the 420bn in total assets for Hypo Real Estate 173bn were bad loans – some record, surely!)

Finally, in 2010 Germany split the bank into two, moving all the bad assets into a bad bank, and leaving all the good assets in a good bank. In fact it used the 6-step clean up routine, which can be used for virtually any bank in trouble.

(1) nationalise,
(2) create bad bank (bad loans),
(3) create good bank (good loans),
(4) administer bad bank,
(5) privatise good bank,
(6) count money

So what is the result, and what has happened since 2010?

Bad Bank:

When the bad bank, FMS Wertmanagement, was formed in 2010 it obtained all 173bn of the bad debts from Hypo Real Estate as assets. Over the last 4 years it has reduced the assets previously counted as bad debts from 173bn to 108bn. These 65bn bad debts, in fact, did not turn out to be bad debts at all. FMS is a corporation owned by the German government. That ultimate guarantee allows the bank to issue bonds to finance its assets. And it can issue bonds at 0% interest, in fact slightly negative interest rates.

Good Bank:

The remainder of Hypo Real Estate became the good bank in 2010. That good bank has now 76bn of consolidated assets. Its only trading subsidiary, Deutsche Pfandbriefbank was finally listed last week (15th July 2015) on the Frankfurt Stock Exchange, valuing the bank at Euro 1.5bn. Which the ultimate shareholder, the German state, can now pocket and count as profits.

This was the biggest new listing on the Frankfurt Stock exchanges so far this year.

What can Greece learn from the sorry tale of Hypo Real Estate?

(a) The sooner Bad Banks are established, the better.

Before the bad bank was established, Germany had to support the bank with 10bn Euro of additional capital. This money has now been lost by the German state, even though the sale of of the main arm of its still active subsidiary, Deutsche Pfandbriefbank, last week meant the inflow of eventually 1.5bn Euro.

If Germany had established the Bad Bank earlier, it might have avoided the 10bn capital injection which came largely between 2008 and 2010.

(b) A Bad Bank concentrates on getting money back only, and can borrow cheaply

Getting money back over the long term is a long and messy business for the Bad Bank, but its only business purpose. It will try to wind the bank down over the next few years. Concentrating on just getting the money back, selling assets, and restructuring deals is much better performed in a bank set up just for that purpose. The main aim of a normal, good bank is of course to lend as much as possible. To try to recoup as much as possible and shrink the balance sheet is the exact opposite.

It therefore makes sense to have a separate bad bank in this respect. The ultimate ownership of the German state and low interest rates make a resolution of these bad debts more likely and allow cheap re-financing in the market.

It remains to be seen whether FMS can get all its money back. That is of course highly unlikely that 108bn of bad debt remaining will, in the end, all turn out to be “good debt”. In fact, the longer a debt sits on the balance sheet of FMS, the more likely is it, that it will never be repaid. So the taxpayer, in the end will have to pay for some of the bad debt.

(c) Bad banks increase debt/GDP ratio of a country,

Because of its full government guarantee, the bad debt of the bad bank FMS is fully included in the state debts of the government of Germany.

So about 1 Euro in 20 of German government debt is due to the irresponsible lending policy of one bank alone, Hypo Real Estate! Or as Germany repays its total state debt from taxes, (Germany has a budget surplus), one twentieth of the tax money allocated to repayment is to pay for the Hypo Real Estate disaster.

What does that mean for Greece? if perhaps a quarter of Greek bank loans (100bn) in the end turns out be be bad, the total debt to GDP ratio of Greece could increase to over 230% from about 180% now, if that bad debt were to be resolved through a bad bank.

(d) The good bank can survive, and the good bank’s solvency will be assured

Once a bad bank is proposed, all lending even slightly doubtful will end up in the bad bank.

That means that the Good Bank will now undoubtedly be solvent!

The good bank is then able to continue to lend new money to businesses, trade profitably, and could eventually be sold off.

(e) Hypo real Estate was always insolvent, Greek banks are not.

At no stage did the Bundesbank seem to help Hypo Real Estate as a lender of last resort, having obviously decided in 2008 that it was not just a liquidity problem, but a solvency one. The German Central Bank, the Bundesbank, did only play a supporting role in the restructuring. The German Banking Supervisor, Soffin, had to put in 10bn of extra capital, provide the government guarantees, arrange all the rescue and re-structuring, and set-up the Bad Bank.

Greek banks are not insolvent, however, liquidity is currently provided by the ECB via the Greek Central Bank for the Greek banks, financing about a third of its assets. 120bn of the Greek banks liabilities are financed via Target2 payment system, and sit as liabilities in Greek banks’ balance sheets. Arguably, therefore, the Greek banking system, which in total has assets of 400bn (about the same as Hypo Real Estate had in 2008 ! ) will be in a better position than Hypo Real Estate was.

So in summary – to follow Option (1) and set up a bad bank – the following points are important to remember:

If Greece were to follow German in setting up a bad bank immediately, to resolve all its bad debts in the long term, the consequences would be:

Avoidance of capital injections now, the 25bn of new bank capital injections, part of the “86bn bail-out”, would not be necessary!

The remaining good banks would then be solvent

Cash in-flow from selling the good banks would arrive when good banks are sold

Bad banks have then only one purpose. getting money back from bad debts in Greece, and are able to wait long term for asset prices to increase.

Bad Banks increase government debt and result in increases in debt/GDP ratio – a recognition of the fact that the government (especially before a fully functioning banking union is in place next year) will ultimately be responsible for the debt of its banks.

So, if Greece was to follow what Germans did with Hypo Real Estate, the bad bank would be the solution to follow.

It would be the only option if central bank lending was not available, as it did not seem to be for Hypo Real Estate.

But, if the Greek banks are solvent, or even border-line solvent, there are other options available:

Option (2) Follow German words of wisdom: Use Quantitative Easing for what it was intended for – Purchase of Bad Debt

Option (3) Follow German writings: Continue to provide liquidity, even if solvency is in doubt

Option (2) Follow German words of wisdom: Use Quantitative Easing for what it was intended for – Purchase of Bad Debt

Richard Werner, Banking and Finance Professor at Southampton University, and the person who invented the term quantitative easing says here what it really should mean, helping banks back on its feet. He is being interviewed for the RT program Boom Bust

(Please fast forward to go to minute 18:00 to 21:00)

Just in case the video will not work, the gist of Prof. Werner’s argument is this: the ECB shoud just buy up non-performing assets of banks at face value and thereby give the banks the liquidity and solvency they need. That would allow the banks to lend. Also, Professor Werner argues, why should the taxpayer pay for it, the taxpayer did not create those bad debts? The argument is, before the crisis hit, it was the ECB’s fault, allowing credit creation, year on year of 25% to 40% growth. So the ECB should deal with the mess that it has created.

Also, it would allow countries to move away from the fiscal rectitude they have had to endure, due to the banking problems in their countries, which have made the problem in the peripherie countries worse.

So really what Prof Werner is saying that the ECB should pay to solve any bad debt issues.

Option (3) Follow German writings: Continue to provide liquidity, even if solvency is in doubt

For the last option on how to deal with bad debts, let us read the words of Prof Martin Hellwig, the co-author of the most eminently sensible suggestion on how to avoid future banking crisis. (The idea is that banks should in future have a much stronger capital base, so shareholders should put up 30% of their own money to lend, across the board, rather than just effectively 3%).

In the article for the German blog Oekonomenstimme, he talks about the role of the ECB during the bank closures in Greece (my translation):

The real question must be  how the ECB behaves. Jens Weidmann [Head of the German Bundesbank] and Hans-Werner Sinn [prominent German economist] have long been demanding to end the emergency loans for Greek banks . Why has the ECB now frozen the emergency loans (ELA) to the Greek banking system and not completely cancelled them ?

However, already the freezing of emergency loans is questionable. According to the European Treaty, the ECB has the task of “promoting the smooth operation of payment systems” and it has to do so in all member states, also in Greece . The freezing of emergency loans had resulted in the closure of the Greek banks and massive restrictions their banks’ payment system . This is incompatible with the contractual obligations of the ECB.

Hellwig continues:

Emergency loans in case of a run on the banks belong to the core tasks of a central bank . Banks finance themselves through short- and medium-term customer deposits , and assign these funds to long-term loans . If depositors come to panic and withdraw their deposits, the banks are defenseless. In such a situation, either the central bank helps, or a crisis will develop that will badly affect the economy as a whole.

And finally, Hellwig addresses the issue of solvency:

According to the rules of the ECB only solvent banks can get loans from the central bank. By applying that rule the central bank can protect itself from losses. But would it not have been better in 1931, had the Reichsbank [the German Central Bank at the time] continued to give credit to the commercial banks, even the apparently insolvent Danatbank [the first German bank to become insolvent, triggering further insolvencies in the German banking system]? The costs of the crisis for Germany were so great that the answer should be easy to this question. In those days, however, the Reichsbank did not have a choice but had to end its support because it did not have sufficient gold and foreign exchange reserves to provide adequate cover for its liquidity support.

The rule to lend money only to solvent banks, comes from the time when the central banks had to be ready to redeem their paper money for gold or foreign exchange. Concern for their gold and foreign exchange and the fear of a run caused the Reichsbank to take special care. This caution prevented an adequate monetary policy in the Great Depression.

Now, we have pure paper money, without any obligation to redeem. Central banks can support the monetary system and the banking system without worrying about their own ability to act. Should the EU Treaty, setting out the responsibility for the functioning of payment systems, not take precedence over an internal rule of the ECB, which dates back to the time of the gold standard and is not covered by the treaty?

So, yet another professor who thinks that ultimately it is the ECB’s job to take on potential losses, to protect a functioning payment system.

So the three German solutions to bank restructuring are:

(1) a long term work out solution, a bad bank, which tries to get money back in the long term

(2) a buying up of bad loans by the ECB

(3) continued liquidity support by ECB, to ensure functioning payment system, even in the case of insolvent banks, as broken payment system is worse outcome for economy.

Greece should pick and choose from the 3 options.

They are, of course, not on offer as part of the bail-out. The Troika has other ideas:

It is not entirely clear, how the 25bn is to be used, but in this detailed report we get an idea. It is the view what could happen from Silvia Merler, an economist working for the Brueghel think-tank.


a) Greek depositors are to pay, every deposit of over 100,000 Euro will be reduced to increase the capital base of the banks. A depositor bail-in

b) then, the Greek taxpayer becomes liable, with a further 25bn injection into Greek banks

Now, clearly, this idea of using depositors, and hair-cuts on their deposits, to recapitalise banks has been used in Cyprus, and has arguably led to the bank run which we have seen in Greece in the last few months.

It would be a sure-fire way to ensure that Italians and the Spanish will now also move their money from accounts in their respective countries, to Germany and Switzerland. As Italy and Spain might be next. A more stupid idea could not be proposed, it will lead eventually to the undermining of trust in the whole banking system. But it seems that is what the EU is aiming for.

In order to avoid further debt, Greeks now have to refuse the 25bn new loans offered to them for bank restructuring as part of the “alleged 86bn bail out” and aim to use the lower cost options set out above. That would make the “alleged 86bn bail out”, of course, entirely redundant. As the only new money would have been the 25bn.

So the moral of the tale: sometimes it pays to listen to the Germans, not always, but where they have a comparative advantage it might pay dividends. In ideas for bank restructure, they seem to have such an advantage.

Banking restructure, a comparative advantage by the Germans, which seems to be as solid as in football.

Greece should remember what happened last time their national football team was led by a German football coach. Otto Rehhagel led the Greek team to a famous victory in the European Championships in 2004.

Is it now time that German proposals will save the Greek banking sector?