24
Feb
12

Greek Chicken

Nick Rowe isn’t sanguine about the latest Greek austerity/bailout “agreement”:

All the Agreement does is make it harder for Greece to abandon the Euro and redenominate its debt into Drachmas (because the new bonds will be governed by English law not Greek law). So the eventual default, when it comes, will be even messier than it would be otherwise.

And I don’t see how any of the parties to the Agreement can really expect it to work. Which raises the question: so what are they doing?

A majority of Greeks want to keep the Euro.

Most Greeks want to stay in the euro zone, the poll showed, with 77 percent saying their country must keep the currency “at all costs”, the same percentage as two months ago.

That’s the underlying problem. The Greek people themselves refuse to exit.

I think everyone else is just going through the motions, because they don’t want to be the ones blamed for the “Agreement” failing. They don’t want to be blamed for taking Greece out of the Euro. It’s a game of chicken, where each side wants someone else to be the first to reject the Agreement.

I was a bit surprised to read that most Greeks want to keep the Euro, but it makes sense if Greek personal/household debt levels are relatively low.   I can’t find anything helpful about that with a quick Google search — searching up anything involving “Greek” and “debt” gets a thundering herd of public-debt hand-wringing.  Devaluation — switching from the Euro to the Drachma — would only help individuals with lots of debt.  From my outsider’s perspective I find it hard to believe that Greeks really expect to be able to unfuck their country (or ride out the storm, or whatever) without devaluation and without some form of austerity-related reform.  (Incidentally, I feel the same way about Californians.)  On the other hand, I can imagine that if I was Greek, I wouldn’t trust the government not to fuck it up no matter what they try, so given that any solution will get fucked up I’d prefer the one that leaves me with a decent salary (though see also).

Maybe this really is a local optimum for J. Random Greek Citizen.  Stay on the Euro, and savings and salaries stay on a currency that’s backed by the full faith and credit of the German economy.  Austerity measures will still suck, but at least they’re easy to blame on someone else.  Flip to Drachmas, and savings and salaries go all Weimar Republic.  Devaluation will impose its own equivalent to ECB-backed austerity, but it’s harder to blame on someone else.  At least for the short term, the frying pan looks better than the fire.

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3 Responses to “Greek Chicken”


  1. February 24, 2012 at 18:45

    So the Greek government got into this problem because they lost the ability to inflate when they switched to Euros.

    I’m trying to work out whether this shows that stock markets are bad at logic or not.
    On one hand, for complicated but intuitive reasons, it shows that no sovereign can in fact balance its budget without cheating.
    On the other hand, every non-EU sovereign can cheat. (Wait, EU sovereigns are fake sovereigns…)

    So is the right call to value bonds at their correct, non-cheaty value, or to roll the cheating in, until Reality comes knocking at the door?

    • February 25, 2012 at 00:21

      So the Greek government got into this problem because they lost the ability to inflate when they switched to Euros.

      That and they were able to borrow as if Germany would pay off their debts. Which actually turns out to have been not a bad bet, in some ways.

      I’m trying to work out whether this shows that stock markets are bad at logic or not.

      Disclaimer: I’m not a finance guy, and I’m not a macro guy, so take this with a bigger pillar of salt than usual.

      But first: Greece was selling debt to a bond market, not a stock market, and bond markets have a different initial set of assumptions.

      Second: Quote-unquote “private” banks in the EU have been under a lot of pressure to give preferential treatment to Euro-denominated sovereign debt. So when Deutsche Bank buys Greek euro-denominated bonds at some ridiculously low interest, it’s not necessarily a reflection on the natural rate of interest for Greek bonds.

      I think what this shows is that short-term incentives, especially for Euro-banks, are a lot stronger than people like us would like to think. “Buying Greek debt is stupid! But… what would happen to us if we didn’t buy these worthless overpriced bonds? Hmm… okay, let’s buy these bonds, and maybe the politicians will make sure we don’t take a huge haircut.” I basically think that Euro-bankers are fairly rational. This leads me to believe that they believe that the short-term consequences of taking a realistic view on sovereign PIIGS debt are ridiculously bad. So:

      So is the right call to value bonds at their correct, non-cheaty value, or to roll the cheating in, until Reality comes knocking at the door?

      Apparently, the way to go is to roll the cheating in as long as you can get countervailing preferential treatment from your government (or whoever) for supporting the status quo. I think it’s a mistake to believe that the banks are treating Euro-denominated sovereign debt as investments in an indifferent market with no other considerations. There is a fuck-ton of other incentive trading going around behind the scenes.

  2. February 25, 2012 at 09:25

    Right.

    Quote-unquote “private” banks in the EU have been under a lot of pressure to give preferential treatment to Euro-denominated sovereign debt.
    […]
    I think it’s a mistake to believe that the banks are treating Euro-denominated sovereign debt as investments in an indifferent market with no other considerations.

    Of course. They did the exact same thing here with houses, after all.

    I don’t think the bond and stock markets are much different in terms of deductive skill, though, and I think with government shenanigans taken into account there’s every reason to believe they’re sufficiently skilled.

    It’s just that I think one shouldn’t be able to beat the market with a dabbling of philosophy, and any time it becomes true I require an explanation.

    Though that means there’s a market-beating strategy, and it’s to find out exactly what PC is and bet against. Pretty long-term, though.


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