Rubber ducks explain the Greek negotiations

By Felix Salmon
February 10, 2012
a done deal in Greece?

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Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.)

And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”.

It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit.

If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now. It would be a multi-billion-dollar gift to bondholders who expect much less than that, in a context where a few billion dollars could well make the difference between a successful deal and a failed one. If there’s effectively going to be an EU/IMF guarantee of the new Greek bonds, then the nominal haircut would surely be bigger than 50%, and I haven’t heard anything along those lines.

Basically, what’s going on here is that because the bondholders are already in the boat, no one needs to do them any favors. What’s needed is an agreement between Greece and the Troika — something acceptable to both sides, and which the Troika believes that Greece will hold to. Even as sensible people like Mohamed El-Erian can see clearly that that’s not going to happen. “I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best,” he writes. “Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.”

Or, to put it another way, that overloaded pirate ship is very precarious. And even if it manages to get everybody on board now — which is far from certain — it could still easily capsize a few months down the road.


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I think the important political question to be asked here is will any deal last beyond the forthcoming German elections? If it does, things could work out for the Greeks; if it falls apart before then – or even if the Germans suspect it will fall apart before their own elections – then Greece will pay a heavy price.

Given past Greek subterfuges and deceptions they are going to have to give pretty solid guarantees they will behave – not something easy to give before an election, and while it seems from the Greek perspective these things are easy to promise, they appear to be next to impossible to abide by.

Posted by FifthDecade | Report as abusive

What if Merkozy lose the next election(s). Then it will all have to be started all over again, right?

Posted by Chris08 | Report as abusive

What if Merkozy lose the next election(s). Then it will all have to be started all over again, right?

Posted by Chris08 | Report as abusive

At this point I think it should be very clear to everyone who follows that none of the relevant EU decision makers care about what Greece may or may not do. The real issue is how to provide credible assurances to the capital markets so that investors can continue to finance the welfare state elsewhere in Europe as the water is rapidly draining from the tub.

Posted by Tseko | Report as abusive

It is by no means a foregone conclusion that there will be vote in favour in the Greek Pariament. Today the third coalition party LAOS leader, Karatzaferis, has stated that he an his MPs will not vote for the deal. Nobody wants to be the one to cause the deal with EU to fall apart, but nobody wants to be associated with the deal. We will wait to see how many PASOK and ND MPs try to distance themselves from the deal in the Parliamentary vote. Already 2 PASOK MPs have resigned rather than vote. And will the EU leaders will be prepared to lend on the back of at best luke-warm political support for the next bailout deal?

Posted by pcubed | Report as abusive

“What if Merkozy lose the next election(s). Then it will all have to be started all over again, right?”

Not really, Chris08, German politicians on all sides of the German Parliament are supportive of plans to save the Euro. Last time they voted there was something like 90% support for providing funds. And Germany has very deep pockets. Exports reached the record level of €1.06 trillion ($1.3 trillion) last month while inflation is half that of the UK at 2.1%.

Tseko, I think you are indulging yourself in wishful thinking.

A question for pcubed: what do you think the Greeks will do when faced with no handout – when it really hits home there might be no payout? Will they fold like the Republicans did over the US debt finances, or go for penury and political mayhem? Just because the Germans have the money doesn’t mean they will spend it if there is any thought the Greeks are playing games.

Posted by FifthDecade | Report as abusive

As a casual observer, it’s unclear to me what the Greek people want to happen. If it’s an ongoing bailout without fundamental economic changes (in particular the payment of taxes), it won’t happen; no sane counterparty would be a Greek sugar daddy. If it’s the debt to just go away and leave them alone, well, it looks like about 70 percent of past debt is doing just that (whether or not the ECB participates will have an effect on the final number). But that won’t eliminate debt altogether, and it won’t sustain what still looks to be an operational deficit. They don’t seem to want to leave the Euro, which will ultimately have the same effect as the first choice.

So I reiterate, just what is the outcome that Greece and the Greek people want here? I don’t understand.

Posted by Curmudgeon | Report as abusive


What the Greek people want will certainly never be articulated by their so-called political representatives. While many might not understand the finer nuances of Euro-level economics, the Greek people do understand some basic realities of life in Greece and realize that nobody (Troika or Greek political class) is talking seriously about fixing many obvious root causes of the current malaise, which if addressed would make the adjustments easier to achieve:

1. They know that if retail prices of goods and services were to fall by a similar order of magnitude as the targeted reductions in labour costs, the required adjustments would be far more palatable. They know that prices of Greek goods and services are generally very high relative to most countries in Europe (with a few exceptions such as fresh fruit). There are clearly cartels at work in retail and transfer pricing games are being played by international retailers. Regulation of business is extremely weak. The Troika simplistically focus on input costs such as transportation, and argue that restructuring of such sectors will drive costs down. It could help if the reforms were actually implemented (they never are), but without competition amongst the large retailers such changes could just increase the monopoly rents earned by these retailers. THE GREEK PEOPLE KNOW THAT IF THERE WAS AS MUCH ATTENTION DEVOTED TO DRIVING DOWN PRICES IN THE MALFUNCTIONING MARKETS FOR GOODS AND SERVICES AS THERE IS TO DRIVING DOWN COSTS IN LABOUR MARKETS THEN AUSTERITY WOULD BE A LITTLE EASIER TO TAKE.

2. They would like the Troika to focus on what really matters and stop attacking institutional feature in Greece that have nothing to do with competitiveness or total labor costs, and indeed are shared with other Eurozone countries. For example, the Trokia are fixated on getting rid of the 13th and 14th “months” salaries that are standard practice. This might seem a less transparent way of reducing labour costs but people are not stupid. They also know that identical arrangements are in place for a large proportion of the workforce in France, among other countries. They would be more prepared to listen if they were treated in a consistent manner to other countries that are attempting to dictate to Greece how things should be done.

3. They want to see the current political class replaced by a new generation of principled, ethical politicians (possibly an oxymoron?) who put society first. They seriously mistrust all senior politicians of all persuasions, who collectively have got Greece into the mess it is in and many of whom are believed to have misappropriated significant levels of wealth through corrupt activities.

4. They want to see the Troika insist that the Greek political class address the major injustices that are being inflicted on the private sector in the interests of protecting the public sector. Frankly the Troika have been negligent for the past two years in turning a blind eye as increasingly the costs have been shifter onto the private sector in the interests of protecting the public sector so closely-aligned with politicians.

5. They want to see a meritocracy where the best-educated and smartest Greeks have incentives to stay in or return to Greece, rather than make their lives in other countries. And where equal opportunities in employment are legislated and enforced (this does not happen now).

6. They want to see a fair tax system where taxes are collected from those who owe, rather than form those without connections or the ability to pay a back-hander.

If only the Troika has insisted on structural, business regulation, public sector and employment law reforms from day one, instead of focusing on deficit reduction through tax increases like first year economics students. They would have earned credibility among the people who matter and the political blocks to reform would already have disappeared. Instead what they have done is sustain the politicians who have caused the crisis and who have vested interests in avoiding the necessary solutions.

Posted by pcubed | Report as abusive

@pcubed – Thank you for your thoughtful response. I don’t have the knowledge to judge it, but it seems to begin to explain things that no one has addressed anywhere in press coverage. What you say seems to make the political class here in the US seem almost . . . honest in comparison.

Posted by Curmudgeon | Report as abusive

All I can tell you is how it seems to the “normal” hardworking people in Greece who see no short-term political solutions emerging. It is disappointing that the Anglo-American press-coverage is so uncritical and does not seem to address the key question of “how did Greece get into this mess?”

One thing is for sure, many billions of Euros worth of funds have flowed into Greece from the EEC/EU over the last 30 years. The legitimate and effective use of these funds transfers has not been adequately monitored or audited by the negligent bureaucrats of Brussels and Euro politicians. These funds have oiled the wheels of political corruption. They have created an illusion of economic growth and enabled the explosive growth of the public sector and sustained the private sector inefficiencies that ultimately can be borne no more.

The EU actively helped promote this disaster. But now regular people in the streets of Greece are being forced to pay when they are denied healthcare by doctors who in turn are not paid by the state and when their children have no school books to study. When spring comes again the old women will be picking chorta (a sort of wild green grass-like salad) in the parks to eat, as they were last year – that’s if they survive with no heating in the current freezing temperatures.

Some honest reflection by the authors of the EU project and their successors would be welcome.

Posted by pcubed | Report as abusive

Thank you pcubed for such interesting comments.

One thing I have heard is that there is no real independent civil service in Greece – each administration brings in its own people right down to the level of police chiefs, and the new folks don’t know where the last lot hid their skeletons. That can’t help things. Also, if you think your political opponents are corrupt, you aren’t going to want to pay any taxes to them if you can hide them somehow because if they were like you, they’d hide them in the costs of building a swimming pool in their gardens for instance.

Prices in Greece did go up rather quickly when the Euro was introduced, I remember news reports with shoppers in markets complaining the stall holders would move a price from, say, Dr. 1,495 down to something like €4.95 rather than the €4.40 it should have been, and this typically drove wages up too. It’s hard for most people to divide numbers in the thousands by 340.750 to buy their daily bread and there seems to have been widespread abuse of the situation.

Posted by FifthDecade | Report as abusive

Curmudgeon, I believe that Greece has something like 40bn in uncollected taxes. That would be before dealing with the rampant evasion. The corruption there and the repeated broken promises is also why, contrary to conspiracy theories, the people bailing Greece out are reluctant to give the politicians there direct control of the cash – I doubt it would be going to many pensioners….

Posted by Danny_Black | Report as abusive

Why should the Greek people pay for their spending? Sounds undemocratic to me. Let the Germans and bankers pay!

Posted by TFF | Report as abusive

There is a good Swedish documentary on the issue that can be found on youtube. Search for “What’s wrong with the Greeks”.

Posted by AquaMeerkat | Report as abusive

No duck for the Greek people?

Tells us everything we need to know about our “democracy”…

Posted by hedonistbot | Report as abusive

The problem in Greece is a big inefficient public sector. The politicians in Greece are using feudal methods to exploit their own people. To a lesser extent this problem can also be found in other areas of the E.U.. In my opinion, this is the problem, that in the long run, has to be corrected.
Greece has 10 mil. European citizens and the vast majority of them have nothing to do with causing this crisis. They are hard working, quite efficient and have a lot of value to add to the Union. Their currency is the Euro.
Nobody should take their European citizenship or their currency away from them (Greek politicians are the most likely culprits, who would very much like to do that, so they can continue exploiting). European leadership must not allow that to happen!
This inefficient Public sector finances itself with money of European citizens inside and outside of Greece.
Everybody should stop financing this public sector a.s.a.p.. This includes northern Europeans as well as Greek Europeans who have to pay a very high price for the ridiculous quality of services they receive from this government.
I have a solution to propose: the Greek public sector prints its own money (say, the new Drachma: ND) and use it to pay for its own obligations while the rest of Europe (and that especially includes the rest of Greece) continues to freely use the Euro. In the mean time both currencies will be used. Obviously the ND will be mostly used in Greece (but not necessarily exclusively). In Greece, the private sector will continue to use the Euro but can also collect NDs. The Super Markets (and every other store) will accept both currencies but obviously prices in ND will be more often adjusted upwards. Taxes will be collected by the Greek public sector in both Euros and NDs.
The Greek public sector will pay the bulk of its obligations with NDs (salaries, etc) but will also have Euros to use for payments towards the exterior of the Greek area. The value of the ND will continue diminishing until the Greek government stops producing deficits. When this happens (if it ever), the Greek government will stop using the ND and switch back to Euros.
Further, I propose that in the mean time a number of European wide changes be made:
Why not allow European citizens all around Europe, choose who they pay taxes to.
Imagine, for example, that a central European government starts receiving income tax payments from Europeans all over Europe in exchange for border patrol, fire protection, policing, public education, highway maintenance(*) and (why not) even defense services offered throughout the Union.
Why doesn’t Brussels introduce a European-wide VAT rate and issue “no-country-mentioned European passports” with “no-country-mentioned European tax ID numbers”.
(*) Isn’t it ridiculous to have to pay so many “Vignettes” when you drive a few hundred km in the heart of Europe? Shouldn’t that end at some point?

Posted by 1moreEuropean | Report as abusive

You are proposing a European federalism? With the central government in charge of most significant services and the individual states managing what? The distribution of welfare?

Posted by TFF | Report as abusive

While I’m not absolutely convinced that severe austerity will fix the issue, it is clear that excess has caused it. 1moreEuropean is right to suggest there are problems with the public sector, and privatisation would not be a bad thing. I’ve read that a large portion of Greek debt is held internally, so how about swapping debt that is overvalued for shares in the private sector industries and services that are currently so expensive and unproductive?

I don’t see Federalism or a 2 currency solution as fixing anything, while those elsewhere suggesting the Greeks would be better off overprinting current Euros in cicrulation with “New Drachma” signs are off their rockers.

Whatever the solutions are though, it would really help if instead of dancing around the thing, someone would come out and tell the Greeks the Facts of Life: move out of the Euro and lose 70% of your wealth, or stay in it and lose 50%. Politicians though find it hard to say anything that is not positive news in case they don’t get reelected, while journalists generally only print what is told to them by politicians.

It’s time for straight talking. The Greeks cannot live in denial forever.

Posted by FifthDecade | Report as abusive

Worst thing about living a life of excess is that you need to CUT BACK to get to balance. And you need to cut back further to repay for those decades of excess.

Cutting back is never pleasant.

Posted by TFF | Report as abusive

TFF, which is why in a democracy no one ever votes for it….

Posted by Danny_Black | Report as abusive