Yanis Varoufakis On Greece's Destruction And Europe's Bogus Growth Pact

Tyler Durden's picture

Authored by Yanis Varoufakis and originally posted at YanisVaroufakis.com,

On November 27th, 2012, the Eurogroup (comprising the Eurozone’s finance ministers) reached a decision on Greece. Its essence is a guarantee that Greece will remain in the Eurozone (and therefore off the Northern European agenda) for another ten to twelve months; at the very least until the German federal political cycle has seen through the election of a new Bundestag. The repercussions of this short-sighted agreement are grave not only for Greece but for the Eurozone, and indeed the European Union, more broadly.

To accomplish the task of taking Greece off the minds of markets and Northern European electorates for this space of time, Eurogroup ministers came to an agreement with the IMF on how to patch up their conflicting agendas on Greece by means of a joint communiqué according to which Greece’s de-railed Bailout Mk2 is, supposedly, back on track. The basis of their agreement is twofold:

  • The IMF will pretend it believes Europe’s claims to have rendered Greece’s public debt viable without an OSI (i.e. a haircut in the loans provided to Greece by the troika, aka its European partners), while
  • Europe will pretend that it can do this without an OSI.[1]

The idea here is that, yet again, the Eurogroup-ECB-IMF alliance is not ready, politically, to reveal the truth to its various constituencies.

  • The German and Dutch governments (not to mention the Finnish) feel it is impossible to tell their Parliaments, and voters, the terrible truth that some of the money they have put up as part of Bailout Mk1 & Mk2 will not be retrieved.
  • The IMF cannot admit that it allowed Europe to involve it in a country program that does not fulfill the debt-viability conditions that any IMF program ought to.
  • The Greek government has invested its survival on misleading its constituency into believing that the tailspin of the Greek macro economy can be arrested under the current arrangements.
  • And, finally, the ECB is struggling to maintain the illusion that it can remain faithful to its no bailout clause vis-à-vis governments, especially in view of the great challenge awaiting in relation to Spain and Italy.

This holy alliance of subterfuge and double-speak raises a pressing question: What does this new ‘Greek Deal’ mean for the Eurozone in the medium to long run? Before discussing this question, a quick look at the latest ‘Greek Deal’ may be helpful.

The latest ‘Greek Deal’: From OSI to PSI Mk2

Last year’s Greece’s Bailout Mk2 was predicated upon the fantasy that Greek debt would fall, as a percentage of GDP, to 120% by 2020. The specific number, of 120%, was chosen by the IMF as the level that allowed it to remain part of the Greek ‘rescue’ effort (nb. since, unlike the Europeans, the IMF is charter-bound not to provide loans to a country with a runway debt to GDP ratio). What gave ‘credence’ to this target (in the eyes of the unschooled and uninitiated into the laws governing imploding macro-economies) was the substantial haircut that was part and parcel of Bailout Mk2 – the so-called PSI, which imposed ‘voluntarily’ on private bond holders a write down of 54% of Greek government bonds’ face value (on the basis of a swap with longer maturity bonds) which, in present value terms, translated to a 75% haircut. The gist of Bailout Mk2 was: Greece would be back on track on the basis of further austerity, a new 130 billion euro loan for Greece, a 100 billion private sector haircut, and a privatisation drive that would, supposedly, raise 50 billion euros.

As many of us were predicting at the time, screaming our predictions from the rooftops, it took only a few months for the predictions of Bailout Mk2 to reveal themselves as pure fantasy. Less than a year later, Europe had to confess that Greece’s debt to GDP ratio was edging toward 200%. Clearly, the IMF’s Ms Christine Lagarde could no longer pretend that the IMF was faithful to its own charter in remaining part of the Greek ‘program’. And since the German government needs the IMF to remain on board, so as to convince the German conservative side of politics that its ‘Greek strategy’ remains intact, some new ‘deal’ on Greece was necessary that would allow for a re-freshed claim that Greek debt can be pushed down to around 120% by 2020.

To procure this magic number, the powers-that-be had, somehow, to argue that Greece’s GDP will rise by about 50 billion while its debt will fall by 40 billion (nb. for if this were to happen, by 2020, Greece’s debt to GDP ratio would be back to just over 120%, thus keeping the IMF’s board, if not happy at least, pliant). This is precisely what they announced on 27th November: a boost in GDP by 50 billion and a concomitant reduction in public debt by 40 billion.

The first observation regarding these two numbers is the audacity of the first one. At a time when Greek GDP is shrinking inexorably, and with new austerity measures that amount to fiscal waterboarding of a national economy (new austerity measures of 12 billion euros for 2013 alone), the troika of Greece’s lenders had no compunction in predicting that, somehow, the Greek economy would miraculously achieve a growth rate of, on average, more than 4% annually for at least eight years. And all this with a broken banking sector, no serious investment by the European Investment Bank and, to boot, within a Eurozone that is caught firmly in the clasps of a double-dip recession!

Setting aside this preposterous ‘plan’, let us now turn to the Eurogroup’s other ‘number’: the planned reduction of Greek public debt of 40 billion. How do they intend to effect this? By three means.

  • First, by cutting 1% off the interest rate Greece pays for the loans given in the context of Bailout Mk1. How much is this going to shave off Greece’s mountain of public debt? Two billion, is the answer. OK, 2 billion gone, 38 to go.
  • Secondly, by postponing by 15 years the repayment of capital and 10 years the repayment of interest on Bailout Mk2 loans. How much does this reduce Greece’s debt by? If this is a mere re-scheduling, as it seems to be, it does nothing to reduce debt per se. What it does do is to lighten the repayments that the Greek government will have to be making for the period of grace granted. (If the interest rate is, later, pushed below 2% then there will be an element of debt relief, but nothing that makes a substantial difference to the 2020 target.)
  • Thirdly, by returning to the Greek government the profits made by the ECB on Greek government bonds that the ECB purchased, at a discount, between 2010 and 2011 as part of the failed SMP program (when Mr Trichet’s ECB purchased second hand Greek, Irish and Portuguese bonds in an ill-fated attempt to prevent these states from going under). How much will Greece get from that? Around 7 billion is the answer.

So, by means of an interest rate reduction and an ECB-profit return, 9 billion euros will be shaved off Greece’s debt. This leaves us with 31 to go in order to reach the target of 40 billion announced by the recent Eurogroup decision. Where will these come from? Answer: By means of a debt buyback. Greece will be lent more money by the EFSF with which to buy back its own post-PSI bonds and tear them up (or ‘retire’ them, in the trade’s own language). At the time just before the Eurogroup met, Greek bonds were trading at a price of 35% of their face value. Assuming that Greece was given 16.7 billion euros from the ESFS (in new loans), it could buy back (at that price, 35% of face value) 47.7 billion of its own bonds, in order to retire them. Hey presto, the debt reduction of 31 billion (47.7-16.7) that the Eurogroup announced would be a reality!

Alas, if Greece is given enough cash to buy a significant part of its distressed bonds in the open markets, the increase in demand for these bonds will push up their price to an extent that the debt buy-back will be pointless. Already, the mere rumour of this debt-buyback pushed Greek bond prices well about the 35% level. For this reason, the Eurogroup decided to fix the debt buyback price at the 35% level that was the going rate on the preceding Friday. In other words, the proposed debt buyback will not take place at a free-floating price but at a price set by the Eurogroup which was designed to ignore the increase in demand caused by the… debt buyback itself. To put it differently, the Greek government must now convince bond holders to sell their Greek government bonds to back to the Greek government at prices which are now much lower than those determined by demand and supply (i.e. by ignoring the effect on demand that the EFSF loan to the Greek government has effected).

To gain a perspective on the Greek government’s problem, in convincing the private sector to sell 41.7 billion worth of bonds back to it, at 35% of face value, it is worth nothing that the total value of bonds in the hands of the private sector, globally, is 61.8 billion. Of that, 15.2 billion is held by Greek banks, 8.6 by Greek pension funds and then rest (38 billion) by non-Greek investors, mainly hedge funds. So, the success of the debt buyback program will depend on non-Greek investors. Assuming that Greek banks and pension funds can be made ‘an offer that they cannot refuse’ by the Greek Finance Ministry (nb. already the Greek Finance Minister has told them that it is their… ‘patriotic’ duty to cough up their bonds at the offered price), the Greek government will be short by 23.9 billion (nb. it needs to buy back 47.7 billion, minus the 23.8 held by Greek banks and pension funds, equals 23.9 billion). Will foreign institutions, and hedge funds in particular, ‘play ball’? Or will they hold out for a higher price (perhaps for a 100% redemption even)?

With these thoughts in mind, it is clear that the latest Eurogroup decision will go down in history as the precursor to PSI Mk2. The reader may recall that this Eurogroup summit was supposed to, at the IMF’s behest, usher in the long awaited OSI. But resistance from Germany led to the debt buyback idea which is no more than a disguised new PSI primarily for Greek banks and pension funds. Not only will we fail to achieve the target of 40 billion debt write off but, at once, the already bankrupt Greek banking and pension system be given another major push into the mire of irretrievable bankruptcy; the very same banking (and pension) system which is supposed to provide the financing and backing for a rebound of Greek GDP to the tune of 4% per annum…

What does this all mean for Greece, for the Eurozone, for Europe more broadly?

It is clear that the Eurogroup cannot be serious about either its Greek debt or its Greek GDP targets. The November 2012 decision was merely a pretext for releasing withheld loan tranches to Greece so as to buy another year or so for Europe to patch up, in similar fashion, its crisis elsewhere – in Italy and Spain in particular. Meanwhile Greece has been condemned to another year of misery, failed targets, depression etc.

The Eurogroup’s underlying ‘logic’ is that, as long as the Samaras government plays well its ‘model prisoner’ role, Greece will be given its OSI after the federal election in Germany is over, in September 2013. Many commentators, even those critical of Europe’s dithering, welcome the implicit acceptance that an OSI is inevitable. I think they are wrong. Take for instance last year’s PSI. What did it prove? It proved that a haircut can be meaningless if badly delayed. While it is true that a haircut of privately held debt in 2010 would have been helpful, Europe’s insistence that there would be no such haircut (and its desperate attempts to fill the gap by huge loans and austerity) ensured that, when the haircut came (with the PSI), it was too little too late. Similarly with the impending OSI: when it comes evenutally, after the awful delay effected by the latest Eurogroup’s shoddy ‘Greek Deal’, it too will prove too little too late and too toxic not only for Greece but for Europe as a whole. In short, delaying the delivery of the inevitable medicine turns into poison.

So, what will come of Greece, given the latest Eurogroup ‘decision’? It is my fear, and belief, that the country is becoming a version of Kosovo – a protectorate in which the euro remains the currency, sovereignty is minimal, the population is ruled over by a glorified kleptocracy with strong links with Berlin and, last but not least, a permanent migratory flow is established that sees the young and the skilled move to northern Europe and beyond.

Turning briefly to the significance of the latest ‘Greek Deal’ for the Eurozone as a whole, the omens are particularly troubling for Spain and Italy. First, there is the small matter of the inbuilt domino effect. The reader is reminded that the reduction in Greece’s interest rates (which will be enhanced in the not too distant future further, as the Greek state grows increasingly unable to repay its partners’ loans), will translate into losses by the Spanish and Italian governments (since other troika ‘program’ countries, i.e. Ireland and Portugal, have been spared). The fact that the markets’ expectation of some OMT assistance for Italy and Spain are keeping their bonds’ yields low, for the time being, does not alter the fact that the vicious contagion dynamic is gathering strength.

Beyond this ‘small’ matter, Rome, Madrid and, indeed, Paris must now reckon with a Eurogroup decision that demonstrates how bogus all talk of a Growth Pact really has been (since President Hollande raised it as an issue a few months ago). The fact that the Eurozone’s finance ministers declared, without the slightest hesitation, that substantial growth will come to depression-hit Greece without an iota of a smidgeon of a hint of fresh public investment reveals that Europe is truly blind to what it will take to deal with the recession it faces in aggregate and with the various depressions in its Periphery.

Last but not least, the readiness to sink Greece’s already bankrupt banks further into bankruptcy (by imposing upon them surreptitiously PSI Mk2), rather than implementing the June 2012 Agenda for decoupling the banking crisis from the sovereign debt crisis, is yet another sign that the Eurozone remains on the road to ruin. And, as long as this is the case, the European Union will be increasingly buffeted by the centrifugal forces (especially those emanating from London) that may well cause its evolution into, at best, some form of NAFTA-like trade zone.

[1] OSI stands for ‘Official Sector Initiative’, and is juxtaposed against last year’s PSI (Private Sector Initiative). In essence, PSI was a nominally voluntary, but in reality compulsory, haircut on Greek government debt held by the private sector, whereas OSI refers to a haircut taken by the troika of Greece’s official lenders – the IMF, the ECB and the EU’s member-states. Note however that the IMF is bound by its charter never to concede to a haircut. And given that the ECB is vying for similar ‘superseniority’ status, an OSI is widely expected to hit the taxpayers of EU member-states that have lent money to Greece in the context of Bailout Mk1 and Bailout Mk2.


Yanis interviewed by INET on the (Mis)design of the Euro...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Yen Cross's picture

 I Googled it>

Yanis Varoufakis     I'm still studying his thoughts/

  That young man might save Greece and it's pillaged past! He looks good on the negotiation, idea...

 Not polluted or delusional> that's (A) plus...

Silver Bug's picture

ALL of the "official" statistics that governments quote are bogus. Trust in Gold and Silver.



zorba THE GREEK's picture

Ceranda-penda Yanidas, y miay cocodi nioci.

CPL's picture

Greece doesn't need saving anymore than the planet does.  Greece will always be greece.  Governments change.  Money changes.  History changes.  Not sure what Yanis is worried about, the Greeks as a culture are like the Chinese or Indians or Italians or Celts or Germanic.  They've been around for thousands of years.  They'll be here in a thousand from today.


Nobody goes to great lengths to describe a government or some fiat printed a hundred years ago in a culture.  But they certainly remember it's people, food, wine, song, stories, clothing usually because it's what sticks.

A Middle Child of History's picture

Woggie would oft post to this site,
A link that was nothing but shite,
What a fool and a bore;
One couldn't possibly do more,
to waste so many a byte.

macholatte's picture



The can shall be kicked!

"So let it be written. So let it be done."


The "End Game" will not come until there is no food.  It is then that the Greeple will begin to think they are in trouble and need to actually do something besides snivel.


I have seen all, I have heard all, I have forgotten all.
Marie Antoinette

zorba THE GREEK's picture

The Greeks need to go back to the Drachma and take charge of their own problems.

Berlin doesn't have the Greek peoples' interest in mind. HEY..PATRIOTIES, the time

has come to hit the 'RESET' button and start over.

Joebloinvestor's picture

That is why I have been trying to find out if the gold that was pledged for the last tranche has been moved.

What are they gonna base the "new" drachma on without gold?

"A promise to pay?"

Declare it "legal tender for all debts, public and private"?

Gee, that sounds familiar.........

ArrestBobRubin's picture

Just bear in mind who stabbed Greece in the back. Even though it's supposed to remain a "secret" now.

Yet, even after all the damage the Mammonites of the Synogogue of Satan have wrought in Greece and across the Eurozone, brainwashed dolts are actually more concerned about Golden Dawn and other Greek nationalists who must now clean up the post-looting devastation the banksters left behind...

It would be laughable if it weren't so tragic. 

OFFICIAL: Goldman Sachs role in eurozone debt fraud to be kept secret

Just fancy that

The European Central Bank has won a ruling to refuse access to secret files showing how Greece used derivatives to hide its debt. They were guided in this scam by Goldman Sachs.... contd.

Yen Cross's picture

Greece will ultimately print her old coins... The European Union hasn't agreed to anything.< No payments have been made!

 Just another fiscal facade/

BRIC-layer's picture

`Griechenland ERWACHT!

GS-DickinDaMuppets's picture

WTF!  The outcome for Greece (and eventually the rest of the EU), is the EXACT SAME TODAY as it was when the ELITES started having their meetings and kicking the can down the road in Brussels 3 years ago!!  The ONLY difference is the ELITES got gourmet meals and lodging paid for on the backs of the GREEKS, who only got screwed to the wall, while their banks got bailed out for making disastrous derivative deals and the MUPPETS GOT..... ZERO!


...doing God's work...GS-DickinDaMuppets



sunny's picture

A great analysis.  Has anyone bothered to check out the German, French, Spanish, Italian market charts recently.  Germany is near multi-year highs, the rest are showing remarkable strength in that they are not crashing but holding their own or sliding up, as is Japan.  Someone forgot to tell them that there is a global recession.  They didn't get that memo.  Just saying.


urbanelf's picture

Who doesn't like Yani?

CrashisOptimistic's picture

Pretty good analysis, but what was glossed over was the very real possibility that about half this new PSI can't be made to happen.  The Greek paper held by non Greek institutions have no reason to play ball until they get government knocks on the door with pictures of their children and school schedules shown to them.

There was a subtle quote in the IMF statements that they would not be a participant if this new PSI doesn't go smoothly.  

In a much larger context, does everyone notice how the whole systemic hanging-by-a-thread dynamic is out there with about 4 or 5 scissor threats per year being juggled and maneuvered away by governments.  Over and over again they do crisis management and just barely avert swap triggering events. 

They succeed over and over again.  They only have to fail once.  One would think that one time is inevitable.


CDSMonkey's picture

Good catch. Many of the ideas for Greek relief contingent on this program. I'm guessing at 50 a lot of hedge funds would sell 2% Greek bonds.

THE DORK OF CORK's picture

These guys want to make the market state work

The end of the nation state means the end of politics ...........the banks already almost free will be free to farm the entire Euro construct when the market state is complete.


Remember the value of the assets is of no consequence to the banks.

They however seek above all else to FARM THE FIAT MONEY SUPPLY via legal state means.

In recent questioning with Irish state politicans the head of BoI made this very clear.



Riche B. is correct within this current monetary framework

“this is not a pawnbroking business”

They are messing up the FIAT money supply to preserve their credit Kingdoms.


The ending of the European nation state means  Europe becomes another US of fucking A

where politics is not even considered a serious matter for discusion.  -  therefore the banks can get ALL of the surplus rather then part of it under the nation state mode.


Those two want to create another bland USA in Europe

The 9th circle of market state hell.

obessoligarch's picture

at the same time the girls of greece are trying to put economy buck in track.


Peter Pan's picture

Varoufakis may not have all of the solutions but at least he is a mile ahead of the lying kleptocracy thay continues to rule Greece and the European vultures that circle and land for instructions and inspections.

Just for readers' interest;

1, the mother of ex prime minister George Papandreou has been found to have an account with 500 billion euros

2. The wife of an ex PASOK party powerful minister Papantoniou has been found to have not declared a bank account with 2 million euros

3, Ten high ranking clergy are being invetigated for multi million euro bank accounts.

In the good days, the high ranking kleptocracy stole 5 and gave out 1 to the common people to buy their votes. Now that things have soured they persist by trying to syphon 5 out of the common people while they can barely bring themselves to contribute even one euro themselves.

Greece will have no progress until the local and international vermin remove their tentacles from the throats of the people. Of that, I hold no immediate hope.

Nussi34's picture

Varoufuckis is a socialist!

elwu's picture

Again, Yanis focus solely on finance alchemiae. He doesn’t provide proposals for the only things that would make a real change, which are, structural changes.

As for “Its essence is a guarantee that Greece will remain in the Eurozone” is IMO misleading. Since it is only Greece herself who can decide to stay in the Eurozone or not. BTW, it is also only Greece herself who can decide if she wants to continue down the road to Kosovo-like failed-state or not.

BTW, contrary to the statement by Yanis: the 1st PSI has cost the German taxpayers already ~15bn Euro, real money, lost forever. Thanks to the (partial) ownership the regional and national governments took of zombie banks like Commerzbank and some Landesbanken, or the Bad Bank ‘FMS Wertmangament’.

Greece, and only she herself, must decide if she wants to stay in the currency union and thus continue to live on a living standard the rest of the Eurozone is willing to subsidise – or if the nation wants to become free again and start all over, with her own currency. If I’d be a Greek, my choice would be very clear.