This page has been archived and commenting is disabled.

Hans-Werner Sinn Warns Europe - Don't Underestimate Varoufakis

Tyler Durden's picture




 

Authored by Hans-Werner Sinn, originally posted at Project Syndicate,

Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.

Plan B comprises two key elements:

First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone.

 

Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.

Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.

Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.

A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.

A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.

All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.

The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.

Rumor has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralized is wearing thin, given that, in many cases, the collateral has a rating below BBB-, thus falling short of investment grade.

If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. A large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future.

Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 05/30/2015 - 13:15 | 6147001 Wolferl
Wolferl's picture

Throw those pathetic Greeks out of Europe already. It´s just a worthless third world country.

Sat, 05/30/2015 - 13:37 | 6147041 Dead Canary
Dead Canary's picture

Hey, anyone who is such a giant pain in the ass of the central bankers is ok in my book.

Sat, 05/30/2015 - 14:49 | 6147177 Wolferl
Wolferl's picture

The Greeks are central bankers best friends. Useful idiots of the international bankster cabal. And idiots like you who are not able to understand this are called muppet.

Sat, 05/30/2015 - 15:06 | 6147213 Ex Cathedra
Ex Cathedra's picture

Call us when you know something.

Sun, 05/31/2015 - 08:04 | 6148836 nicxios
nicxios's picture

WolferLOL. The bigger useful idiots of international bankster cabal are the Germans. Will be funny watching, popcorn ready

Sat, 05/30/2015 - 15:40 | 6147301 gorillaonyourback
gorillaonyourback's picture

Yeah just like your mom.  A cheap third world hooker.  Oh by the way ask you mom how much she charges for a blowjob.  I'm comparative shopping.  Thanks have a nice day.

Sat, 05/30/2015 - 17:02 | 6147513 Ploutos74
Ploutos74's picture

Well from where I stand they are worth 350 billion in debt plus 100+ bilion in TARGET debt. And another 5 trillion or so in derivatives. Do you feel lucky punk?

Sat, 05/30/2015 - 17:08 | 6147521 researchfix
researchfix's picture

Absolutely my words. Five years ago. And true. Then. They cheated EU from the beginning.

But it is like they saw the future or the real intentions.

Now they are my heroes, because they do what my own German countrymen are too lazy and brainwashed to do.

Sat, 05/30/2015 - 12:43 | 6146958 q99x2
q99x2's picture

Long live Zeus

Sat, 05/30/2015 - 12:49 | 6146962 YHC-FTSE
YHC-FTSE's picture

Underestimate him? If he had a couple of neurons rolling around his brain pan, he should have used the best tactic of all - the element of surprise to collapse the entire system with its overloaded CDS - a few bloody months ago: Taking a few billion in bailouts in "hard currency" to stabilise the new Drachma, then defauling to take the few short months of agony to help his country towards prosperity and debt-free stability instead of this endless bullshit greek drama. I suppose he could still do it, but the element of surprise diminishes with each new day.

Quirte frankly, I don't have a clue where the bond markets, insurance, and third party underwriters' risks are at the moment. Nobody does.

Sat, 05/30/2015 - 13:25 | 6147018 Herodotus
Herodotus's picture

"Quite frankly, I don't have a clue where the bond markets, insurance, and third party underwriters' risks are at the moment. Nobody does."

From a common sense point of view, I think that they must all be up the creek without a paddle.  However, no one wants to admit it for fear of spoiling the party.

It was reported a while back that the Northwestern Mutual Insurance Company was keeping a certain portion of their assets in gold bullion that was held in the company vault in downtown Milwaukee.  That is a good sign that at least some of them are exercising a little caution.

 

 

Sat, 05/30/2015 - 16:50 | 6147199 CPL
CPL's picture

Actually he took option C. 

Greece and the rest of the european countries that were hung to dry financially were going to be robbed at lawyer-point anyways, so he did what anyone could do in the situation.  Run the clock.   He bought time for his people giving them a chance to get out of the way.  Helped hang the people that print bonds and money from thin air as it only added more rope around the lenders necks.  I think it highlights his merit in his responsibility to his people and playing a good defensive game. 

Incidentally, he also helped buy all of you time.  The next question is, why the fuck do any of you still have a dime in the banks or in a stock market or even in an insurance policy? 

Once he pulls the pin in the financial grenade and hands it back to the ECB/EU, all those loans are part of all of your portfolio's now after the past couple of years because in 2010 the rules changed and all of NATO got the opportunity to partake in the shit sandwich as all the central banks instructed all the governments to do.  Whether anyone wanted it or not.

Sun, 05/31/2015 - 08:18 | 6148856 provokethegoyim
provokethegoyim's picture

The Greeks are now paying for their crimes of 2200 years ago, when the evil Seleucids attempted to erase G-d's holy people in the Land of Israel.

Now is the reckoning.

www.provokethegoyim.blogspot.com

Sat, 05/30/2015 - 12:51 | 6146965 ZippyBananaPants
ZippyBananaPants's picture

I hear Mr. Panos is actually pulling all the strings in this play!

Sat, 05/30/2015 - 13:16 | 6146999 El Oregonian
El Oregonian's picture

"I hear Mr. Panos is actually pulling all the strings in this play!"

 

I like "I hear Mr. Pianos hits all the keys in this play!". Just say'in...

Sat, 05/30/2015 - 12:56 | 6146973 Yen Cross
Yen Cross's picture

 

  WRONG> "A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members."

  If I were a Greek holding all my euros in cash, the last thing I'd do is invest in European assets. European assets are going to be under pressure if Greece defaults.

   When Greece reintroduces the Drachma it will be heavily devalued, and eventually stabilize. Then I would start converting my euros back into Drachmas for pennies on the euro, and start investing in Greek assets that have been cleared from the default.

Sat, 05/30/2015 - 13:14 | 6147000 Totentänzerlied
Totentänzerlied's picture

Set up shop as a moneychanger.

No one will want new Drachmas for the foreseeable future, inside Greece or outside Greece. They'll have a dual currency situation, with all Greeks dumping their Drachmas on the booming drachmas-for-euros black market, to protect/gain purchasing, specifically to be able to access the international oil market as Greece produces essentially none. That's why they wanted the euro in the first place.

All Greeks will be forced to become currency speculators.

Sat, 05/30/2015 - 13:31 | 6147028 Yen Cross
Yen Cross's picture

   The euro is in a downward, not upward trend. The Greeks don't have to convert their euros back to Drachmas until they choose to, or the new currency stabilizes. Most of the smart Greek money has already been pulled out of Greek banks.

 Spain and soon Italy will be heading down the same road. There isn't going to be a dual currency eg; Northern and Southern Euro.

Sat, 05/30/2015 - 13:00 | 6146979 Joebloinvestor
Joebloinvestor's picture

What a fucking joke.

The "fix" is getting Greeks to believe the government is no longer corrupt and pay their fucking taxes.

Since the Greek way of life is a corrupt government with the public taking the attitude they don't support it by not paying taxes.

What a circle jerk.

Sat, 05/30/2015 - 13:05 | 6146992 Bangin7GramRocks
Bangin7GramRocks's picture

Enough with this game theory bullshit! How did humans handle difficult situations for the first 100,000 years of existence? You need to study crazy ass John Nash to formulate a plan? And a plan B? 

Sat, 05/30/2015 - 14:26 | 6147135 Stumpy4516
Stumpy4516's picture

His game theory is working just fine.  So well that the common Greek does not seem to realize they are the mark, not the EU or the bankers.  He works for the bankers.

Under plan A he got their pensions and emptied all the central govt's coffers, with the money going to the EU/West bankers.  He has set the stage and started the impimention of increased controls on the average Greek.  He has moved them closer to the edge so that they will accept what the EU/bankers impose upon them in order to avoid falling off the cliff.  He knows people will submit in order to survive.

He tried to get all the funds held by the local govts but they refused.  When he and his party are done Greece will be a fake govt that owns nothing and whose citizens are just renters on foreign held land.  He and his party will sell Greece right out from under the Greek citizen.  However, his party will not effect any real actions against the Greek elites who have taken the wealth of Greece.

Sat, 05/30/2015 - 13:10 | 6146998 jimfcarroll
jimfcarroll's picture

I'm guessing Dr. Sinn is correct. An accomplished taxonomist couldn't put together a complete backbone from the remains of everyone in the Troika. They will ultimately back down - kicking the can down the road and encouraging sovereign-level moral hazard to the leaders in Spain and Portugal.

Ultimately it will be awesome when it all comes down. But alas, we'll need to wait a little longer.

Sat, 05/30/2015 - 13:23 | 6147014 hibou-Owl
hibou-Owl's picture

What are chances Greece Government does a deal (rolls over), gets it's final bailout cheque from the EU. Then has the big party and gives the EU the bird and def

Sat, 05/30/2015 - 13:26 | 6147021 hibou-Owl
hibou-Owl's picture

Defaults.

Sorry but my lovely iOS is shit..

another words take the money and runs!

Sat, 05/30/2015 - 13:24 | 6147015 flyonmywall
flyonmywall's picture

The charade will keep going, and the can will be kicked down the road again. Count on it.

It would be nice to see these fuckers eat crow or get beheaded, but I highly doubt it's going to happen in my lifetime. Look how long the Japanese have kicked the can down the road. It's been like 20 years or so, and the shills and money printers are still in charge. The plebs will simply never get it, because they actually enjoy getting shafted and living their pathetic clueless lives.

 

Sat, 05/30/2015 - 13:29 | 6147027 Herodotus
Herodotus's picture

This will continue until the Emperor and the Army take the reins away from these folks.

Sat, 05/30/2015 - 13:36 | 6147037 Batman11
Batman11's picture

How big is the Greek debt?

$377 billion according to the online debt clock.

James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

Losses from sub-prime - less than $300 billion

With derivative amplification - over $6 trillion

Assuming the same loss amplification from derivatives:

The losses from a Greek default become $7.5 trillion.

 

Sat, 05/30/2015 - 14:02 | 6147090 Winston Churchill
Winston Churchill's picture

Just as well they all net out, with no counterparty risk then.

Do I really need the /s ?

Sat, 05/30/2015 - 14:52 | 6147181 Uber Vandal
Uber Vandal's picture

The sad thing is that far too many people actually believe that.

 

 

Sat, 05/30/2015 - 14:02 | 6147091 kchrisc
kchrisc's picture

Only a tool of Zion's banksters would not just tell them to look for their next payment up where the sun don't shine.

He's a tool, and the only game he's playing is heads the banksters win, and tails the Greeks lose.

Liberty is a demand. Tyranny is submission..

Sat, 05/30/2015 - 14:18 | 6147120 Free_Spirit
Free_Spirit's picture

Very well explained, I never joined up the dots in this way before.    Only question is why Schauble who knows all this very well,  so does Jen at the Bundesbank,  are letting it ride.   

 

Sat, 05/30/2015 - 15:52 | 6147333 bitterwolf
bitterwolf's picture

SOOO funny.....NATIONS DO NOT HAVE FREINDS...musical chairs with with a pandora's music box playing the sultry strains of misccalculation's...

Sat, 05/30/2015 - 16:18 | 6147389 malek
malek's picture

I always held Hans-Werner Sinn in high regard, but this article of him really has some outrageous proaganda parts to it.
Start to prepare the ground by putting on display some obviously bad manners:

Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank [...] then transfer the money to other countries to purchase foreign assets (or redeem their debts)

And then as a follow-up:

A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad.

So wait a minute, a Greek simply taking his hopefully hard and honestly-earned savings from the bank is as bad?
Sorry HWS, but fuck you!!

Sat, 05/30/2015 - 16:48 | 6147468 burocracy
burocracy's picture

Daft analisys. but there are at least two people believing it: Varoufakis and Tsipras.

first: Target Liabilities are "placeholders": should the terrible duo try to redenominate, they would redenominate as well.

"Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme". Utter rubbish. I deposit the money, the bank lends it, and when I withdraw the money the banks either call the loans back or take on further debt. The difference? the citizen does not owe any money. the bank does.

"If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong."

In which parallel universe money owned abroad by citizen is recoverable by a government?  you know, there are two ways to join people and money.

Sat, 05/30/2015 - 17:38 | 6147590 MKD
MKD's picture

Fuck the EU

Sat, 05/30/2015 - 18:42 | 6147709 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

and the bus they rolled in on.

Sun, 05/31/2015 - 04:37 | 6148722 theprofromdover
theprofromdover's picture

The minute Greece exits the Euro, there will be no shortage of international bankers flying in to offer them money.

They can't help themselves; there are already scores of plans drafted in readiness

Sun, 05/31/2015 - 17:16 | 6150036 jonjon831983
jonjon831983's picture

Is this something that is being done on purpose? A partial bailout without making it look like one?

"If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. A large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future."

Do NOT follow this link or you will be banned from the site!