Good morning. It’s Default Day, and Greece is now in Restricted Default. Or it will be from midnight tonight. But the poker hand is now all-in – and on Sunday, the Greeks decide whether to fold or call the bluff. Well, more a decision to fold or Fold with a capital Exit.

Starting with the European Commission President

Yesterday, Mr Juncker got up and said some very confusing things about the proposal that the Mr Tsipras walked away from:

He won’t let the Greek people go down…

I will never let the Greek people go down, never. And I know that the Greek people don’t want to let down the European Union.

He’s tried really really hard, guys, and, like, why aren’t you noticing that?

After all the efforts that I have made, after all the efforts of the commission and of the other institutions involved, I feel a little betrayed because people are not taking enough account of my personal efforts and the efforts of numerous other people.

Like, really really really hard.

I have done everything, and we don’t deserve all the criticism being heaped upon us.

And the Greeks mustn’t kill themselves because they don’t want to die (?).

I will say to the Greeks who I love deeply: You mustn’t commit suicide because you are afraid of death.

And always say yes, whatever happens.

You must vote yes, independently of the question asked.

Extremely confusing. Also, a teensy bit of falsehood, possibly. Like saying that there were no pension cuts in the “comprehensive” proposals. Um – I think there were. I read them. They are here in English and here in Greek. Cast your eye down to section 4 (Pension Reform). Raising the health contributions on pensioners from 4% to 6% sure sounds a lot like a pension cut to me… But perhaps, if I squint my eyes and pretend that there is no section 4, then it won’t be a pension cut.

Then Stiglitz and Krugman

Two Noble Laureates in Economics came out yesterday in favour of a Greek “No” vote in Sunday’s referendum. Here is Joseph Stiglitz: How I would vote in the Greek Referendum. And here is Paul Krugman: Greece Over The Brink.

In both pieces, basically this:

  1. Austerity is not working.
  2. The creditors are REFUSING to see that it is not working.
  3. They are condemning Greece to suffer this depression from now until forever – or at least until the creditors decide to restructure the debt. Whenever they decide to do that.
  4. Voting “No” and defaulting will be bad as well – but at least it might give Greece a chance to shape its own destiny.

So I have some thoughts on this.

And the main one being: let’s not understate the impact of a Grexit. For a real world example, have a look at what happened to Argentina in 2002, the last time we had “the biggest default in history”. Argentina’s trade doors closed. To the point where diabetics couldn’t get their insulin because there was no trade corridor through which to import it. There was no money to pay for it, and no legitimate way to make that transaction happen.

Be clear: people will die in a Grexit. Not to be too dramatic about it or anything.

Of course, some people will head abroad for treatment while Greece is sorting itself out – and the Greek diaspora will be sending medications back to their parents and grandparents.


There will still be a large portion of the elderly that will lose access to their chronic medication and hospital care. And many of them will pass away. Which would be, forgive me, but quite the extreme pension reform.

And let’s not pretend that a Grexit would suddenly make Greece a better economy for youth employment. Whether Greece leaves or stays, I think that the youth of Greece will mostly have to emigrate in search of job opportunities.

The point is: we can talk about Greece being able to shape its own future – but that needs to be balanced against the cost.

Those EU proposals…

So let’s talk about the 10 point proposal that Mr Tsipras is calling blackmail, and weigh it up against the Grexit alternative. Firstly, because not all of their proposals are bad. And secondly, because some of their proposals should happen regardless of whether Greece leaves the Eurozone or not.

Here is my summary of what the creditors want to happen (and again, here is the link to their longer version):

  1. Primary Budget Surpluses
    1. Greece must continue to collect more money than it spends (ie. the Greek government must turn an effective profit, before paying off its debts and interest).
    2. It must make a 1% profit margin* in 2015, a 2% profit margin* in 2016, a 3% profit margin* in 2017, and a 3.5% profit margin* in 2018.
      *the non-private sector term for profit margin is ‘budget surplus”.
  2. VAT Reform
    1. Simplify VAT by making the rate for everything 23%;
    2. Except for basic foods, energy, hotels and water, which will be at 13%;
    3. Super-except for medicine, books and theatre, which will be a 6%.
    4. I thought that the theatre super-reduction was weird.
    5. Also, eliminate all discounts and simplify any VAT exemptions in order to make the VAT process easier to enforce.
  3. Fiscal Structural Measures
    1. Tidy up the Tax Code by removing lots of the special-interest group exemptions.
    2. Fix other legislation which creates ring-fencing for special interest groups.
    3. Reduce military expenditure.
    4. Raise the corporate tax rate from 26% to 28%.
    5. Introduce/extend some other special taxes that specifically target the wealthy.
  4. Pension Reform
    1. Basically, make it so that you only become eligible for a pension from the age of 67.
    2. And redesign the pension system so that it’s more self-funded through contributions.
  5. Public Administration, Justice and Anti-Corruption
    1. Standardise public sector wages so that we know what we’re dealing with.
    2. Sort out the department that prepares the statistics so that we get better statistics.
  6. Tax Administration
    1. Get yourselves an autonomous tax collection agency.
    2. Change the wage-garnishing system so that you can collect taxes more effectively.
    3. Do some things to combat fuel smuggling.
    4. Chase tax evasion by checking bank account transactions.
    5. Put in place a plan to get more Greeks to pay with their cards rather than with cash.
  7. Financial Sector
    1. Re-organise the insolvency laws. Because you get good-faith debtors and strategic defaulters – and those two should be treated differently.
    2. Also, get that bankruptcy process moving along a bit faster. Geezlike.
  8. Labour Market
    1. Start looking at changing the labour law – because it seems over-protective.
  9. Product Market
    2. Privatise the Electricity Provider.
  10. Privatisation
    1. Privatise everything else.

The big thing that is missing from the EU plan: no mention of any form of debt relief.

My only possible counter to this: some kind of debt relief/restructuring is inevitable even if Greece stays in the Eurozone. There is just no way that Greece can pay back its current debt burden – and I don’t think anyone disputes that. Really.

But as Angela and co keep saying – there can be no talk of debt restructuring until the reforms have been implemented. That doesn’t mean “No restructuring ever” – it rather means “Put these reforms in place – many of which you have already agreed to – and then we can go back to our parliaments and tell them that Greece has changed, that Greece has demonstrated her commitment to Europe, and that we now can and must do the same by wiping that slate clean.

So the Grexit alternative

Some thoughts on what would happen to the conditions of that 10 point proposal in a Grexit:

  1. Primary Budget Surpluses
    1. Well, Greece could now run a deficit.
    2. Only, it wouldn’t be able to borrow money to finance that deficit. It would have to self-finance, either through taxes or through money-printing.
    3. History has shown that the Greek central bank is a dab hand with the printing press, so Greece would certainly get devaluation, and almost just as certainly, high inflation.
    4. The only possible upside: the devaluation might prove stimulative by making Greek exports and tourism more competitive.
  2. VAT Reform
    1. VAT would go unreformed, with 0% VAT on medicines and books.
    2. Except that you probably wouldn’t be able to buy the medicines. At least in the short term.
    3. And in the long term, those medicines would be more expensive due to:
      1. Inflation;
      2. Devaluation; and
      3. Special Interest Group protections (the pharmaceutical industry gets its own special bullet point in the EU proposal).
    4. So whatever the outcome of the referendum, the Greeks will end up paying more for things.
  3. Fiscal Structural Measures
    1. These reforms would be mostly positive.
    2. Without them, the Special Interest Groups would continue to be protected.
    3. And the tax code would stay as it is…
    4. Unless the tax code goes through some reforms anyway, in order to finance that deficit.
    5. At least with the “Yes” option, you might get rid of the Special Interest protections.
  4. Pension Reform
    1. Pensions will devalue in real terms as soon as Greece leaves the Euro.
    2. Pension reform is coming regardless.
    3. If Greece stays, at least the process will be managed.
  5. Public Administration, Justice and Anti-Corruption
    1. These reforms are necessary.
    2. But will they happen in a Grexit scenario?
    3. I doubt.
  6. Tax Administration
    1. Again: positive reforms.
    2. But unlikely post Grexit.
  7. Financial Sector
    1. More positive reforms.
    2. More reforms that are unlikely post a Grexit.
  8. Labour Market
    1. Still more positive reforms.
    2. Still more reforms that are unlikely post a Grexit.
  9. Product Market
    1. And yet more positive reforms (with the possible exception of the privatisation).
    2. And yet more reforms that are even more unlikely post a Grexit.
  10. Privatisation
    1. At least post Grexit, the state-owned enterprises won’t be sold for peanuts, as Yanis Varoufakis keeps describing it.
    2. Only they might. Who knows what a Syriza-led Socialist State might do in the aftermath? There are plenty of Socialist States that have lambasted the West for trying to buy their assets, and then promptly turned around and sold those same assets to China.
    3. But also, a question: aren’t Greek state-owned enterprises basically privatised already? Honestly, I have no idea if that’s the case. But I can’t help but think that the families/individuals that run them are already basically running them for their own benefit anyway. And a privatisation would really just sever state-protection for an essentially private enterprise… But that is complete speculation on my part.
  11. Default on the odious debt though
    1. At least Greece would be able to restructure its debt.
    2. Maybe.
    3. It’s still unclear.
    4. These aren’t private debts any more. They’re institutional ones. And institutions don’t really forget debts involuntarily.

But at least Greece would claim its sovereignty?

Even if it means that your average Greek citizen would now be beholden to internal special interest groups and the political parties that they support…

To summarise

I think that a “No” vote would mean that a lot of useful reforms will never happen; and many of the more odious parts of the EU proposal would effectively take place anyway (like pension reform and the increased cost of basic goods and medicines).

As I see it, this Grexit conversation is happening too soon. Of course Greece must consider exiting the Eurozone if the Eurozone refuses to consider the possibility of debt restructuring – but that conversation should take place after these reforms have taken place.

What I’m hoping for Greece:

  1. The Greeks vote to stay in the Eurozone on Sunday
  2. Syriza resigns
  3. A more moderate government gets elected, and implements most of the special interest group reforms over the next 18 months on the back of the referendum’s mandate (in my mind, that’s sort of the same timeframe during which the Grexit pain would be at its worst – so there’s some ambivalence around the economic situation either way)
  4. At the end of next year or so, Greece goes back to the creditors with a progress report, and asks to discuss debt restructuring to assist with the reform process
  5. Greece then hosts a new referendum
  6. And at least if Greece chooses to exit the Eurozone then, it does so with a more reformed governance system.

I realise that’s a bit pie-in-the-sky. But I can hope.

And if I can offer a pithy reduction of Sunday’s vote*:
*Which is almost a complete revision of my gut reaction to Mr Juncker yesterday

  • Voting “Yes” – means voting for government reform.
  • Voting “No” – means voting for the status quo.
  • The rest…will almost certainly happen either way, in one form or another.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at