Nouriel Roubini's Global EconoMonitor

Greece Must Exit

From Project Syndicate:

The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the eurozone.

Postponing the exit after the June election with a new government committed to a variant of the same failed policies (recessionary austerity and structural reforms) will not restore growth and competitiveness. Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression. The only way to stop it is to begin an orderly default and exit, coordinated and financed by the European Central Bank, the European Union, and the International Monetary Fund (the “Troika”), that minimizes collateral damage to Greece and the rest of the eurozone.

Greece’s recent financing package, overseen by the Troika, gave the country much less debt relief than it needed. But, even with significantly more public-debt relief, Greece could not return to growth without rapidly restoring competitiveness. And, without a return to growth, its debt burden will remain unsustainable. But all of the options that might restore competitiveness require real currency depreciation.

The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy. A rapid reduction in unit labor costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. It took Germany ten years to restore its competitiveness this way; Greece cannot remain in a depression for a decade. Likewise, a rapid deflation in prices and wages, known as an “internal devaluation,” would lead to five years of ever-deepening depression.

If none of those three options is feasible, the only path left is to leave the eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

Of course, the process would be traumatic – and not just for Greece. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks, and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesofied” its dollar debts. The United States did something similar in 1933, when it depreciated the dollar by 69% and abandoned the gold standard. A similar “drachmatization” of euro debts would be necessary and unavoidable.

Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.

Greece would also have to restructure and reduce its public debt again. The Troika’s claims on Greece need not be reduced in face value, but their maturity would have to be lengthened by another decade, and the interest on it reduced. Further haircuts on private claims would also be needed, starting with a moratorium on interest payments.

Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation. But that is logically flawed: even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of eurozone GDP.

Reintroducing the drachma risks exchange-rate depreciation in excess of what is necessary to restore competitiveness, which would be inflationary and impose greater losses on drachmatized external debts. To minimize that risk, the Troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too.

Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness. Portugal, for example, may eventually have to restructure its debt and exit the euro. Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely.

The substantial new official resources of the IMF and ESM – and ECB liquidity – could then be used to ring-fence these countries, and banks elsewhere in the eurozone’s troubled periphery. Regardless of what Greece does, eurozone banks now need to be rapidly recapitalized, which requires a new EU-wide program of direct capital injections.

The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Like a doomed marriage, it is better to have rules for the inevitable divorce that make separation less costly to both sides. Make no mistake: an orderly euro exit by Greece implies significant economic pain. But watching the slow, disorderly implosion of the Greek economy and society would be much worse.

47 Responses to “Greece Must Exit”

AntitrusterMay 17th, 2012 at 3:16 pm

Excellent analysis, however, you fail to take into account a significant parameter beyond macroeconomics: the socio-political environment and culture in Greece. Such an "orderly" exit, as you seem to suggest, would necessarily imply the existence of political personnel which could deliver results; citizens educated enough to understand the concept and abide; social relationships that would allow common goals and their realisation, etc. You do not have that background in Greece. You simply talk about a "failed" state not only in economic terms, but mainly in social terms. I would like to have your approach on that.

HppyMay 18th, 2012 at 5:23 pm

You are correct. Pretense aside, the article recycles the POLITICAL path already proven unsustainable in Greece: Abdication of Greek sovereignty in favor of the "orderly" rule of EU technocrats. The article also presumes that the northern European electorates will passively abide yet more bailouts of Greece, now under the guise of orderly exit. But these electorates are already fed up with what the majority views as subsidies for Greek profligacy.

gregoryMay 21st, 2012 at 7:47 am

Agree, I could count at least 7 'deals' that need to be negotiated and happen, and there is no such personality in greek politics to do them.
Remind you that failiure to remain in the EU would result to national security concerns starting with tensions with Turkey.

PilioVillasJune 26th, 2012 at 7:09 am

"…citizens educated enough" No, it is not a question of education, but of culture. One fundamental flaw in the euro project was the idea that Greeks – with their traditional culture – should play the same game as the Germans, who are happy in the iron cage of market economics. To adopt a discourse in which the Germans are educated and the Greeks are uneducated indicates an approach that is so blinkered as to be ridiculous. For people who have not been habituated to the iron cage, there were elements of the Greek culture and way of life that needed to be preserved and built upon (not necessarily carved in tablets of stone). The net result of both the boom and the bust is that all those elements are being destroyed. One example: Greeks were famous for their hospitality. Now we have the Greek nazi party in parliament. When trying to think through how Greece can move forward, let's not make the mistake of thinking that either German or American culture represents some sort of ideal political telos.

princess1960May 17th, 2012 at 3:18 pm

your column is very correct i think is logic ..but this have consecuences for all the Europe and i mean mathematice (numbers) will be tragic ..we have to see after election 17 J ..but e true is here have to change radical structura.. constitution tax ..even syndicate is part of GV doesn't work good . can not be righte sector public have higher reat from privat sector can not have 11 million people in GR and 1 million working in public sector ..coruption is very very higher and all this needed really very hart work for changet because is difficult when are learn to have all in the name of (democracy) wrong ..GR is contry in europe not in AFRICE here needed really democracy (not anarchi) we hop will change ..if not after the GV 17 J doesn't change than will be better to be out …because this go to take big propotion in all the europe and than have consecuances for other contryes. thank you
your analysis is very correct

EugenRMay 17th, 2012 at 5:52 pm

I i is time to acknowledge towards what Greece and Europe are heading.

– Greece GDP is about 240 milliard Euro.

– Greece debts after write offs are about 400 milliard Euro, mostly external. The interest payments are about 20 milliard Euro 8% of the GDP.

– Greece annual current account deficit is about 30 milliard Euro or 13% of the GDP. There is no way to finance this deficit unless someone is willing to give them new loan.

– All what IMF &ECB &Others are ready to do is to change the old loans for new ones, with prolonged expiration date and reduced interest rate.

The general Greek public is surprised that non of all the write offs and restructuring of loans (write offs), goes to their pockets, but in contrary it increases their economic misery.

The Greek people said what they want, they want to stay in the Euro zone, and getting help to finance the 30 milliard current account, (forget about the debts). As reward to Europe for letting them live their previous life, Greece will not destroy the European Union. Are the European leaders frightened? Is the remaining Greece debt too big to fall? It is annoying, but not too big.

As to Greece, it will have after the new election an extreme left-right government , with no will to make any real decisions, except of its plan to receive from Europe annually 30 milliard Euro to cover the current account deficit. If Europe doesn’t agree, it will default and stay in the Euro Zone, but without Euros to pay government employed, the pensioners, etc. To overcome the problem, the new left-right government will issue bonds called Eurodrach, with securing delayed Euro payments for four years (the life expectancy of the left+right government). The Euros, will slowly disappear from the markets and be replaced by the Eurodrachs, its rate after wild fluctuations will stabilize on 1 Euro to 3 Eurodrachs. Slowly Greece economy will return to function. Finally after the new elections at 2017, a new central liberal-conservative-socialistic coalition government will be created, and will try try to negotiate its return to Eurozone, that it never officially left. After long negotiation on new terms for restructuring its sovereign debt, that officially never defaulted, and a very long weekend, Greece, IMF and ECB will agree to write of the Greece debts to sustainable level of 120% of its GDP, subject to its voluntary withdrawal from the Euro zone. By then the Greek GDP will be 120 milliard Euro and its new dept accordingly 144 milliard Euro.


zz-44May 20th, 2012 at 7:41 pm

"Bolivar could not bear two" – either the dollar or the euro!!!
America is on the right track – let it prodolzhant Gan flock to the edge….
Abame muddy water is not long from now – will soon be the right guy for the final triumph of the dollar, and no other way

StamatisSeptember 4th, 2012 at 1:23 pm

If you were Greek, I would say you are a politician… Very wild imagination! These things could happen only if the EU wasn't treating Greece as a mule, pulling its throatlatch…

EcoGuyMay 17th, 2012 at 10:07 pm

Are years of deflationary pain worth the prevention of a permanent loss of price stability (i.e. back to unending cycle of excess inflation/high rates/recession)?

barfMay 18th, 2012 at 1:07 am

Again "this crisis ends when General Hamm is in Athens." It's what i said years on Seeking Alpha when i was the one and only who ever brought up Greece as a problem in the first place. And I know of NO ONE who has argued for a such an outcome…let alone made it seem as inevitable as it is. While it is still possible for Germany itself…once outside the euro zone…to still "rescue" Greece…the historical complexity and…"interconnections"…are such that to argue any "knowability" is ridiculous. I would also add "no one predicted this weekend." How all the certainty then? Ed Harrison and myself are the only two who have been on this thing…glad you're on board now but it would appear "game over" already.

AmarMay 18th, 2012 at 8:58 am

Greece has dug itself into a hole from which it is nearly impossible to emerge without a severe battering.

And it seems that the bond markets are ready for an exit. Spanish and Italian yields have shot up in the past few days but are still much lower than the highs made a few months back. It almost seems as if the bond markets are ready for a Greece exit and might even be hoping that it happens! Of course the yields would rise if Greece exits, fact that they have not even cross the highs made a few months back shows that bond markets are much more ready now.

AmarMay 18th, 2012 at 9:03 am

An excellent and an insightful analysis. Roubini has held the exit view for at least the past two years. Two years back it didn't sound possible, but now with each passing day it seems more and more possible.

However I tend to believe that the impact of Greece on the world economy is being over-rated. Pasting below a story I did some time back

Can Greece take down the world?

All of the current discussion about Greece causing a Doomsday is starting to sound more and more ridiculous (which is the funny part). Nonetheless, the underlying factors could be a far more serious issue. Here's why:

Funny aspect # 1

The country of Greece is comprised of less than 0.5% of Global GDP! It is pretty understandable that when the U.S. sneezes, the world catches a cold- after all, the U.S. is nearly 30% of the world’s GDP. But can Greece cause a global slowdown – I really doubt so.

Funny aspect # 2

There is a report from the IIF that was prepared to scare some of the hesitant lenders into signing off on the country’s bailout package. Through a series of 'well reasoned' arguments, the report discusses a global slowdown due to Greece’s default. Now, how all of this would be achieved by such a minuscule economy like Greece – which is less than 0.5% of the global GDP- has truly made the IIF report a hilarious read.

Funny aspect # 3

In the debt deal of February 2012, private creditors were quoted to have forgiven more than half of the Euro 200 Bn of outstanding. If forgiving more than 50% of a loan is a 'deal', then what in the world does a default mean?

Funny aspect # 4

Which brings us to the next aspect of our humorous stroll- If this 50% 'forgiveness' didn't cause any real blip on the global economy, will the default of remaining 50% cause a global slowdown?

Of course, if this were to really happen, then the economists would surely begin to discuss CDO losses and the contagion effect. This leads us onto the following serious issues:

Serious issue # 1

Several banks and institutions will certainly go down, and countless jobs will be lost. What will become of the bankers who are going to be held responsible for writing those CDO's on Greece? More importantly, what about the politicians who are going to lose power? Let’s think of them for a moment. I would think that in such a scenario, countless big-wigs in banking & finance industry would no doubt be joining the hall of shame along with Alan Greenspan, Dick Fuld and many others. Some of these people could likely get prosecuted, and possibly even join Maddoff’s ranks as well.

Serious issue # 2

Every economic crisis, including the most recent one beginning in 2008, clearly portrayed the lack of integrity and competency in the so called business leaders who are supposed to be examples of these very qualities. Furthermore, after every crisis, skeletons started to tumble out of the closet. Here are a few examples; they almost sound funny

Some of the rating agencies were later stated as saying that they had made mistakes in their excel spreadsheets and models, resulting in more than a few incorrect evaluations. Imagine that- a world crisis caused by a few excel mistakes; and the men who are responsible for those mistakes are supposed to be CPA's , CFA's, PhD's and MBA's. This calls not only calls into question the very competency of these professionals, but more so the leadership within the company.

Only the relatively junior level executives who created those CDO's knew what they were actually comprised of, yet they did not have the experience to understand the risks and future implications. Furthermore, the senior leaders- who had the experience to understand the risks- didn't completely understand how the CDO's were structured, so they preferred to count their bonuses, rather than to show their ignorance.

In conclusion, the question to ask is- can a minuscule economy with less than 0.5% of the global GDP cause a Doomsday effect, or are the business and political leaders really afraid of something else?

EEBMay 23rd, 2012 at 10:35 pm

Yes, it can- "doomsday" to the financial system and the financiers, that is! The European banks are leveraged at about 350 : 1, and U. S. banks at 40- 50 : 1. Capitalism without capital always leads to financial crises and the 1% always try their damnedest to impose the losses on the 99%. This dynamic, in turn, causes the real economy to collapse, since gov't's. have very stupidly given up their ability to borrow/ print money (in the Eurozone) directly from the Central Bank (ECB). The only way that "doomsday" can be prevented is for the banksters to be stripped of their power to control money and credit. All banks must be nationalized and converted into (and operated like) public utilities. Banking is truly too important to be left up to banksters and fraudsters.

Mark AllanMay 18th, 2012 at 5:42 pm

Martin Wolf in today’s FT says it would be a disaster if Greece went. Nouriel says it would be a disaster if they stayed!!

Two eminent economists,two differing views. How am I a humble bystander to make any sense of the mess that is the eurozone.

Scott BarlowMay 22nd, 2012 at 2:06 am

Mark, it's easy…in respect of the economic doctrines each subscribes to, Martin Wolf and Roubini are both 'Keynesians'. Of course they're clueless and at opposites. That's where Keynesian thought leads you…into the wilderness. If you want a clear picture start here

SchtinktankMay 18th, 2012 at 6:12 pm

Since the E.U. is more of a Confederation of States rather than a single political entity it should be possible to have a temporary separation from E.U. membership rather than full divorce. As sabatical partner of the E.U. a number of negotiated financial and political solutions might be available for Greece for return to full status at a later date.

AndrewMay 19th, 2012 at 9:39 am

A very well analysed summary of the current situation in Europe, I like the way you compare it to a marriage/divorce.

buzzMay 19th, 2012 at 4:16 pm

I have to disagree on this one. I think it's pretty clear that the Greeks intend to default while staying in the Euro. Internal devaluation through deflation is very tough but going back to the drachma frightens them more. So we should accept this reality and prepare for it. There are a lot of open questions. There needs to be a frank discussion about the limits of ELA, for example. If these questions are left open and uncertain, there will be more chaos and bank runs.

Pedro BatistaMay 19th, 2012 at 8:27 pm

The main question now is : Will Greece leave ? or Will Europe have to expel Greece ? I do not believe that Greece will take the action to leave Europe even with a left wing in power, my beliefs are that Greece will not pay its debts and will not leave the Euro. So Euro zone will get the burns out of the greek irresponsabilities and will cause so many political conflicts into the Euro area for so long!

MarcusSedlmayrMay 20th, 2012 at 8:40 am

Psychologists would call this a priming effect: the inevitable exit of Greece is so often
reiterated that everybody believes that there is no other solution.

A Greek exit would not help because this world has a structural problem: BRICs are partly donating their resources for free to the rest of the world. Greece does not have anything to sell. The world can get anything for free elsewhere.

Globalisation has proceeded too fast for the social fabric too keep up. The EU will have to impose huge tariffs on goods and services from the BRICs to make it economically viable to produce anything meaningful in Greece. Only when producing locally becomes economical again will the structural problems in Europe be solved.

KubKaramazoffMay 20th, 2012 at 10:07 am

Flush crossing phantom currency:

Euro → Drachma → Euro new exchange rate

for example:
1Euro → 1 Drachma →0.9 Euro

No transactions and payments in the drachma.
Only the depreciation of domestic debt!

Period of operation – just a few hours, days.
Greece remains in the euro zone and devalue the domestic debt.
For optimal devaluation of debts that can be repeated.
Sorry for my English. More information in Russian:

zz-44May 20th, 2012 at 7:48 pm

I have to disagree on this one. I think it's pretty clear that the Greeks intend to default while staying in the Euro. Internal devaluation through deflation is very tough but going back to the drachma frightens them more. So we should accept this reality and prepare for it. There are a lot of open questions. There needs to be a frank discussion about the limits of ELA, for example. If these questions are left open and uncertain, there will be more chaos and bank runs.

KubKaramazoffMay 20th, 2012 at 8:23 pm

Thanks for the arguments.

a) The outflow of deposits has occurred.
b) The idea of a phantom currency implies the inviolability of real money in bank accounts. Deposits, unsecured real means, will not run away. They uncovered – they need to devalue.

Deva SagayamMay 22nd, 2012 at 3:34 am

“A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.”
With or without Euro, there is no growth path for Greece. In what way will it grow?
High labour costs, no capital to invest. No market to sell goods to.

Dr Yoosuf CaderMay 22nd, 2012 at 5:22 am

Greece is in a difficult situation not unlike many coutries implementing austerity measures. On the one hand, they have to placate the European Union and other lenders and on the other hand, they have to keep in mind how their own community is suffering, as is Spain and some other countries going through not dissimilar domestic iissues. In this situation should the european union abandon Greece, in tough times? Should Greece exit and try to resolve their issues on their own, if they think it is possible? Perhaps they should voluantarily exit, give it a go themselves. Who knows they may solve their problems like some of the Asian countries did, during their finacial crisis, Malaysia in particular comes to mind. They did not borrow from lenders who were demanding austerity measures and imposing other unfair conditions (we know this with hindsight). I think, Greece must voluantarily leave on amiable terms with the European union, and after they fix their problems – lets think positively- consider re-joining the European Union, if their is mutuable benefit to both Greece and the European union, at the time?

RANA MITRAMay 22nd, 2012 at 8:23 am

Thanks Mr. Roubini for yet another excellent analysis on Greece. But, as usual, he is totally reticent to go deep into the real root of the problem i.e. increasing financialization of global economy, creating unbridled space for global finance capital to run havoc on peoples' lives and economy. If one is to search for any radical long term solution (and that is the only solution available) of the problems being faced by global economy including by Greece, Spain, Italy, Portugal, USA, Britain, Germany, Japan etc. and a host of developing countries like India, one has to stop beating about the bush. Stricter capital control in the form of rigid regulation on free flow of global finance, giving priority of labour and common people over capital and finance, expanded public spending (even if such measures offend global finance) to put essential purchasing power into the hands of the people, imposition of a kind of "Tobin Tax" or "Robin Hood" tax to tame the flow of global finance are the needs of the hour. If World capitalist leaders fail to achieve this (which is highly likely), the world is heading towards an economic disaster that may spring new opportunities for the radical and progressive forces in the days to come. At present, let us watch the drama with bated breadth!

jackMay 30th, 2012 at 12:30 am

Your words hit the spot, with the proviso I am speaking from a strictly U.S. prospective, maybe the global elites, and you know who you are, might take this small post as a somber warning.

I would only add that the Greek crisis and all the imaginary debt right wing elites scream about – to no end, all came about because of the collapse of the old Soviet Union. It’s not as ridiculous as one might guess once you think about it.

It would seem now in retrospect; that the international global elites only minded their collective Ps & Qs when there was the possible looming consideration they might wake up one day and find themselves dragged into the streets and literally killed by some kind of left wing revolutionary outrage.

And what I mean by minding their collective Ps & Qs was paying their 45-50% tax rates and being grateful they were allowed to live relative lives of luxury compared to the rest of humanity, which was still possible, even after they paid such high tax rates to support social democracy.

It is truly in a historical sense, it is very ironic that once the seemingly looming threat that the Soviet Union once posed that it might, could, maybe or even actually think about assisting potential revolutionary movements, was removed that the vast majority, but not all, still the vast majority, of corporate managers across the whole business spectrum and across nations, and many others including financial hedge fund players, and global bankers – all very quickly in less than one or two generations embraced a type of capitalism which indeed harkens back a world prior to 1917.

I might add, some say harkens back to pre-enlightenment feudalism, but either way billions of us are not laughing about all this…

When the Soviet Union existed the global elites said and or pretended that they believed in social democracy as a historical alterative to doctorial state Stalinism parading as socialism.

I and of millions upon millions of others who work away and pay our taxes and have nothing to show for except massive long term un-employment, debt and lectures from elites how un-productive or lazy we are collectively, and or as in the case here in the United States for daring to expect that Social Security bonds owned to the American public be paid back by those American elites who have seen their tax refunds and subsidies made possible by raiding SS funds the last forty years.

If the American Federal government is drowning in debt it is because hundreds of billions leading to trillions were and continued to be poured down that black hole called the Pentagon and two wars of choice and then the addition spending,( depending on which source one quotes), of somewhere between 8 and 14 trillion was poured into disingenuous bankers who ridiculously claim they believe in the consequence of a free market and that last part, the bank bail out happened under Bush not Obama.
All this, is a matter fact lesson that should cause many to recall the one thing those left wing Marxists have been claiming now for than 160 years: capitalism will destroy itself.

Not because it’s a such a bad system, given the relative choices, but because it can not come to terms, left to its own devices, with it most fundamental contradiction that social democracy did fix for a while when it lived in fear of Soviet Communism, that is:

Financial capital running so amok that it renders the whole system a bad and very cruel joke.

I’ll just end by speaking to my peers, all those out there in the States or across the pond in Europe, who like me, who make under 60K a year when one combines my wife’s and my own income, yes the growing working poor.

We saw our 401k funds looted twice once after the melt down and again in 2008. My wife was down sizing out of a fairly good corporate job in 2003 and faced 8 years of part-time jobs where none lasted more than a few months, only finding a full time job last year at just under 1/2 of her old pay. I could go on at length, there is no point, as the elites could care less about me or you the millions out there facing this fiction called “austerity”.

Only know this: your situation, my situation is due to the very poor fleckless leadership of corporate America and there counter parts across the globe whose only real collective interest is personal wealth at your expense PERIOD and it takes far too many forms to list now…

The elites lie on a daily basis; they are just as clueless as you on how to fix this global financial mess beyond padding their personal bank accounts and stashing the results in foreign tax havens.

iqfinsvcsMay 22nd, 2012 at 4:39 pm

Greeks have indicated that they wish to stay in the euro zone. The path described by Roubini is too complex and requires too many individuals and institutions to be involved in doing the correct things to ensure an orderly exit from the euro by Greece.

The only sensible path for a return to solvency by Greece is "internal devaluation". The major problem with "internal devaluation" is the very real and extremely dangerous issue of substantial increases in crime and the possible degradation/subversion of the nation's institutions as a result.

lorenzoMay 22nd, 2012 at 8:53 pm

I think Greece should have exited EU 1 year ago. I think people in that country wouldn't have suffered what they went trough. I think someone made his interests in keeping Greece in the EU…

Now: do you think all the other PII(g)S will go through a similar scenario?

Don't you think it would be better to get countries out of the EU monetary union before people in these countries start suffering what greek population is undergoing?


KarlMay 24th, 2012 at 6:39 am

Dear Prof. Roubini
While I agree with your analysis, I'm not sure, whether there is not a fourth option:
(a) of course: you need to default.
(b) but does this automatically mean, that you have to return to teh drachma?
Consider this:
(1) Aplly an andmistrative cut of wages and prices.
(2) Freeze deposits, but garantee them while imposing haircuts on the remaining claims on banks
(3) Balance the budget via tax increases
(4) Allow the government to issue California style IOUs, which the governement accepts at par with the € in tax payments which can be borrowed by banks to finance credit. (Run a slight budget surplus, in order to eventuallly stablize the exchange rate of you IOUs).
(5) Withdraw them from circulation, if the interbank market in the €zone recovers.

Rodger WillMay 25th, 2012 at 12:47 pm

Germany and to a lesser extent France need to clean up the mess they created. The root of the Greek crisis was big European banks giving easy money to countries that historically have had little fiscal restraint. Giving Greece easy credit was like handing out pre approved credit cards to college students on spring break. Merkel needs to cut the sanctimonious rhetoric and open her wallet if she wants the Euro zone to survive.

AndrewMay 25th, 2012 at 11:07 pm

Well the EU has tired to help them but Greece should also try it help itself by making reforms such as lifting the retirement age from 50 yrs. to 65-70 yrs., plus a lot of people do not pay tax’s the Government should be much tougher on things like that also $100 billion has been forgiven (which is the world’s biggest reduction)

Rodger WillMay 26th, 2012 at 1:38 pm

Andrew, are you really expecting the Greeks to undertake massive social and political change to appease the German leaders and banks in a time of strong economic headwinds? The Germans knew the Greeks and others were not on the same fiscal page as they were, yet they pushed forward with their vision of a Euro that would displace the USD as the global reserve currency. Yet another flawed German attempt at continental (economic) domination. I recall many noted economists predicting the inevitable demise of the Euro zone for the same reasons we have seen now.

AndrewMay 27th, 2012 at 11:58 am

No Rodger the Greeks Well Not Change that is a fact & they have stated it openly, and never well the Euro take over from the USD, that well not take place in our life time I belive.

EconomopolousMay 29th, 2012 at 11:32 am

What will happen to Greek property mortgages should drachmatisation follow? will they be converted to Drachma or will they remain in Euro – since the underlying asset will automatically be pricd in Drachma.

Alex Lopez-OrtizMay 31st, 2012 at 11:05 pm

To minimize that risk, the Troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too.

I do not know of many successful examples of a central bank preventing overshooting. What they should do is warn against long term overshooting, let the short term market forces overshoot and once the panic has died down (and short term capitals been exhausted), step in and assist in the pull back. There are various examples where this took place successfully within a period of six months to a year from the initial devaluation.

assignmentJune 6th, 2012 at 12:06 pm

A new black hole of 600 million euro has been opened in the Greek state budget due to the political uncertainty – or even say: lack of governance – between the May 6 and June 17 elections. Then no matter how severe the situation is, Greek state mechanisms have a tendency to ‘relax’ before the elections.

EconomartJune 9th, 2012 at 6:38 am

There is a very simple solution to the problem of Greece and any other nation facing such a problem.

Here it is, and if anyone can find the flaw I shall give them $50,000 US because I am sick of doing this.


The costs of borrowing for a nation to fund public expenditures, if it
borrows solely from its resident citizens and in the nation's
currency, is nil.

Why? Because if, in adding a financial debt to a community, one adds
an equivalent financial asset, the aggregate finances of the community
will not in any way be altered. This is simple reasoning confirmed by
simple arithmetic.

The community is the source of the government's funds. The government
taxes the community to pay for public services provided by the

Cost of public services is $10 million.

Scenario 1: The government taxes $10 million.

Community finances: minus $10 million from community bank accounts for
government expenditures. No community government debt, no community
government IOU.

Scenario 2: The government borrows $10 million from solely community
lenders at a certain interest rate.

Community finances: minus $10 million from community bank accounts for
government expenditures. Community government debt: $10 million;
Community government bond: $10 million.

At x years in the future: the asset held by the community (lenders)
will be $10 million + y interest. The deferred liability claimed
against the community (taxpayers) will be $10 million + y interest.

The value of all community government debts when combined with all
community government IOUs or bonds is zero for the community. It is
the same $0 combined worth whether the community pays its taxes
immediately or never pays them at all.

So if a community borrows from its own citizens to fund worthy public
expenditures rather than taxes those citizens, it will not alter the
aggregate finances of the community or the wealth of the community any
more than taxation would have. Adding a financial debt and an
equivalent financial asset to a community will cause the elimination
of both when summed.

Whatever financial benefit taxation possesses is nullified by the fact
that borrowing instead of taxation places no greater financial burden
on the community.

However, the costs of Taxation are immense. By ridding the nation of
Taxation and instituting borrowing to fund public expenditures, the
nation will shed all those costs of Taxation for the negligible fee of
borrowing in the financial markets and the administration of public