Can Alexis Tsipras become the Greek Lula?

In the wee hours of Thursday morning, Greek parliament passed a second series of measures as a condition for negotiating further aid from the rest of Europe. Here is the BBC:
Greece has taken a crucial step towards a bailout after its parliament passed a second set of reforms.

The passage of the measures means that negotiations on an €86bn European Union bailout can begin.

The reforms include changes to Greek banking and an overhaul of the judiciary system.
More importantly for PM Alexis Tsipras, there were fewer Syriza defectors than there were in the last vote:
Among those who voted against were 31 members of his own Syriza party. However, this represents a smaller rebellion than in last week's initial vote.

Former Greek Finance Minister Yanis Varoufakis was one of those rebels in the first vote who returned to vote with the government this time.

Mr Varoufakis wrote (in Greek) that he felt it was important to preserve the unity of the government, even if he believed the programme was "designed to fail" by Greece's creditors.
I have written before (see Greece: How both sides are right AND wrong) that Greece and Europe were talking past each other. While Europe was speaking the language of micro-economics (get the structural reforms right and growth will follow), the Greek government was speaking the language of macro-economics (you can't have growth if the combination of crippling debt and austerity pushes the economy into an economic depression). At the time, I wrote:
Here are the two basic scenarios that I am working with. Either Tsipras' ultimate objective is to take Greece out of the euro, which would also put their EU membership at risk, or there will be a deal.

If there is a deal, everyone will have to save face. The EU will make Greeks swallow tough Grand Plan restructuring reforms. At the same time, they will be able to demonstrate that the Greeks are taking sufficient pain that the other euroskeptic parties watching this drama will be deterred from taking the same path. The Greeks will get some form of back door debt relief, either as NPV debt writeoffs or some form of aid in the form of humanitarian or military aid to help with their budget.

In other words, it will be the typical European fudge solution. Everything else is theatre.
Now that the Tsipras government has surrendered to virtually all Eurogroup demands, the theatre continues, but on an more optimistic note.


A Nixon in China moment?
The passage of these painful reform measures have prompted a few optimistic notes for Greece. Jeffrey Frankel went so far as comparing Tsipras to Lula of Brazil, if he can effectively implement the reforms demanded by the creditors:
Alexis Tsipras, the Greek prime minister, has the chance to play a role for his country analogous to the roles played by Korean President Kim Dae Jung in 1997 and Brazilian President Luiz Inácio Lula da Silva in 2002. Both of those presidential candidates had been long-time men of the left, with strong ties to labor, and were believed to place little priority on fiscal responsibility or free markets. Both were elected at a time of economic crisis in their respective countries. Both confronted financial and international constraints in office that had not been especially salient in their minds when they were opposition politicians. Both were able soon to make the mental and political adjustment to the realities faced by debtor economies. This flexibility helped both to lead their countries more effectively.

The two new presidents launched needed reforms. Some of these were “conservative” reforms (or “neo-liberal”) that might not have been possible under more mainstream or conservative politicians.

But Kim and Lula were also able to implement other reforms consistent with their lifetime commitment to reducing income inequality. South Korea under Kim began to rein in the chaebols, the country’s huge family-owned conglomerates. Brazil under Lula expanded Bolsa Familia, a system of direct cash payments to households that is credited with lifting millions out of poverty.
George Magnus echoed a similar level of optimism [emphasis added]:
Many people, certainly in the UK and the US, still see Grexit as the most likely outcome sooner or later. But it’s not an option we should wish upon the Greeks. Nor should we delude ourselves that Syriza’s economic and political agenda, until now at least, was ever compatible with lasting membership. But if Alexis Tsipras really does take ownership of the most important parts of the bailout programme and tacks away from the Left Platform in his own party, aided and abetted by steady, if slow, economic growth in Europe—including in Greece from next year—the outcome of this crisis could be far less apocalyptic than many assume.
Anatole Kaletsky, writing in Project Syndicate, said that outsiders should look past European theatre to see what matters is the Grand Plan of structural reforms (see my previous post Mario Draghi reveals the Grand Plan). As long as they are being implemented, Europe will allow Greece (or Spain, Portugal, etc.) to backslide on debt obligations:
This raises a key issue that the Tsipras government and many others misunderstood throughout the Greek crisis: the role of constructive hypocrisy in Europe’s political economy. Gaps between public statements and private intentions open up in all political systems, but these become huge in a complex multinational structure like the EU. On paper, the Greek bailout will impose a fiscal tightening, thereby aggravating the country’s economic slump. In practice, however, the budget targets will surely be allowed to slip, provided the government carries out its promises on privatization, labor markets, and pension reform.

These structural reforms are much more important than fiscal targets, both in symbolic terms for the rest of Europe and for the Greek economy. Moreover, the extension of ECB monetary support to Greece will transform financial conditions: interest rates will plummet, banks will recapitalize, and private credit will gradually become available for the first time since 2010. If budget targets were strictly enforced by bailout monitors, which seems unlikely, this improvement in conditions for private borrowers could easily compensate for any modest tightening of fiscal policy.
He concluded:
In short, the main conditions now seem to be in place for a sustainable recovery in Greece. Conventional wisdom among economists and investors has a long record of failing to spot major turning points; so the near-universal belief today that Greece faces permanent depression is no reason to despair.

A hard road ahead
The one common theme to all of this commentary is the kind of structural reforms as outlined in the Grand Plan. It doesn't just mean austerity, though that is one component, though not the key component. It means the kind of reform that makes the economy more competitive. James Suroweiki explained in a New Yorker article:
So what can Greece do? It really has only one option—to make the economy more productive and, above all, to export more. It’s easy to focus on Greece’s huge pile of debt, but, according to Yannis Ioannides, an economist at Tufts University, “debt is ultimately the lesser problem. Productivity and the lack of competitive exports are the much more important ones.”

There are structural issues that make this challenging. Greece is never going to be a manufacturing powerhouse: almost half of all Greek manufacturers have fewer than fifty employees, which limits productivity and efficiency, since they don’t enjoy economies of scale. Greece also has a legal and business environment that discourages investment, particularly from abroad. Contractual disputes take more than twice as long to resolve as in the average E.U. country. Greece has been among the most difficult European countries in which to start and run a business, and it has myriad regulations designed to protect existing players from competition. All countries have rules like this, but Greece is an extreme case. Bakeries, for instance, can sell bread only in a few standardized weights. Recently, Alexis Tsipras, the Greek Prime Minister, had to promise that he would “liberalize the market for gyms.”

The scale of these problems makes Greece’s task sound hopeless, but simple reforms could have a big impact. Contrary to its image in Europe, Greece has already made moves in this direction: between 2013 and 2014, it jumped a hundred and eleven places in the World Bank’s “ease of starting a business” index. And reform doesn’t mean Greece needs to abandon the things that make it distinctive. In fact, in the case of exports, the country has important assets that it hasn’t taken full advantage of. Greek olive oil is often described as the best in the world. Yet sixty per cent of Greek oil is sold in bulk to Italy, which then resells it at a hefty markup. Greece should be processing and selling that oil itself, and similar stories could be told about feta cheese and yogurt; a 2012 McKinsey study suggested that food products could add billions to Greece’s G.D.P. Similarly, tourism, though it already accounts for eighteen per cent of G.D.P., has a lot more potential. Most tourists in Greece are Greek themselves, a sign that the country could do a much better job of tapping the booming global tourism market. Doing so would require major investments in improving ports and airports, and in marketing. But the upside could be huge. Greece also needs to stem its current brain drain. It produces a large number of scientists and engineers, but it spends little on research and development, so talent migrates abroad. And there are other ways that Greece could capitalize on its climate and its educated workforce; as Galbraith suggests, it’s an ideal location for research centers and branches of foreign universities.
Here's the hard part, implementation requires buy-in, ownership of the reforms and, most of all, trust from all sides:
To implement such changes, Greece will have to overcome other problems. Reforms work best when the level of trust in political institutions is high. But the Greek state has a poor reputation among citizens, who see it as a pawn of special interests. (This distrust of the government is one reason for the country’s notoriously high rate of tax evasion.) On top of this, the chief advocate of structural reform to date has been the much hated troika, whose obsession with austerity has made the mere notion of reform anathema. Opening up the Greek economy would benefit ordinary citizens, since the economy’s myriad rules and regulations serve mainly to protect the wealthy and those lucky enough to have won a sinecure. But that’s a hard sale to make at a time when people are worried about holding on to what they have.

Attacking corruption
Yves Smith at Naked Capitalism is a bit more skeptical that Tsipras can actually implement the reforms because of the endemic level of corruption in Greece. She highlighted an article by Christos Koulovatianos, of the University of Luxembourg and John Tsoukalas, at the University of Glasgow:
As numerous Greek MEPs opposed the Eurozone summit deal, implementation will require a broad coalition of political parties. This column argues that corruption in Greek politics will prevent the formation of such a coalition. The heavy debt service leads parties to invent extreme ways of responding to super-austerity and to strongly oppose direct reforms that challenge existing clientelism. The way out is to sign a new agreement that combines debt restructuring and radical transparency reforms, including naming-and-shaming practices, to block clientelism in the medium and long run.
Correlation between the fiscal-surplus/GDP ratio (in percentage points) and the Corruption-Perceptions Index (CPI) for Eurozone countries (t-statistics in parentheses).

The argument against the effective reform implementation is there are few reasons for the various factions in Greece to cooperate:
The immediate argument in favour of broad coalition governments is that policy reforms and austerity have a high political cost. Cooperation among parties can make them share the political cost. In addition, a broad consensus among parties provides credibility to society concerning technocrat-expert suggestions for solving the fiscal profligacy problem. From the very beginning of the sovereign crisis in the Eurozone, the IMF has provided explicit guidelines in favour of broad coalition governments or for cooperation across parties (see International Monetary Fund, 2010a-d, 2011a-f, and 2012a-f for specific sentences expressing these IMF guidelines).1

In the case of Greece, coalition governments have never been broad across parties, and reforms have progressed slowly, despite the intense monitoring by the IMF (Campos and Coricelli 2015). According to the theory suggested by Achury et al. (2015), the corruption problem in Greece, combined with its high debt-to-GDP ratio, has led Greece into a trap.
There is a way out, but it won't be easy:
The ideal long-run solution to Greece’s problem would be to eradicate rent-seeking groups in politics. However, this requires time and a deep understanding of the problem. The short-run solution would be to restructure Greek debt, postponing payments and giving enough time for economic recovery. This short-run strategy could make benefits from a broad-coalition government more attractive to political parties, because it would take away the debt-servicing burden. The working hypothesis is that some rent-seeking activities would still be speculated by parties (Achury et al. 2015, Sections 2.5, 3.1.2, and 3.1.4).

Of course, such debt restructuring requires a new agreement. And certainly the EU should ask for reforms in exchange for debt restructuring. Whether these reforms could solve the corruption problem (or not) in the long run, is a matter of understanding the roots of the corruption problem in Greek society.
The vast majority of Greek citizens are not corrupt: Corruption is a social coordination problem leading to a prisoner’s dilemma

A small but critical mass of citizens and politicians break the rules of fair play and equitability against the law. Businesses that do not pay their taxes oblige other businesses to do the same in order to survive competition. Skilled young people who apply for civil servant jobs are obliged to invest in clientelistic political connections, after seeing inapt persons obtaining such jobs. Citizens see their taxes ending up in the private pockets of people they know, but are unlikely to win a court case because of the political support for involved persons. Lawful citizens, knowing that taxes will not finance public goods but private benefits, are unwilling to pay their income taxes, becoming friendly to parties that promise lenience regarding tax collection.

The list can go on and on, but the issue is not morality. It is the technical perils of a coordination problem that ends up in prisoner’s dilemma situations that arise in everyday life. The sad equilibrium is that Greek citizens do not feel equal among equals against taxpayer law. A feeling of social mistrust pervades citizens, especially young people.
Can the Tsipras led government succeed? In a previous post, George Magnus complained about how the Syriza government seemed to substitute one set of vested rent-seeking interests for another:
Greece has less than 200,000 doctors, lawyers and engineers and about 600,000 public sector employees, but they have organisation and impact. The number of the latter has fallen from about one million four years ago, but they retain a strong influence of all aspects of labour relations. Regarding the former, many professional associations self-regulate, and have acquired special tax, pension and legal privileges. Tax evasion and under-reporting of income is rife. According to Oxford law Professor Pavlos Eleftheriadis, in the 2010 legislature, 221 of the 300 seats were occupied by doctors, lawyers, educators, engineers and finance professionals.

Ironically, Syriza articulated a made-to-measure analysis and diagnosis of governance problems in its 2014 Thessaloniki programme, which sought to end “decades of misrule”, and transform Greece’s political system and institutions. It argued quite coherently that this was essential to break the vicious circle between political and economic inequality.

Yet, since being voted into office, it has offered little and done less to live up to this transformation. It is telling that Europe’s final loan conditions before the referendum laid considerable emphasis on governance enhancement, spanning measures to strengthen transparency, price competition, privatisation, and the rule of law, and to attack corruption, fraud and tax evasion. Alexis Tsipras rejected these and other conditions, and lumped them together, accusing his counterparts of blackmail. But without addressing these crucial matters, Greece cannot hope to succeed inside or outside the eurozone.
Alexis Tsipras did a complete U-turn after the "no" result in the referendum and acquiesced to creditor demands. Can he do it again to implement the kinds of reforms outlined above? If so, he will achieve the mantle of the Greek Lula.

Greece: How both sides are right AND wrong

I really hope that this is my last post on Greece for a long, long time...

I recently wrote a post on Greece on how both sides are right and both are wrong at the same time (see What would happen after a "Speech of Hope"?). I lamented that both Greece and Europe were talking past each other instead of at each other. Part of the problem was that they were speaking different economic languages (macro vs. micro-economics):
It is also the story of two parties talking at each other instead of with each other. The Greek approach, which is top-down and macro oriented, rests with the idea that somehow the country can return to sustainable growth if the macro problem of excessive debt were to be lifted (and hopefully coupled with some form of stimulus plan).

By contrast, the (mostly) German plan is highly bottom-up and micro-economic oriented. Its underlying philosophy calls for getting the right market mechanisms in place, e.g. cost structures, labor market reforms, the right incentives, etc., and growth will naturally follow. The problem with this approach is that Greece, unlike countries like Ireland, has few competitive advantages. The EU mandated solution amounts to forced internal devaluation. It would mean that, in the example of textiles, that Greek wages would have to fall even further to levels that competes with the likes of China, Vietnam or Thailand.
Let me expand on those points.


The European Grand Plan
The European elites have a way of mapping their path for the European Project and not deviating from their plan. Mario Draghi revealed the Grand Plan back in 2012 (see Mario Draghi reveals the Grand Plan). First, the ECB would hold things together to buy time for member states to execute a set of reforms. This reforms that Draghi outlined in a WSJ interview had several components. The first was government austerity, but the right kind of austerity:
WSJ: Austerity means different things, what’s good and what’s bad austerity?

Draghi: In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.

WSJ: Bad austerity?

Draghi: The bad consolidation is actually the easier one to get, because one could produce good numbers by raising taxes and cutting capital expenditure, which is much easier to do than cutting current expenditure. That’s the easy way in a sense, but it’s not a good way. It depresses potential growth.
The second is structural reform:
WSJ: Which do you think are the most important structural reforms?

Draghi: In Europe first is the product and services markets reform. And the second is the labour market reform which takes different shapes in different countries. In some of them one has to make labour markets more flexible and also fairer than they are today. In these countries there is a dual labour market: highly flexible for the young part of the population where labour contracts are three-month, six-month contracts that may be renewed for years. The same labour market is highly inflexible for the protected part of the population where salaries follow seniority rather than productivity. In a sense labour markets at the present time are unfair in such a setting because they put all the weight of flexibility on the young part of the population.
The purpose of structural reform is to attack the youth unemployment problem by getting rid of the idea of a job for life mentality (emphasis added):
WSJ: Do you think Europe will become less of the social model that has defined it?

Draghi: The European social model has already gone when we see the youth unemployment rates prevailing in some countries. These reforms are necessary to increase employment, especially youth employment, and therefore expenditure and consumption.

WSJ: Job for life…

Draghi: You know there was a time when (economist) Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working. That’s gone.
What Draghi outlined in 2012 were micro-economic prescriptions. Get the economic structures and incentives right and growth follows. That has been the template all along.

There is one other important core element that`s been somewhat lacking in executing these structural reforms: Governance. George Magnus pointed to a book by Stathis Kalyvas, Modern Greece: What Everyone Needs to Know, as an explanation:
The clue is governance. Professor Kalyvas traces some roots here back to Greece’s emergence from an economically backward, agrarian corner of the Ottoman Empire into an aspiring modern state. Specifically, he notes the considerable challenge of trying to graft liberal and democratic institutions and practices on to such a society. Put another way, public administration, the structural backbone of the modern state, is in Greece’s case unfinished, and in some respects even un-started, business.

With this in mind, it becomes clearer why creditors have moaned that Greek governments often lacked the capacity to implement reforms properly or, in some cases, at all. In Syriza’s case, the problem of lack of capacity has been accentuated by lack of willingness. This year, both sides argued a lot about debt relief, primary surpluses, VAT rates and pension arrangements. But many of their disputes were bridged or narrowed significantly. What irks Europe most about Syriza is the latter’s inaction with regard to initiatives to overhaul governance. In other words, to improve the capacity to implement reforms by addressing dysfunctional institutions such as administrative capacity, a weak tax system, over-regulation and protection, corruption and the rule of law, and the privileges of oligarchies, professional associations and other vested interests.

Reflecting these flaws, Greece has tended historically to protect domestic sectors, nationalise weak or failing firms, rely on credit creation as a substitute for productivity growth, and use political patronage to expand growth in the public sector. The PASOK government (1981-89), for example, is argued to have created dysfunctional public administration, civil service and wage-setting institutions that were associated particularly with corruption, mismanagement, maladministration, and disregard of the rule of law.

Even in subsequent years, entrepreneurship and industry were left behind. Greece has not developed a vibrant, successful export sector, other than in tourism and a few agricultural products. Unlike, say Poland, the Czech Republic, Turkey, and much of Asia, including comparable per capita income countries such as Vietnam and Bangladesh, it hasn’t got a viable manufacturing sector. The World Bank’s annual Doing Business survey (2015) still ranked Greece at 61 of 189 countries around the world, with positions close to the bottom in the registration of property, and contract enforcement.
These kinds of cozy relationships are not unusual in cultures where the population doesn't trust the sovereign (government is the wrong word in this case) because the sovereign can change at any time. In such instances, trust is not formed based on bureaucratic structures such as the rule of law, but on family and clan-like relationships that have been created over the years. These cultural norms are common not only in southern Europe but in much of Asia.

In a way, the election of Syriza might have been a hope that a new administration could sweep away many of the cozy and corruption that have plagued Greek society. Magnus went on to complain that Syriza did nothing of the sort:
Ironically, Syriza articulated a made-to-measure analysis and diagnosis of governance problems in its 2014 Thessaloniki programme, which sought to end “decades of misrule”, and transform Greece’s political system and institutions. It argued quite coherently that this was essential to break the vicious circle between political and economic inequality.

Yet, since being voted into office, it has offered little and done less to live up to this transformation. It is telling that Europe’s final loan conditions before the referendum laid considerable emphasis on governance enhancement, spanning measures to strengthen transparency, price competition, privatisation, and the rule of law, and to attack corruption, fraud and tax evasion. Alexis Tsipras rejected these and other conditions, and lumped them together, accusing his counterparts of blackmail. But without addressing these crucial matters, Greece cannot hope to succeed inside or outside the eurozone.
A recent article in the Guardian echoed similar concerns:
What Syriza has done is to bring back some of the worst excesses of its predecessors. The state broadcaster ERT – scrapped abruptly by the previous government under the impulsive and irascible conservative, Antonis Samaras – has been reformed. But instead of fresh blood, the government put ERT’s tainted former leadership back in charge. The return as chief executive of Lambis Tagmatarchis, a television executive associated with the governments who ran up Greece’s debt pile, outraged even the ERT employees who were getting their old jobs back. From prefectures to court appointments, party hacks have been favoured over more qualified counterparts. This is indiscernible from the cronyism of old.

The gap between Tsipras’ rhetoric on social justice and progressive policy and his record in office has left some to conclude that Syriza is more intent on consolidating its power than delivering the reforms-for-cash deal with creditors that he claims to still want. If not a deal, then what does he want, critics ask?
So when Europe talks about reforms, that's really code for:
  1. Getting rid of the corruption that have plagued governance
  2. Austerity, but the right kind of austerity (which seems to have been given a lower priority in the latest round of negotiations) 
  3. Structural reforms, in order to get rid of the "jobs for life" mindset and make it easier to fire people
Without step (1), the entire task becomes monumental.


The top-down view of Greece
The Greeks, however, approach their debt problem from a top-down perspective. It's all well and good to talk about structural reforms, but there has to be a limit. This chart of Euro area statistics show that Greek unit labor costs have come down considerably compared to Germany. How much more micro-economic adjustment can Greeks take?

The Greek economy is a modern macro-economic disaster. This chart from RBS shows that Greece experienced a GDP collapse that has not been seen other than war or the Great Depression (via Business Insider).


Tom Keene at Bloomberg summed up a way of analyzing the Greek macro outlook with The Formula, as outlined by Paul De Grauwe:


Keene explained it this way:
The Formula is timeless and in each and every basic economics text. (It gets less respect because it is a dry-as-dust fiscal equation compared with the steamy romance of monetary math.) In fiscal crises, the best-and-brightest always trot The Formula out. The truth is the dynamic simplicity of The Formula's core -- the (r-g) in the above -- always bears repeating.

The relationship is: A nation's debt-to-GDP ratio is equal to the critical dynamic of its nominal interest rate (the "r" in the above formula) minus its nominal growth rate (the "g"), applied to the previous debt-to-GDP ratio and then all of that compared to the nation's overall growth rate. Then take that movable feast and subtract the massive weight of its primary budget surplus. It is a deceptive and simple relationship but, in crisis, there is one key moving part. The key moving part, again, is (r-g). The "g" must equal or be higher than the "r" in The Formula. If the nominal interest rate ("r") is higher than the nominal growth rate ("g") then the government will face an ever-increasing debt-to-GDP ratio.
Longer term, Greece needs growth to be higher than its nominal interest rate. Another way to get relief is to change D(t), its debt to GDP ratio, which is what Athens is seeking.

Greece was quick to seize on the IMF report that the Greek debt position is not sustainable without €50 billion in debt relief over the next three years. The Syriza government has seized on that report to bolster its position to ask for debt writoffs in its negotiations.

Ah, but the devil is always in the detail! Antonio Fatas pointed out some inconsistencies between the assumptions of the IMF report and Greek government positions (think about this in the context of The Formula above, emphasis added):
Can we be more realistic regarding Greek prospects of growth? That's what they IMF is doing now. It forecasts growth in Greece to be input 1.5% in the long term. This is what I would say a very pessimistic number (even if it might still be realistic). It assumes that a country that has a GDP per capita of less than 50% of the most advanced economies in the world will fail to converge to that level, in fact it is likely to get stuck at that level or even diverge.

And here is where the Greek government and the IMF projections might be at odds. The Greek government argument is that once debt is reduced and all the reforms are implemented, the Greek economy will take off and start finally growing. But if growth returns, is debt really unsustainable Greek debt is unsustainable because the Greek economy will not grow in the long run (and this is not just about austerity). But if the Greek government is right and the reduction in debt does indeed raise the potential growth of Greece then the current debt level might be closer to being sustainable than what the IMF says. In other words, the IMF tells the Greek government something that they want to hear (debt needs to be reduced) but in an scenario that the Greek government cannot accept (growth is going to be dismal for decades).
At the end of this debate, we have to ask ourselves as to who is right and who is wrong.


A pragmatic view
I am just a simple investor and trader. The question of who is right and who is wrong is well beyond my pay grade. I am more interested in what is likely to happen. I agree with Yves Smith, who has taken a far more pragmatic view of the situation (emphasis added):
Greece faces multiple impediments. The biggest is that financial time moves faster than political time. Greece needed a deal by June 30. Going past that event horizon, as events are going to prove out, tipped the scales decisively against Greece by given the creditors cover to give their real enforcer, the ECB, free rein. Changing values and ideology are decades-long projects, so moral appeals might make for nice op-eds but will not change the power dynamics in time to have any impact. Look at how long it took for women’s rights and civil rights to become accepted in the US, or even with extremely deep pockets and the most sophisticated messaging money can buy, how long it took corporate interests to move values in the US decisively to the right. Greece was far too small and economically weakened to confront the creditors and have any hope of succeeding unless it got support. Its only conceivable allies are nowhere to be found. The Obama Administration has gone all in with the Eurocrats and the European left has been missing in action.

As we’ve said from early on, many commentators on Greece have wanted to make Syriza into something other than what it is. Despite the bold talk and some Marxist trappings, the core of the party leadership is moderates and its base consists heavily of disaffected Pasok voters, not hard core leftists. And this sadly, is the flaw of the stirring call to action in this post. Even after its incredible suffering, Greece is not as radicalized as those outside Greece would like to believe. The high percentage of Greeks saying, even on the eve of the referendum, that they still wanted to remain in the Eurozone, shows that Greek society is not willing to make a break even from its punitive overlords Syriza’s new coalition with centrist, pro-business parties should dispel any doubt as to what Syriza really stands for, as opposed to what Tsipras would like you and Greek voters to believe.
Here are the two basic scenarios that I am working with. Either Tsipras' ultimate objective is to take Greece out of the euro, which would also put their EU membership at risk, or there will be a deal.

If there is a deal, everyone will have to save face. The EU will make Greeks swallow tough Grand Plan restructuring reforms. At the same time, they will be able to demonstrate that the Greeks are taking sufficient pain that the other euroskeptic parties watching this drama will be deterred from taking the same path. The Greeks will get some form of back door debt relief, either as NPV debt writeoffs* or some form of aid in the form of humanitarian or military aid to help with their budget.

In other words, it will be the typical European fudge solution. Everything else is theatre.




* Imagine if you owed $1 million but couldn't pay. You then negotiate a settlement where you pay $1 a year for the next million years. The face value of the debt stays the same, but the net present value drops dramatically.

Time to buy GREK?

With Greece in turmoil and the Athens Stock Exchange closed, one of the few ways investors can get exposure to Greek stocks is through the Global X FTSE Greece 20 ETF (GREK), in addition to a number of listed ADRs.

As of the close on Monday, GREK was down 20% from Friday's close. Does this mean that speculators should step up and buy GREK in anticipation of a likely "Yes" vote in the upcoming referendum?

A quick glance at the chart gives us some good news-bad news readings. On one hand, the ETF did rally through a downtrend and the price has start to stabilize and go sideways, which is constructive. On the other hand, it did break support today on high volume, which is a bad sign.



Decomposing the portfolio
How about trying to value the ETF by looking at the components? My analysis of percentage holdings is based on Friday night's close, before the surprise referendum call and serves as a useful benchmark for valuation as that was the last time we had actual Athens Stock Exchange prices to compare against. The following table from Yahoo Finance, shows the top three holdings to be the local Coca-Cola bottler at roughly 20% weight, the local telecom at 10%, followed by the lottery operation at about 10%. While the first three holdings appear to have some stability and somewhat defensive in nature, the next few are banks, all of which have significant risk attached.


This table from Morningstar gives us some idea of the sector weightings and another overview of ETF holdings. Based on some quick back of the calculations, I get an estimated range of $6.57 to $7.56 per share.



Here`s how I did it. Consider a worst case scenario where the No side prevailed in the referendum and Grexit looms. I assume that the financials all get wiped out (24% weight), the Consumer Cyclical sector gets cut in half (18% weight) and everything else takes a 20% haircut. Based on Friday`s closing price of $11.78, that would give us a downside target of $6.57 per share.


A big bet on the banking sector
Monday`s closing price was only 20% below Friday`s level and the financial sector represented roughly 24% of the value of GREK. Therefore the current valuation of the ETF, which is blind because there are no market prices of the underlying share in Athens, is based on the dubious assumption that the banking sector won`t get wiped out.

Yves Smith at Naked Capitalism has the details of what might happen if and when Greece defaults:
In any case, enough about the past, let’s run through the most likely end game for this Greek saga as a deal never gets agreed before default.

1. Greece misses its IMF payment on the 30th of June. This could be a trigger but it may not be. The IMF has 30 days to call Greece in arrears so technically Greek government guaranteed collateral, and hence the Greek banks, are still solvent after the 30th. However on the 20th of July the Greeks will surely default to the ECB without a deal. This is the official d day.

2. Upon default, the collateral at Greek banks cannot be posted any longer to the Euro system. The Greek banks then become insolvent and the ECB, through the newly created Single Resolution Mechanism (SRM), is obligated to resolve the Greek banks.

3. So the ECB goes to Tsipras and tells him – we are immediately instituting capital controls and we will begin resolution of your banks unless u sign the agreement and re-enter a program. Without a bailout program in place the Greek government, and banking system, are both insolvent. So Tsipras says – what do you mean resolve my banking system? And then Mario explains as follows. First we wipe out all equity and bond holders. And then, as in Cyprus, we bail in depositors. There are 130b in Greek deposits against 90b in ELA. And while those deposits are technically insured up to 100,000 euro, there is no pan European bank insurance yet in place. That only comes in 2016. Right now Greek deposits are only insured with a Greek deposit insurance fund that has about 3b in it. This Is hardly enough for the 130b in deposits. So we take the 130b against the 90b in ela. Any remaining deposits go to fund a bad bank that begins resolving all the NPLs. The good loans of course will go into a good bank which will be funded with German capital and most likely will have a German name. Of course depositors will get 2 to 3 euro cents on the dollar for their existing balances from the 3bio in the insurance fund. So you have that going for you!
The big question then becomes, "When does the ECB decide to blow up the banking system, where the bank shareholders get wiped out and depositors recover 2-3 cents on the euro?"


Even the optimistic case looks ugly
Let`s construct a best case scenario. Suppose that the Yes side wins the referendum. Will all be forgiven and will Greece re-enter a bailout program and the banking system gets revived?

Not so fast! When Greece asked for a last minute extension to the bailout program so that it could wait for the results of the referendum, what upset the Eurogroup ministers was not just the surprise referendum call, but that the Tsipras government would be actively campaigning for the No side. Notwithstanding the fact that the Eurogroup offer expired on June 30, the active campaign for No by the Greek government made the Syriza government an unreliable partner in the Eurogroup`s eyes. How can such an organization be expected to implement any reforms that may have been agreed to. A Yes vote will likely cause the current Greek government to collapse and new elections called. Prime Minister Tsipras has indicated that he would resign should the Yes side prevail in a TV interview on Monday night (via CNN):
"If the Greek people want to move ahead with austerity ... for young people to move abroad in their thousands, for us to have unemployment and for us again to be moving towards new programs, new loans... if that is their choice we will respect it, but we will not carry it out," he said in an interview with Greek TV.

"I am telling you that I cannot be a prime minister under all circumstances."
While I could envisage a scenario where the IMF and ECB bent over backwards to keep supporting Greece and its banking system in the run-up to the referendum, there are some real drop-dead deadlines. There is a payment to the ECB on July 24 and, if Christine Lagarde is willing, there is a 30-day grace period for the missed payment to the IMF on June 30.

If we were to get a Yes vote, which is likely given current polling, and the Syriza government were to collapse. It is unclear whether there would be enough time to call new elections, form a new government and see the new government agree to a new bailout program before the July 24 ECB payment deadline. While the ECB could conceivably bend the rules and keep the banking system going at the current ELA levels until July 24, there would be no justification to do so if a payment to the ECB is missed. The ECB has no choice other than to resolve the banking system,

There are two groups in Greece who would get badly hurt under that scenario. Ordinary citizens who do not have the means or sophistication to move their money abroad and businesses with operating accounts with daily cash flows. Both would collapse and so would the Greek economy. Business collapses have cascading effects that cannot be reversed immediately.

Under such a seemingly *ahem* "optimistic scenario", bank shareholders would still get wiped out. So assume that GREK takes a 24% haircut on its position in financials and a 20% haircut on everything else, we get a target price of $7.56 based on the Friday close of $11.78.

In conclusion, the Monday closing price of GREK of $9.42 is well above my target range and Mr. Market is making a bet that the banking system remains intact. I am not willing to make such a courageous assumption.

Two ways to play Greece

Are you getting tired of the Greek news? I know I am. The market seems to be tired of Greece too.

This is a chart of the Greek ETF (GREK). Despite all of the dire news that's been coming in in the past few weeks, GREK hadn't fallen very much and has failed to make new lows. This kind of price action suggests that most of the bad news is already in the market.


Here is the Euro STOXX 50, which peaked in April and has been in a downtrend since May. The index is now just above a support zone that could serve as a near-term floor. Does this mean that most of the Greek bad news is already priced into the market?



An examination of the market internals of other major European averages on IndexIndicators also suggests that eurozone stock markets are also washed out. This chart of the average 14-day RSI of DAX stocks are nearing oversold levels where it has staged decent rallies in the past.


Here is the same chart for the CAC 40. The conclusion is the same.


These readings are highly suggestive of a "sell the rumor, buy the news" strategy, where Mr. Market has already capitulated and fear is rampant.


Conflicting messages
How can we square these technical conditions with the Bloomberg report that Street strategists haven't capitulated and they remain bullish on eurozone equities (emphasis added)?
Greece isn’t budging, and neither are Europe’s stock strategists.

Clashes between officials in the Mediterranean nation and its creditors are wreaking havoc on markets, yet none of the 15 forecasters tracked by Bloomberg lowered their year-end estimate for European indexes. All of them see gains. UBS Group AG even raised its projection this month, citing better-than-expected earnings growth and a turn in the economy.

With analysts projecting three straight years of earnings growth surpassing 10 percent and European Central Bank stimulus in force, equity forecasters view Greece jitters as temporary. A Bank of America Corp. survey showed the region is still favored among stock investors. Citigroup Inc., the most bullish firm, sees the Stoxx Europe 600 Index jumping 17 percent through the end of the year.
The latest BoAML Fund Manager Survey indicates that institutional fund managers remain heavily overweight eurozone equities, with a net 46% of manager overweight the region to a 1.3 standard deviation level above their historical average exposure.


The FMS also shows that institutional managers are not positioned for the worst case scenario, with 43% expecting a last-minute deal and 42% expecting a Greek default:


The technical conditions and the survey data are highly contradictory and make no sense. Is the Street bullish or bearish on Europe?

All this has happened in the face of today`s Bank of Greece dire warning of floods, plagues and locusts what might happen should Greece fail to reach an agreement (emphasis added):
Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.
After tabling that report, the governor of the Bank of Greece Yannis Stournaras was attacked by the House Speaker for "uninhibited intervention". In the meantime, anti-austerity Syriza forces has begun a demonstration to show that even if the Tsipras-led government were to compromise and there was a deal, they would have to bring out the tanks to enforce its terms.

This picture is worth a thousand words:





Traders vs. investors
Here is my interpretation. Trader and investors should behave differently in the current circumstances.

For traders: The fast money crowd has been selling Greece (and eurozone stocks) in anticipation of a negative resolution to the negotiations. Judging from the technical condition of the markets, they are nearing a crowded short condition and a significant relief rally is likely when any resolution of the issues, whether positive or negative, hits the tape. The most likely negative trigger would be the ECB either refusing to support the Greek banking system any further through ELA, or requiring higher haircuts on Greek paper pledged as ELA collateral.

For investors: The ultimate measure of the value of stock prices are its earnings and the discount rate to those earnings. Investors therefore have to make a decision on the likely effects of any Greek resolution have on those factors. A deal, even if it's a temporary solution, will obviously be bullish for European equities.

On the other hand, suppose that Greece were to default, but uncertainty remains as to whether it would stay in the euro. I have highlighted in the past that a Greek default would hit the budgets of other eurozone governments badly, with Italy being the most exposed (see Bears wake up, but they're not out of the woods). Under those circumstances, the contagion effects would be very real as peripheral yield spreads would likely widen and risk premiums rise, which negatively affects the discount rate on earnings. As well, the viability of Greece in the eurozone and the EU itself would also shake the very foundation of the European Union.

One of the benefits of the introduction of the euro was a greater economy of scale. Not only did the euro simplify the cost of doing business in the eurozone, which raised the earnings growth rate, it created an economy of scale in the corporate bond market. A Dutch company could finance a cross-border acquisition of an Italian company, or vice versa, more cheaply because of the better depth of the euro-denominated corporate bond market, compared to a single currency one like the Dutch Guilder. Much of those benefits could come into question.

Institutions have large equity holdings with positions that they can only trade in and out of in months, not days and minutes like fast-money traders. The BoAML FMS indicates that they are overweight the eurozone and they will likely be re-evaluating their eurozone equity exposure if Greece were to go over a cliff. In the case of a relief rally in the face of a Greek default or Grexit, investors should take the opportunity of any relief rally to lighten their positions.

Bottom line: Traders should buy the news of any resolution, investors should wait for the news and then decide on what to do next.

What would happen after a "Speech of Hope"?

Greek finance minister Yanis Varoufakis recently penned a Project Syndicate essay in which he challenged German Chancellor Angela Merkel to give a "Speech of Hope" in Greece in the manner of US Secretary of State James Byrnes did in 1946. In that speech, Byrnes' speech signaled an about face in American foreign policy towards Germany by reversing its intention to de-industrialize the conquered and shattered nation:
Byrnes’ speech signaled to the German people a reversal of that punitive de-industrialization drive. Of course, Germany owes its post-war recovery and wealth to its people and their hard work, innovation, and devotion to a united, democratic Europe. But Germans could not have staged their magnificent post-war renaissance without the support signified by the “Speech of Hope.”

Prior to Byrnes’ speech, and for a while afterwards, America’s allies were not keen to restore hope to the defeated Germans. But once President Harry Truman’s administration decided to rehabilitate Germany, there was no turning back. Its rebirth was underway, facilitated by the Marshall Plan, the US-sponsored 1953 debt write-down, and by the infusion of migrant labor from Italy, Yugoslavia, and Greece.
Varoufakis went on to challenge Merkel to deliver a similar "Speech of Hope" and presumably echo the same kinds of policies that America did with Germany in 1946. Varoufakis seems to be very good at evoking the kinds hope that Greece can embark on a growth path to prosperity:
Europe could not have united in peace and democracy without that sea change. Someone had to put aside moralistic objections and look dispassionately at a country locked in a set of circumstances that would only reproduce discord and fragmentation across the continent. The US, having emerged from the war as the only creditor country, did precisely that.
Suppose we were to fantasize for a moment and imagined that Varoufakis got everything he wanted, namely some form of debt relief and a stimulative Marshall Plan. What would happen to Greece under such circumstances?


The Competitive Advantage of Nations
To answer that question, I would use a development economics framework by following the work of Michael Porter, who wrote The Competitive Advantage of Nations, and Jane Jacobs, whose works included The Economy of Cities and Cities and the Wealth of Nations. The ideas of Porter and Jacobs are quite similar. One of Porter's formulas for success is the existence and development of industry clusters, e.g. Silicon Valley, which becomes a hub that spawns industry excellence, development and employment. Jacobs' work more or less says the same thing, except that her unit of development is the city-state instead of Porter`s focus on country-specific development.

Now consider the cases of post-war Germany and Greece today. Even though it was shattered by war, 1946 Germany was endowed with a considerable amount of human capital. The Germans had a tradition of excellence in science and engineering that went back years. As an example, German companies had a technological lead in chemicals in the late 19th and early 20th Century. Today, companies like Bayer and BASF carry on that tradition of German chemistry. The Second World War was marked by German "wonder weapons". It was therefore not a surprise that there was a scramble for former German rocket scientists after the war.

What competitive advantages does Greece have today?

A glance at the chart of GDP per capita (via Ian Bremmer) shows that Greece is one of the poorest regions in the eurozone, with the "rich" eurozone regions being Germany, northern Italy, northern Spain, the Low Countries and Ireland.

Supposing that Greece were to get some form of debt relief and growth stimulus, how could it lever its competitive advantages and get on a growth path?

The Telegraph recently featured a photo essay of the derelict factories of Greece. Perhaps we can see what industries Greece had before its economy cratered. While the photo essay may not entirely be representative of Greek industry, it does give us some idea of what was there. The photos included abandoned plants specializing in:

  • Textiles
  • Building supplies (marble, insulation)
  • Food processing (cooking oil, grains, dry nuts)
None of these are high value-added industries. In particular, textiles manufacturing has been un-competitive in developed countries for years as most of the production has gone to emerging market economies.

With the exception of tourism and limited food processing, Greek industry has few competitive advantages to lever to return to a superior growth path.

There is one other possible competitive advantage that Greece possesses in the form of its geographical location. Various people have suggested that Athens could play the Russian card and perhaps move into Moscow`s orbit. Such a development would be an enormous blow to the EU and NATO. The accusations of "Who lost Greece" would begin. However, I would tend to discount that possibility. Russia had the opportunity to insert itself into the Mediterranean during the Cypriot crisis in 2012 at a far lower cost but declined (see Europe dodges another bullet (not the Catalan election)). Given Russia`s somewhat shaky finances, it is difficult to see how Putin could rescue Greece in a meaningful fashion.


Micro vs. macro solutions
This is the story of a Greek tragedy. Greek tragedies are marked by the clash of good vs. good, where different parties approach a situation with good intentions but end in tragedy.

It is also the story of two parties talking at each other instead of with each other. The Greek approach, which is top-down and macro oriented, rests with the idea that somehow the country can return to sustainable growth if the macro problem of excessive debt were to be lifted (and hopefully coupled with some form of stimulus plan).

By contrast, the (mostly) German plan is highly bottom-up and micro-economic oriented. Its underlying philosophy calls for getting the right market mechanisms in place, e.g. cost structures, labor market reforms, the right incentives, etc., and growth will naturally follow. The problem with this approach is that Greece, unlike countries like Ireland, has few competitive advantages. The EU mandated solution amounts to forced internal devaluation. It would mean that, in the example of textiles, that Greek wages would have to fall even further to levels that competes with the likes of China, Vietnam or Thailand.

Putting it another way, if Greece was a troubled company, Tsipras and Varoufakis believe that it has an over-levered capital structure and could be fixed with an equity injection. Merkel et al believe that it is poor operation and therefore needs to be remedied with better management and business rationalizations. They are both right and both wrong. It is both.

That`s why it`s a tragedy. The problems of Greece are very difficult and possibly intractable. The solution is well beyond my pay grade.

What behavioral finance tell us about the Greek negotiations

How would you like a loan at an interest rate of 600%? What rational person would agree to such terms?

Some do. Here is a screenshot of a local payday loan website:


It turns out that extreme stress makes people act in a less than optimal fashion. I came upon this profile of Sendhil Mullainathan, who is a Harvard professor specializing in behavioral finance. Mullainathan found that poverty makes people behave in a less than rational way:
If the mind is focused on one thing, other abilities and skills—attention, self-control, and long-term planning—often suffer. Like a computer running multiple programs, Mullainathan and Shafir explain, our mental processors begin to slow down. We don’t lose any inherent capacities, just the ability to access the full complement ordinarily available for use.

But what’s most striking—and in some circles, controversial—about their work is not what they reveal about the effects of scarcity. It’s their assertion that scarcity affects anyone in its grip. Their argument: qualities often considered part of someone’s basic character—impulsive behavior, poor performance in school, poor financial decisions—may in fact be the products of a pervasive feeling of scarcity. And when that feeling is constant, as it is for people mired in poverty, it captures and compromises the mind.

This is one of scarcity’s most insidious effects, they argue: creating mindsets that rarely consider long-term best interests. “To put it bluntly,” says Mullainathan, “if I made you poor tomorrow, you’d probably start behaving in many of the same ways we associate with poor people.” And just like many poor people, he adds, you’d likely get stuck in the scarcity trap.
That brings me to the point about payday loans:
Take payday loans, for instance: high-interest loans that provide cash on demand, to be paid back when the borrower’s paycheck arrives. According to Mullainathan and Shafir, in 2006, there were more than 23,000 payday lender branches in the United States— more than all the McDonald’s (12,000) and Starbucks (nearly 9,000) locations combined. It’s a popular way to get money today, particularly for those without bank accounts. But for people without reliable incomes, debts must often roll over into the following month, incurring exorbitant fees. “This type of high-risk borrowing seems ridiculous,” Mullainathan says, but “we wanted to prove that thinking like this doesn’t come from a lack of financial understanding or foolishness—it comes from putting out fires.”
Mullainathan conducted a non-financial experiment that proved his point:
In 2011, in collaboration with Anuj Shah, now assistant professor of behavioral science at the University of Chicago Booth School of Business (then a graduate student at Princeton), they devised a study that they hoped would prove their point, inducing that same high-risk borrowing behavior in Princeton undergraduates by having them play a version of the American TV game show Family Feud.

In the show, contestants are asked to name things that belong to categories—for instance, “Things you might find in a professor’s office.” Unlike regular trivia games that have right and wrong answers, there are no right responses in Family Feud, just popular ones (the list of answers is gathered from a survey of 100 people prior to the show). Because contestants must think through an array of options before answering, time pressure limits the number of paths they can explore before hazarding a guess, so scarcity’s effects are in full bloom.

At Princeton, contestants were randomly split into “rich” and “poor” groups—the rich having more time to guess than the poor. All were given the option to borrow time: each additional second borrowed would cost them two seconds of “interest” deducted from their total time.

“The results mimicked everything we see in the real world,” Mullainathan reports. At first, the poor performed better than the rich did; scarcity made them focus more intently on the task. But when, in the next round, the subjects were allowed to roll over their loans and “repay” in subsequent rounds (thus making future rounds shorter), things quickly fell apart for the poor contestants. Early borrowing created a vicious circle for the poor; pressed for time, they needed to borrow more seconds, and borrowing more made them more pressed for time. By the final rounds, most of their time went to paying back loans, and the poor lost rounds that the rich won handily.

These students were randomly assigned to “poverty,” Mullainathan explains, so there could be nothing substantially different between them and those fellow students labeled “rich.” “The study shows the intimate link between success and failure under scarcity,” he and Shafir write in Scarcity. And scarcity, no matter whom it menaces, inevitably leads to more scarcity.

Greece as an example of poverty
That got me to thinking. The Greek economy has not only tanked, its growth rate parallels that of the American experience during the Great Depression (via Quartz).
That collapse in economic output puts the Greek recession right up there with the worst depressions in recent memory. At its trough in the first quarter of 2014—which was revised lower in today’s report—the decline in Greek GDP was roughly 33% from the peak. That’s actually worse than the US peak-to-trough GDP decline of 27% between 1929 and 1933, during the most acute phase of the Great Depression.

A simple analysis of the numbers doesn't convey the depth of economic depression. Consider these anecdotal accounts of what`s happening in Greece by Sky News economics editor Ed Conway:
The moment the people of Lamia realised things had really hit rock bottom was when the firemen started turning up on their doorsteps.

They went from house to house through the small, sleepy town about 200km north of Athens, knocking on doors and asking for contributions. The brigade’s funding has fallen so far that they now have little option but to go begging for cash.

Some households gave them a few pennies. Some donated odds and ends from their homes. Some even gave them new tyres for their trucks, which had been worn down to destruction. The police have been doing something similar for some time.
And there's this:
It is hard to get a sense of the scale until you look deep into the numbers. Consider the budget for hospitals across the country. In the first four months of last year, they received funding of €670m. In the first four months of this year they received €43m. That’s right: a 94% cut, which makes any austerity you’ve seen elsewhere around the world look piddling.

The director of the Elpis Hospital, Theodoros Giannaros, lost his own son to suicide two weeks ago.

He described how the country had hit "rock bottom".

"People are dying", he added.
His observations are nothing short of astounding:
I’ve been in developing countries facing fiscal and capital market crises. But I've never been in a developed economy like this as it literally runs out of money.

I've never been to a hospital where the director says he is essentially having to treat patients with no money, where people are not able to get treatments because they, and the hospital, can’t afford them.

It is an unsettling experience - made more so by the fact that even those in authority seem next-to-clueless about what is really happening.

Usually when you're covering economics or politics you assume that someone, somewhere knows what's going on and has a plan. Here, with the best will in the world, I simply don’t think there is one.
Could an entire country that is going through an economic depression make its leaders behave and bargain in an "irrational" way, or in a way that is contrary to "normal" behavior?

That seems to be the current position of the Syriza dominated government in Athens, which is: "We are hurting so much that we want the most short-term expedient way to make the pain go away, regardless of the cost."

The interpretation of Alex Andreou of the current round of negotiations between Greece and its creditors is highly revealing. Though what Andreou says has to be taken with a grain of salt as he is highly sympathetic to the Syriza position, the EU-IMF negotiation strategies may need to be reviewed in light of the Mullainathan analytical framework. First and foremost, each side is so focused on its own priorities that it is becoming blind to the other side's needs. Andreou described the EU position this way:
The entrenched position of the players has to do with domestic rather than international policies. The battle between Merkel and Schäuble behind the scenes for leadership of their party before the next German election; the threat Rajoy faces in Spain from Podemos, underlined by recent municipal results; resistance to Dijsselbloem’s programme of ultra-right-wing economic policies in the Netherlands within his own Labour Party; the failure of Renzi to stimulate a stagnating Italian economy; – all these factors, and many besides, play a much bigger part in shaping players’ position towards the Greek crisis, than anything to do with the Greek crisis.
Viewed in this context, the Yanis Varoufakis Project Syndicate essay that pleaded for growth over strangling austerity is similarly tone-deaf to the priorities of Merkel et al.

As well, the creditor institutions should not behave as if Tsipras is just another typical European leader who wants to maintain the status quo:
There was a catastrophically widely held belief among the European establishment that, once elected, Tsipras would “play ball”. There is still palpable shock at his sticking to his election commitments, often expressed as the accusation that he is being unreasonable. Every statement out of EU institutions for the last five months has been practically underlined by the subtext “shit, he wasn’t bluffing”.
Things are so bad (at least for the typical Syriza supporter) that their sensibilities are dulled by threats of dire consequences:
After living on the brink of disaster for so many years, I sense a que-sera-sera attitude in most people. This is not to say they don’t fear capital controls, the threat of Grexit, austerity, hunger, poverty and degradation. It is to say that they have lived with them for so long, they have become an ordinary part of the landscape.
In a separate article, Andreou explained why he voted for Syriza and the reasons sound remarkably like how Mullainathan described how the value system of people who are forced into poverty changes:
Syriza’s supporters were accused of being irrational, were threatened and cajoled not to destroy the country in advertising campaigns of breathtaking negativity. This confirmed in my mind that conventional politics supported the very system that collapsed globally and spectacularly only a few years ago; a system that eschews taxation, but required unprecedented bailouts from taxation; a system that, somehow, has now gone back to being considered infallible, supreme and self-correcting.

I concluded that voting for that would be irrational and that trying something different with Syriza, however risky, made better sense. Dignity might be an abstract concept, but its absence is a very real and practical thing. Stand outside a central Athens supermarket at closing time, to see elderly women, dressed in black, rummaging through bins for food and you will see it. Spend a day with my mother, who worked two jobs for 45 years, paid every cent of tax and now finds herself diagnosed with Alzheimer’s, with no decent health or social provision and a monthly pension of €400 (£300), and she will explain it to you.

Added to this, Syriza gave me a way to voice dissatisfaction with the EU without aiming to dismantle it. To ask for radical change without victimising migrants. As a migrant myself, this was very important to me. It was possible to be pro-EU and still want to punch its current monetarist policies in the face. The EU as a project is very worthwhile. We need to fight for the Europe we want. The idea that what stands between each of us and a life of prosperity is a hypothetical Romanian cleaner is the most ludicrous one we have ever been sold.
In particular pay attention Andreou's comment about ”bringing back dignity” without discussion of the costs, or what is possible under the current circumstances:
The only promise Tsipras made that truly mattered to me was to “give dignity back to the people”. Of course, he cannot deliver that. Only people can deliver that for themselves. But even mention of that word, “dignity”, in a political context, struck an important chord. It was hugely refreshing to have someone speaking that sort of language, instead of tired neoliberal dogma of privatisation equalling efficiency. To start from priorities and then define the method.
The latest polls indicate that Syriza`s popularity has soared since the last election. If an election were to be held today, it would gain a majority and be able to govern without a coalition partner (via Ekathimerini):
According to the poll by Metron Analysis, if elections were held now, 45 percent of Greeks would vote for SYRIZA and 21.4 percent for ND. Such a result would allow SYRIZA, which co-governs with the right-wing Independent Greeks, to rule autonomously. Potami garnered 6.1 percent, followed by Golden Dawn on 4.4 percent, the Communist Party with 4.3 percent, ANEL with 3.2 percent and PASOK falling below the 3 percent threshold to enter Parliament with 2.9 percent. The survey found that 79 percent of Greeks want to stay in the eurozone.
If this is indeed the mood in Athens, then it may be time to pay attention to Mullainathan's work about what motivates the Greeks. Otherwise, each side winds up talking at each other instead of with each other and the entire project goes over a cliff. Leonid Bershidsky put it another way when he said that Greece and its creditors need marriage counselling.


That sounds about right. If I am right in my analytical framework, then the current market-based estimated probability of a Greek default of 38-40% before year-end may be too low (see data and links from Bears wake up, but they're not out of the woods).

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