Greece Should Approach The IMF

By Simon Johnson

European Union pressure is growing for Greece to “do the right thing” – which means, to the EU’s leaders, a massive and sudden cut in the Greek budget deficit.  Greece, without doubt, has gotten itself into a fine mess; still, it is now time for the Greek government push back more effectively.

Fuming at EU arrogance will accomplish nothing.  And, while global investment banks may have helped hide the evidence, it seems unlikely they actually designed the great blunder of eurozone admission (and broken Greek promises).  It’s time to stop blaming others and get crafty.

Greece should open a semi-official channel to the IMF and talk discretely about taking out a loan.

This is not an anti-Greek suggestion.  The IMF has changed a great deal over the past 10 years – learning lessons and developing new ways of thinking.  (For more detail, see my current Project Syndicate column.)  Today’s IMF would give Greece a much more reasonable deal than would the EU acting alone.

But the main reason to approach the IMF is that this, if done properly, would drive the EU nuts in a most productive manner.

The Germans really do not want more IMF pressure to ease up on European Central Bank monetary policy or – heaven forbid – to engage in some fiscal expansion (or other increase in domestic demand).  The Germans want to export their way out of recession, and the devil take the hindmost.

And President Sarkozy absolutely does not want the current IMF Managing Director – Dominique Strauss-Kahn – to do anything that can be presented as a statesman-like contribution to the world.  Strauss-Kahn is a contender for the French presidential election in 2012, so you can see how that works.  (Aside: strictly speaking, according to IMF rules, Strauss-Kahn should step down from the Fund; but he is too wily a politician to let anyone push him out at this moment.)

By approaching the IMF, Greece will get a better deal from the European Union.  Our baseline view is still that the IMF’s role will be only “technical”, but behind the scenes the prospect of greater IMF engagement (and even a standby loan) is a powerful card that Greece should threaten to play.

39 thoughts on “Greece Should Approach The IMF”

  1. I guess you’ve changed your position since the Feb 6 post re Tim Geithner:

    “The right approach would be to promise credible budget tightening down the road and to obtain sufficient resources – from within the eurozone (the IMF is irrelevant in the case of such a currency union) – to tide the country over in the interim.”

  3. Having read your ProjSyn article (unfettered), me thinks this was the prevailing theme: “This is partly because German Chancellor Angela Merkel, currently maneuvering to ensure that a German is the next head of the ECB, does not want the Fund to become more involved in euro-zone policies….If the IMF were to support Europe’s weaker economies, this would challenge the prevailing ideology among Frankfurt-dominated policy makers.” Sounds like a bit of a power / control struggle there, Germany wanting the upper influence and say.

    Greece received their ultimatum from EU finance ministers – lower their deficit by March 16 to around 8% of GDP. “ The premium investors demand to hold 10-year Greek government bonds rather than benchmark German Bunds rose to 302 basis points on Monday, from 275 bps late on Thursday, and the euro was trading down at 1.3610 to the dollar.” Though, if someone could explain what “basis points” means (?); I’m not necessarily being clueless beyond the general study of neuroeconomics, but just trying to catch up, with you. As was pointed out in an earlier baseline posting, many of the smaller Euro nations wouldn’t be able to withstand a global recession on their own but as a euro zone member, they seem more “protected” (strength in numbers). Simon, you kind of alluded to the opinion that the creation of the euro might have not been right choice initially, but we are, where we are, today…. Circumstances being dynamic, previous baseline remarks can also be undoubtedly inconsistent but being rightly able to reassess as times warrant it (aka being exceeded by your calm collective analysis :-)

  4. In the same post, Simon wrote ” particularly because our banks remain in such weak shape.” and “This is a mistake – the need for US leadership has never been greater, particularly as our banks are really not in good enough shape to withstand a major international adverse event”

    Maybe Pete Peterson suggested Simon tweak his position on the lack of viability of the IMF in this situation?

  5. Greek prime minister orders inquiry into debt crisis

    18 Feb 2010 – Telegraph.co.uk – excerpts

    “The prime minister of Greece has ordered a parliamentary investigation to uncover any mishandling of the country’s finances in the run-up to its debt crisis, at the same time as saying he is not seeking European money to bail out the nation….

    Mr Papandreou is also trying to separate the country’s national statistics agency from its finance ministry – to solve an age-old problem of politically-manipulated statistics – while trying to push through a three-year fiscal consolidation plan.”

    http://tinyurl.com/yzn6mvw

    “We have met the enemy and he is us.”

    Pogo

  7. “It’s time to stop blaming others and get crafty.”

    Says the man who constantly blames Goldman Sachs, Tim Geithner, and Ben Bernanke for all the ills of the world. But something tells me Simon will be back to perpetuating fringe conspiracy theories about matters he clearly does not understand within days.

  8. I thought the IMF could not lend money to an individual state within a currency union. In other words the IMF cannot lend money to Greece, only to the ECB.

  10. The politics involved here go even further.

    Germany and France obviously will not want the IMF involved, but its Greece’s only serious alternative source of relief.

    But beyond the IMF, there’s also this political angle to consider. If Merkel and Sarkozy continue to go postal on Athens, Greece can almost certainly demand that the other PIIGS get similar treatment. Which won’t go down well.

    And the Goldman trade may turn out to be an ace in the hole – I warned you on an earlier post that Italy was ground zero for the derivative shenanigans…

    https://baselinescenario.com/2010/02/14/goldman-goes-rogue-–-special-european-audit-to-follow/#comment-43476

    Now you know:

    http://ftalphaville.ft.com/blog/2010/02/18/153306/italy-%e2%9d%a4-currency-swaps-too/

    Greece has more leverage than people knew, and has more leverage over this situation than currently assumed.

  13. The EU position and in particular that of Germany and the ECB make any reasoned attempt at fiscal adjustment -EU style- impossible. As supposedly responsible Ministers, most of the EU’s leaders would make good plumbers, but that is pretty unfair on plumbers. This of course does allow the IMF some room to manoeuvre but surely DSK is far too clever to run the risk of overriding the Franco-German alliance especially with Presidential ambitions of his own. There is a great deal of dirty washing, in Italy, Greece and elsewhere was hidden to comply with the Maastrich criteria. If I recall Germany didn’t even make it on toatl debt to GDP thanks to the reunion costs. So will the IMF ride to the rescue and override other political considerations. There will have to be a behind the scnes fix for this to work. Germany would certainly regard this as more acceptable to the average voter, albeit it really does show that the EMU is pretty much broken in reality. There will therefore be a lot of face-saving noises off-stage. The ECB will look utterly feeble and undermined for starters.

  14. This is a common misconception, but the IMF has for example lent many times to its member countries in the two African currency unions (WAEMU and CEMAC) that constitute the CFA franc zone and to members of the Eastern Caribbean currency union.

  15. Is it possible the author believes in crony capitalism for the IMF but not in individiual countries?

    Is someone showing their “true colors”?

  16. “The Germans really do not want more IMF pressure to ease up on European Central Bank monetary policy or – heaven forbid – to engage in some fiscal expansion (or other increase in domestic demand).”

    In case you have not noticed about the economy/economies, I believe the solution to too much lower and middle class debt owed to the banks and/or the rich is NOT more lower and middle class debt or more gov’t debt owed to the banks and/or the rich.

  18. I am not convinced that a EU country should go to IMF for help or IMF is really better equipped to deal with a euro zone problem.

    I think there is a nice way to get out of this crisis and give a strong signal to markets, particularly speculators. A EU financial transaction tax which would raise a large sum of money painlessly, and would help to limit the sort of speculative attacks against the euro-zone.

    Moreover funds collected under a financial transaction tax (a kind of VAT at EU level with a Pigouvian character) could also, via a EU fund, cover the issuance of EU bonds.

    The devil is in the details of the above scheme. Euro bond can’t solve all problems, like national interest spreads and premia but common, joint and/or coordinated issuance and uses (including recapitalization of banks, European budget, common guarantee funds, EU projects, rescue loans and packages, IMF resources, etc.) could also create an efficient and effective bill or bond euro zone market. Different arrangements could then be studied concerning the issuing institution (single issuer) or coordinated agencies and its guarantees. A bond clearing house, i.e., a vehicle for sharing information to improve fiscal coordination could also be set up under EU umbrella. Some of the technicalities and arrangements would be the same as for the introduction of the Euro as a common currency.
    http://mgiannini.blogspot.com/2010/02/too-little-to-fail-or-when-you-do-not.html

  19. Inviting the IMF to generously offer a loan? Any Greeks who think the IMF is a white knight need to do more reading.

    The EU is listed as a possible threat to US global leadership, the Euro is certainly considered as a long-term threat to the dollar. Beware of those baring gifts to the Greeks.

  20. The USA should take care of the USA, otherwise the EU shall suggest the IMF take care of California.

    The EU should put an international warrant of arrest against Goldman Sachs, just for appetizers.

    The Euro was obviously very overvalued, and the USA is getting some of its OWN medicine, compliment of the Eurozone. This, of course is an enormous disaster for the USA, and excellent for France and Germany (well worth spending some cash to set-up an economic European metastructure to back-up the Euro).

    Ah, last but not least, DSK is NOT [yet] candidate to the French presidency. That election will happen in 2012. Next year is 2011, and 2012 is after that.

    DSK had said that he would not be candidate, then recently he said that if he is strongly asked, some day, he may consider it then. Perhaps. Never say never.

    PA

  21. Far-fetched Thoughts of The Tigers Plan is For Diverting Attention…

    The Bubble of the “Carry Trade” Has Led To The New Downturn Coming For Oil and Many Other Commodities as Seen By The Graphs Revealing This Economist Student Caught Within The Next Slaughter of Wealth Due To Greed and Political Motives.

    The hidden plan by China to conquer the World through Economic Collapses of Debt through the diversion of The Dollars Decent is no longer the norm and is now threatening Chinas very own long-term stability through reversed inflated commodities.

    Remember, when you make the mistake of trying to only build a recovery based upon using Money to Make Money without producing a “Good or Services” are a sure recipe for disastrous outcomes.

    China now needs to raise the value of the Dollar much Higher. China Is Trumping the other global G-7 with Their 2.7 Trillion held US Currency Debt. The Tiger has engaged with controlling the Central Bank Committees around the globe, especially Ben Bernanke.

    The Tiger of China simple plan focuses on Control of the Greenback to decrease with the assistance of the “Carry Trade,” the value of the US Dollar and peg the YUAN. The trump card China and The rest of the G-20 played; starting back in February of 2010–helps with a needed correction in the world’s commodities.

    The change in moving the dollar higher by the Tiger and the need to dry up serious liquidity issues by many of the Central Banks clears the way for the needed correction within Oil and other key metric commodities.

    The critical reason for the dollar to be on the rise over the next year is not so Far-fetched these days. The Tiger of China knows they must protect their 2.7 trillion dollar exposure from becoming worthless to US downgrade potential to their Sovereign Credit Rating be adjusted.

    The fact of “Too Big to fail” is no longer just for the banks. The new term of (TBFCTF) “Too Big for Countries Too Fail,” serves as the new standard for countries defaulting under the pressure of the “Carry Trade” and their profound hidden lies to the balance sheets of real debt issues.

    Furthermore, it raises the highest flag for all to take notice when “Bill Gross” of “PIMCO Bond Funds” cannot even hold a player’s seat to the best point spreads these days. The Countries holding the power of the ultimate risk to reward for trading on the “Carry Trade” currency high-risk bets currently hold these seats.

    These same players’s seems to be unraveling now with high-risk controls held by China and seems to be for the near term, the U.S. Federal Reserve Committee. They are in the crossfires of causing many potential defaults looming on the near front of economic and world markets concerns of crushing or sustaining a global recovery.

    Clearly, the need of trying to remove massive amounts of liquidity at the same time of generating new consumption to support long-term growth fundamentals found in the theory of lowering the overall cost of raw goods and commodities used by world global consumption measured metrics.

    China in the Year of the Tiger knows they must play the card of Trade-wars and the raising of the dollar to thwart the US plans of dominance of suppressing the value of the dollar against all the other countries to build export recovery.

    Consider this trump card as to cause failure of “The Engineered Plans of Monetary Policy of Keeping such a Low percent (O %), Federal Reserve Rate by Ben Bernanke. The United States Recovery will be the Blunder of Miscalculations of Timothy Geithner and Larry Summers in the Year of the Tiger if congress cannot pass sweeping reforms that the other global countries adopt to rain in the banks and high-risk derivatives and other high leveraged exposures…

    It seems benign that few had noticed what occurred under the radar, as a problem with Japan and the Asian Rim was able to engineer super low interest rates. These real low interest rates are still triggering the match that ignited the fire stoking a “global carry trade” of the next “Bursting Bubble.”

    A bubble to cause many debt defaults starting with Dubai, Greece, and moving through Spain and other countries on the theme of “Liars Economics” with the assistance of the likes of a Goldman Sachs or other such large Money Maker/Market Maker status.

    Frankly, the continuing attitude campaign coming from Washington is still running overly loose monetary policy that led to a real estate bubble that spread its impact beyond our borders via the creation of toxic mortgage product sold everywhere.

    Now these same Toxic Debt Defaults are meeting the wall of Leverage of Bailout is on Critical Care Notification now as signaled out of the EU and the Biggest Banks that are on the Hook for this one also now.

    However, one difference this time is the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater. Second, is that many countries are running loose money policies, but they are at least making some credible noises re tightening (whether they follow through is another matter, of course).

    The US, by contrast, has made clear that it is keeping things easy peasey for the near future. In addition, the US (starting with the Greenspan era) has signaled any hawkish moves well in advance, so the odds that the Fed will have a sudden change of heart are just about zero.

    Now, to play the Far-fetched activist, one could argue that the loose money policy is campaigned by many as warranted. There is tons of slack in the economy, unemployment is high and rising, and capacity utilization stinks. Surely, it is not Far-fetched that raising rates now would be the worst move possible, right!

    Of course, the authorities really, only want bubble restoration in those asset classes to which banks and capital markets firms are heavily exposed. A bubble in gold does them no good, and a bubble in other commodities is downright counterproductive.

    In addition, that was the logic behind the Fed’s proliferating programs: to drive liquidity to the markets it deemed worthwhile. We can see how well that worked.

    The Bubble of the “Carry Trade” Has Led To The New Downturn Coming For Oil and Many Other Commodities as Seen By The Graphs Revealing This Economist Student Caught Within The Next Slaughter of Wealth Due To Greed and Political Motives.

    The hidden plan by China to conquer the World through Economic Collapses of Debt through the diversion of The Dollars Decent is no longer the norm and is now threatening Chinas very own long-term stability through reversed inflated commodities.

    Remember, when you make the mistake of trying to only build a recovery based upon using Money to Make Money without producing a “Good or Services” are a sure recipe for disastrous outcomes.

    China now needs to raise the value of the Dollar much Higher. China Is Trumping the other global G-7 with Their 2.7 Trillion held US Currency Debt. The Tiger has engaged with controlling the Central Bank Committees around the globe, especially Ben Bernanke.

    The Tiger of China simple plan focuses on Control of the Greenback to decrease with the assistance of the “Carry Trade,” the value of the US Dollar and peg the YUAN. The trump card China and The rest of the G-20 played; starting back in February of 2010–helps with a needed correction in the world’s commodities.

    The change in moving the dollar higher by the Tiger and the need to dry up serious liquidity issues by many of the Central Banks clears the way for the needed correction within Oil and other key metric commodities.

    The critical reason for the dollar to be on the rise over the next year is not so Far-fetched these days. The Tiger of China knows they must protect their 2.7 trillion dollar exposure from becoming worthless to US downgrade potential to their Sovereign Credit Rating be adjusted.

    The fact of “Too Big to fail” is no longer just for the banks. The new term of (TBFCTF) “Too Big for Countries Too Fail,” serves as the new standard for countries defaulting under the pressure of the “Carry Trade” and their profound hidden lies to the balance sheets of real debt issues.

    Furthermore, it raises the highest flag for all to take notice when “Bill Gross” of “PIMCO Bond Funds” cannot even hold a player’s seat to the best point spreads these days. The Countries holding the power of the ultimate risk to reward for trading on the “Carry Trade” currency high-risk bets currently hold these seats. These same players’s seems to be unraveling now with high-risk controls held by China and seems to be for the near term, the U.S. Federal Reserve Committee. They are in the crossfires of causing many potential defaults looming on the near front of economic and world markets concerns of crushing or sustaining a global recovery.

    Clearly, the need of trying to remove massive amounts of liquidity at the same time of generating new consumption to support long-term growth fundamentals found in the theory of lowering the overall cost of raw goods and commodities used by world global consumption measured metrics.

    China in the Year of the Tiger knows they must play the card of Trade-wars and the raising of the dollar to thwart the US plans of dominance of suppressing the value of the dollar against all the other countries to build export recovery.

    Consider this trump card as to cause failure of “The Engineered Plans of Monetary Policy of Keeping such a Low percent (O %), Federal Reserve Rate by Ben Bernanke. The United States Recovery will be the Blunder of Miscalculations of Timothy Geithner and Larry Summers in the Year of the Tiger if congress cannot pass sweeping reforms that the other global countries adopt to rain in the banks and high-risk derivatives and other high leveraged exposures…

    It seems benign that few had noticed what occurred under the radar, as a problem with Japan and the Asian Rim was able to engineer super low interest rates. These real low interest rates are still triggering the match that ignited the fire stoking a “global carry trade” of the next “Bursting Bubble.”
    A bubble to cause many debt defaults starting with Dubai, Greece, and moving through Spain and other countries on the theme of “Liars Economics” with the assistance of the likes of a Goldman Sachs or other such large Money Maker/Market Maker status.

    Frankly, the continuing attitude campaign coming from Washington is still running overly loose monetary policy that led to a real estate bubble that spread its impact beyond our borders via the creation of toxic mortgage product sold everywhere. Now these same Toxic Debt Defaults are meeting the wall of Leverage of Bailout is on Critical Care Notification now as signaled out of the EU and the Biggest Banks that are on the Hook for this one also now.

    However, one difference this time is the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater. Second, is that many countries are running loose money policies, but they are at least making some credible noises re tightening (whether they follow through is another matter, of course).

    The US, by contrast, has made clear that it is keeping things easy peasey for the near future. In addition, the US (starting with the Greenspan era) has signaled any hawkish moves well in advance, so the odds that the Fed will have a sudden change of heart are just about zero.

    Now, to play the Far-fetched activist, one could argue that the loose money policy is campaigned by many as warranted. There is tons of slack in the economy, unemployment is high and rising, and capacity utilization stinks. Surely, it is not Far-fetched that raising rates now would be the worst move possible, right!

    Of course, the authorities really, only want bubble restoration in those asset classes to which banks and capital markets firms are heavily exposed. A bubble in gold does them no good, and a bubble in other commodities is downright counterproductive. In addition, that was the logic behind the Fed’s proliferating programs: to drive liquidity to the markets it deemed worthwhile. We can see how well that worked.

    With so much of the financial markets’ action dictated by one trend (the Dollar’s collapse), the markets have begun operating on a beta rather than alpha basis.

    This means that picking out individual investments (individual stocks or companies) is FAR less significant than simply allocating your money into the right “sector” or “asset.” Indeed, there have been very few times in history in which stock picking has been LESS relevant to successful investing. After all, if the rate of return for simply investing in the NASDAQ is 70%+ since the March lows, why bother picking out an individual Tech companies to buy?

    Thus, today we are in an environment in which the US Dollar is THE carry trade of the world. More than 90% of investors are bullish on stocks; more than 80% are bullish on Gold, and LESS than 3% a bullish on the Dollar.

    Now, markets are a bit like boats: when everyone crowds over on one side, the likelihood of disaster increases dramatically. This is WHY you need to be paying EXTRA close attention to the US Dollar if you have any interest in preserving your gains and portfolio going forward.

    If strong economic growth is not the explanation for the large increases since 2001 in prices of virtually all mineral and agricultural commodities, then what is?

    One would not want to try to reduce commodity markets to a single factor, nor to claim proof of any theory by a single data point. Nevertheless, the developments of the last six months provided added support for a theory I have long favored: real interest rates are an important determinant of real commodity prices.

    High interest rates reduce the demand for storable commodities. Furthermore, they increase the supply.

    This is through a variety of identified channels.
    – by increasing the incentive for extraction today rather than tomorrow (think of the rates at which oil is pumped, gold mined, forests logged, or livestock herds culled)
    – by decreasing firms’ desire to carry inventories (think of oil inventories held in tanks)
    – by encouraging speculators to shift out of spot commodity contracts, and into treasury bills.

    All three mechanisms work to reduce the market price of commodities, as happened when real interest rates where high in the early 1980s. A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices, as happened in the 1970s, and again during 2001-2004. It is the original “carry trade.”

    This could also mean serious thoughts to the continued bleeding of jobs around the world and potential for economic collapses if the Central Banks don’t get it right the first time around with extending the stimulus as suggested by Nobel Economist, Professor Joseph Stiglitz.

    An article opinion written by William Pesek thoughts are revisited again, if you have not seen his thoughts for clear resolve, the markets are in real trouble ahead. The article stated the following as I quote,

    ” China’s currency reserves grew by more than the gross domestic product of Norway in 2009. Its $2.4 trillion of reserves is a bubble all its own, one growing before our eyes with nary a peep out of those searching for the next big one.

    The reserve bubble is actually an Asia-wide phenomenon. And we should stop viewing this monetary arms race as a source of strength. Here are three reasons why it’s fast becoming a bigger liability than policy makers say publicly.

    One, it’s a massive and growing pyramid scheme. The issue has reached new levels of absurdity with traders buzzing about crisis-plagued Greece seeking a Chinese bailout. After all, if economies were for sale, China could use the $453 billion of reserves it amassed last year to buy Greece and Vietnam and have enough left over for Mongolia.

    Countries such as the U.S. used to woo the Bill Gross’s of the world to buy their debt. Now they are wooing governments. Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., is still plenty important to officials in Washington.

    He’s just not as vital as the continued patronage of state asset managers in places like Beijing. The stakes are rising fast. The risks in Asia are skewed firmly in the direction of inflation. The focus is now on central banks to see if they will pull liquidity out of economies with higher interest rates. More attention should be on how reserve management is working at odds with that goal.
    Central banks face a difficult task.

    They must withdraw excess liquidity without devastating their economies and running afoul of politicians. Only now is Asia finding out how some of its economic-protection tactics are amplifying the challenge.
    Asia has been holding down currencies to support exports for more than a decade. It’s silly to ignore the side effects of that strategy for the region’s economies.

    Think about how Dubai shook the global economy, or how the mere hint that Chinese growth may dip below 8 percent inspires panic. These disappointments pale in comparison with the turbulence that may come from Asia’s biggest bubble popping” (William Pesek, Bloomberg.com).

    Sites you need to put on your radar to keep up timely with global policies affecting us all.

    https://baselinescenario.com/
    http://www.SeekingAlpha.com

    http://thehuffingtonpost.com

    http://motherjones.com/politics/2010/01/too-big-jail

    http://motherjones.com/politics/2010/01/joseph-stiglitz-wall-street-morals

    Continued theme of reforms for the economy and many affected by the current metrics of the markets…
    James Gornick

  22. According to Ken Roggoff;s book “This time is Different” ,
    Greece has been in continuous default and had no money of its own since 1800 and certainly since 1944…
    How on earth are we ever gonna pay it back if we go to the IMF again now??

  25. “By approaching the IMF, Greece will get a better deal from the European Union. Our baseline view is still that the IMF’s role will be only “technical”, but behind the scenes the prospect of greater IMF engagement (and even a standby loan) is a powerful card that Greece should threaten to play.”

    Sovereign Debt: Greece And California

    February 18, 2010 – 6:43 pm – Forbes.com – excerpts

    “I’m afraid I’m about to state the obvious again. Most of you already know what I’m about to say, but as I listen to pundits talk about Greece on daytime TV it’s becoming obvious that not everyone does.

    The issue is sovereign debt: When is it a problem and when does it become a crisis? The short answer is that too much debt is, by definition of “too much,” always a problem, whether the debt is owed by individuals, corporations or countries. Focusing on countries only, too much debt becomes a crisis if the debt is payable in a currency other than the debtor’s currency, or if the debtor has no central bank to purchase its debt, i.e. monetize it.

    U.S. debt is a problem, but not a crisis. If worse comes to worse, the Treasury (with the help of Congress) could prevail on the Federal Reserve to buy its debt at prices more favorable than those demanded by foreign creditors. If not sterilized, thus neutralizing the impact of the purchases on the money supply, the Fed would be monetizing the debt and a pickup in inflation would be the likely outcome. Indeed, that is what people mean when they refer to “inflating your way out of debt.”

    A developing country that cannot issue debt in its own currency, but must issue it in another currency, say U.S. dollars, must earn the dollars necessary to service and redeem the debt through foreign trade (or perhaps temporarily through foreign borrowing to roll the debt over). It does not have the luxury of borrowing from its own central bank to service and redeem the debt.

    Since Greece is one of 16 members of the euro zone, its position is very much like a state in the United States. The European Central Bank is its central bank, but Greece cannot force it to monetize its debt. Likewise, California shares its central bank with 49 other states and cannot force it to buy and monetize its debt. Just as Greece has to earn the euros it needs, so must California earn the dollars it needs.”

    http://tinyurl.com/Yhee-Haaa

  27. Greece or California: Who’d you rather be?

    February 18, 2010 – L.A. Times – excepts

    “California’s economic woes can do more damage to America’s recovery than Greece’s can do to Europe’s. Yet which of the two may be getting a bailout?

    If I were the governor of California, cursed with an insoluble budget crisis, and if I had asked the federal government for help and been rebuffed, and if I hailed from Europe and noticed that the European Union had agreed — in principle at least — to bail out Greece, I might be mumbling, “Vut gives?”

    http://tinyurl.com/I-ll-be-backk

  28. This is exactly right. The IMF will make Greece its indentured servant, beholden to its interests. Can’t we just admit this system doesn’t work anymore?

  30. Prof. Johnson’s view has been the subject of several articles in the Greek press recently. The general idea is that right now we’re getting pushed extremely hard by the EU for IMF type austerity without any specific support plan to match. The markets are responding by raising the risk premium on Greek gov’t bonds again. So why not go to the IMF instead? We could simply try to get a better deal or put some pressure on our EU “partners” to give us something more than empty promises. It doesn’t have to be a loan, a specific contingecy plan would be enough to restore market confidence (for the short term at least) and allow us to cover our immediate borrowing needs with something better than the loanshark rates we’re paying now.

    If this is what the EU is about I want out. Bring in the IMF, at least we won’t have to take the holier than thou b******t we’re getting now.

  32. 1 Kings

    Tried to write a little more on the depth of current market and economic flags. Sorry for the long article that should of been broken up into smaller pieces.

    James

  33. Per Kurowski:

    Your quite correct that many a Comptroller are having sleepless nights. The Federal Stimulus program is what will float a few States budgets. Very ominous sign indeed…

    Far-fetched, Not anymore!

  34. While it’s only semantics, one can argue that ‘getting crafty’ is how the global economic community arrived at where it stands today.

    How about some good old fashioned economic restraint and common sense for a change, however passe that may be?

  35. Per Kurowski wrote:

    “But what has to be understood is that the euro was a planned experiment designed to create the conditions to make a political union unavoidable…”

    Otmar Issing wrote April 2008:

    “Europe’s monetary union, which launched the euro almost a decade ago, remains an “experiment” with the outcome “likely to remain uncertain for a considerable time to come” writes Otmar Issing, who served as the European Central Bank’s chief economist for its first eight years.”

    http://www.nejtillemu.com/otmarissing2008.htm

    (Otmar Issing, served as the European Central Bank’s chief economist for its first eight years)

  36. Could it be that Greece is an example of giving up national sovereignty to the E.U. only to retain sovereign debt?
    Was there any Greek currencies surrendered for the sake of joining the E.U.?
    What does the nation of Greece have to loose going to the I.M.F. for help?
    California and Greece not necessarily an astute analogy California spends dollars just as Washington does, and to date has given only some sovereignty up to the U.S. and technically should have no debt.
    Greece on the other hand seems to retain the ability to rack up sovereign debt, I don’t understand the parallel

    Maybe the E.U. was ill conceived especially since U.K. did not surrender the British Pound?

    I have more questions than comments or answers.
    Reply if you so desire
    I say as a layman this is mind boggling how we got into this mess and how equities vanished into thin air, whom are the robbers?

  37. Germany Doesn’t Have Plan to Aid Greece, Finance Ministry Says

    February 20, 2010, 11:37 AM EST

    Feb. 20 (Bloomberg) — “Germany’s Finance Ministry said it has no specific plans for helping Greece combat its deficit crisis, denying a magazine report that euro-area governments may offer as much as 25 billion euros ($34 billion) in aid.

    It’s “incorrect” that Germany is considering a “concrete” plan for countries sharing the euro to pump billions in financial aid to Greece, ministry spokesman Martin Kreienbaum said in an e-mailed statement. “The Finance Ministry has taken no decisions in this regard,” the statement said.”

    http://tinyurl.com/NO-PLAN-TO-HELP-GREECE

  38. The state of California unlike the country of Greece, is more different than similar in it’s debt crises. I still wonder if many commentors here realize this an economics blog?

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