Thursday, February 12, 2015


In 1988 my old friend, teacher and mentor Luigi Spaventa was made Treasury Minister in the Italian government.  The Communist Party had been offered a few posts in the government, including Vincenzo Visco at the Ministry of Finance, but had refused; Luigi belonged to the left but was not a party member, and fortunately accepted.  On that occasion, I sent him a postcard with the following verses:

Visco al Fisco! Noo? Peccato,
Il Partito s’e’ imbranato.
Per fortuna c’e’ Spaventa
Che al Tesoro s’arroventa,
E la fine e’ ormai per via
della Cachistocrazia.

[Visco at Finances! No? Pity./The Party has goofed./But fortunately Spaventa/At the Treasury is getting fired-up,/And at last we are on the way/To end our kakistocracy.]

Naively I thought I had coined the word, from the Greek kakistos, superlative of kakos(bad), government by the worst citizens, but on googling the word there are almost half a million entries: kakistocracy was first used in 1829 by the English satirical writer Thomas Love Peacock. The American poet James Russell Lowell wrote in a letter in 1876: "Is ours a government of the people, by the people, for the people, or a kakistocracy rather, for the benefit of knaves at the cost of fools?"

Luigi, a wonderful teacher and a great economist, died prematurely in 2010.  Had he lived longer he might have been appointed premier in 2012 instead of Mario Monti (for he was President Napolitano’s economic adviser), or to even higher office later: Italian recent history would have taken a turn for the better.  In any case I was patently wrong: not only does kakistocracy – the mafia in collusion with the political Casta- still rule Italy, now it has spread to the entire world.  Whenever the best men come to power in a country, the global kakistocracy tries to squash them.  This is the case right now in Greece.

All that Alexis Tsipras is asking of the European and global rulers is six months of breathing space to prepare an alternative plan for debt management and economic recovery.  After all, the elections of 25 January had been called only on 14 December and he could not conceivably have been expected to have a plan ready when his outstanding surprise victory was proclaimed.

His first moves were directed at reassuring the global community: Greece would honour its debts in full, without insisting on a debt haircut; the country would remain in the Eurozone, as preferred by a large majority of its citizens; it would fight tax evasion and raise the living standards of those who had suffered most from the austerity imposed by the Troika (the ”Memorandum” issued by the EC, ECB and IMF): the unemployed, especially those unfairly dismissed, the poor, old age pensioners and the other economically weak groups.  ”If the country’s sacrifices were conducive to recovery and growth I would be the first to advocate them” – he said to Parliament last week (I am quoting from memory) – ”if the bitter pill was necessary to recover health I would readily swallow it”.  But the austerity imposed by the European and globalist kakistocracy demonstrably leads only to cumulative impoverishment and ruin, as it has already done.  Thus Tsipras rejected at once the continuation of the programme agreed with the Troika by his predecessor, renouncing the €7.2bn aid that Greece otherwise expected to receive at the end of February, asking only for the €1.9 bn repayment of ECB profits made on its Greek bonds, with a view to using the next six months to negotiate a new agreement and in the meantime to meet all outstanding obligations by issuing around €10bn short-term Treasury bonds. 

So far the Kakistos and Tsipras are set on a collision course. The Greek Finance Minister Yanis Varoufakis and German Finance Minister Wolfgang Schäuble would not even “agree to disagree”.  On 11 February in Brussels at a meeting of Eurozone Finance Ministers talks collapsed after six hours.  There is no way the debt owed to the ECB or the IMF can be cut, under penalty of losing access to assistance from these institutions – though Greece might be allowed to repay ECB credits by borrowing on very long terms from EFSF, the Eurozone bail-out fund.  Moreover Tsipras has promised that private investors will not be hit.  The only room for debt renegotiation is with European governments, to whom Greece owes directly or indirectly about €195bn, around 62 per cent of its total debt (of which almost 148bn or 45 per cent to the bail-out fund EFSF). True, Greece has already benefited from a debt cut in 2010 and 2012, and from the lengthening of maturities right up to 2057; and from a reduction of interest on its debt down to 2.6% of GDP, equivalent to that paid by Italy or France (and only 1.5% on its debt with the EFSF, which could not possibly be cut further).

But according to the Troika Memorandum Greece is committed to running a primary surplus (before paying interest) of 4.5% of GDP a year, which is an exceedingly heavy burden on an impoverished country.  Such a surplus requirement could very well be cut at least temporarily, by an interest moratorium until growth is resumed, back to earlier income levels, to the 1%-1.5% primary surplus that Syriza’s current plans would require. This is the purpose of the proposal put forward by Yanis Varoufakis, of swapping debt owed to European governments with new bonds indexed to the Greek growth rate.  

The ECB was certainly within its rights to cancel the waiver allowing Greek banks the use of Greek government bonds as collateral, thus denying Greece access to liquidity at 0.05% interest, once Tsipras had indicated his unwillingness to continue on the agreed course at the end of February.  But it was certainly not ”legitimate and opportune” as declared by Matteo Renzi, who presented Tsipras with an elegant tie instead of solidarity (”So that he could go and hang himself with it”, commented Giorgia Meloni, leader of the right-wing party Fratelli d’Italia).  As long as Greece has access to Emergency Liquidity Assistence (even at the higher cost of 1.55%) Greek banks can cope even with the slow run on deposits that has already begun (€15 bn in the two months preceding the elections); but such access has to be confirmed every fortnight and its possible suspension is a Damocles’ sword. Greece really needs the Tsipras really needs the €10bn Treasury bonds that Tsipras wishes to issue.

The trouble is that Greece is already right up against the €15bn limit to short term indebtment that has already been imposed by the Troika, and the additional €10bn bonds have to be, but have not been, authorised.  Yet this is the only and therefore the best way out of the Greek-Troika confrontation.  Wolfgang Schäuble declared that ”Europe is not in the business of granting bridging loans”, but the €10bn would be no skin off his nose, they would be raised – at a price, that current delays make rise all the time – in the international market.  By giving up its entitlement to €7.2bn under the Memorandum surely Greece can have its €15bn borrowing ceiling lifted at the same time?  The Troika cannot have it both ways, tying Greece to its borrowing limit when it is renouncing some of the benefits of its current deal with the Troika.

Germans display the memory typical of elephants when they evoke the ghost of their 1922-23 hyper-inflation to justify their opposition even to ECB quantitative easing.  But they have a shorter memory than goldfish when it comes to the 1953 cancellation of German debt of over 200% of its GDP at the time, much in excess of the current Greek debt burden of under 180%.  According to the economic historian Albrecht Ritschl (LSE), Germany was ”the “biggest debt transgressor of the twentieth century”;Robert Skidelsky recently reminded us that“Germany experienced eight debt defaults and/or restructurings from 1800 to 2008. There were also the two defaults through inflation in 1920 and 1923. And yet today Germany is Europe’s economic hegemon, laying down the law to miscreants like Greece.”

Tsipras’ mention of war reparations was not commented on by Merkel but both vice-Chancellor Sigmar Gabriel and Wolfgang Schäuble immediately said that the issue was definitively closed years ago, and its re-opening was out of the question.  Tsipras mentioning the War was treated as an inappropriate gesture in bad taste.  Shades of Basil Fawlty of Fawlty Towers, shouting at the Hotel’s Spanish waiter Manuel: ”Don’t mention the War!” when German guests arrived.  But why ever not?  If memories of 1922-23 hyper-inflation are not buried, a fortiori neither should more recent and tragic ones.  Such a combination of a good memory for distant events with forgetfulness of recent ones is typical of dementia.

A secret Greek Finance Ministry report is said to provide detailed evidence of ”atrocities and forced loans during Nazi occupation of Greece in World War II”.  Apparently ”in 1960 Germany paid DM 115 million in reparation payments to victims of the Nazi terror regime in Greece in accord with a bilateral reparation agreement”. But 1) the Netherlands suffered much less and received a much larger compensation; 2) “the 1953 London Agreement on German External Debts, between the Federal Republic of Germany and creditor nations, stipulated that payment obligations from World War II were to be deferred until ‘after the signing of a peace treaty’", and 3) apart from the cost of war suffering, casualties and loss of material assets, there was a loan the GreekCentral Bank was forced to give the Nazi regime in 1942, 476 million reichsmarks which the occupiers not only acknowledged but had actually started repaying shortly before the end of the war.  Even at a modest interest rate of 3% a year (though German loans after the War generally had a 6% interest rate) after 70 years that loan would have built up to a handsome three digit billion sum in today's euros.  Professor Hagen Fleischer, a historian from Athens University, explains that "Before 1990, Germany tended to point out [that] it was too soon, because Germany was divided and it was the entire country that had gone to war, not just one half. So the issue was supposed to be canned until Germany was again reunified".  After reunification, however, "Germany's response was suddenly, 'So much time has passed - now it's too late’".  Clearly the Greek Ministry of Finance should publish its secret report in full on the Internet at once, together with all the body of evidence of post-2009 Greek negotiations with the Kakistos of the Troika that led to the ”Memorandum”.

There is a perfectly feasible solution to the otherwise potentially catastrophic losses involved in the confrontation between Greece and the Troika: lifting the €15bn ceiling on short-term debt in exchange for Greece renouncing the aid otherwise payable under the Memorandum.  Paradoxically, Angela Merkel is standing firm and and wisely stopping Europe from joining the USA and its jejeune warmongering President Barak Obama in arming Ukraine and fighting Vladimir Putin.  Let’s hope that she might come to her senses also in her dangerous confrontation with Greece. 

On Thursday 13 February it was announced that fiscal revenue for the month of January was €1bn lower than forecasts (a shortfall of 23%). The ECB extended another EUR5bn in emergency loans to banks in Greece after fears that a spate of bank withdrawals could dry up funding. In fact according to JP Morgan withdrawals from bank deposits since the beginning of 2015 amounted to €21bn.  But ELA is subject to fortnightly verification and is not a permanent solution.  On Friday 14 it was announced that in the fourth quarter of 2014 the Greek economy had contracted slightly, reversing the trend after nine months growth.

The Greek government claims that it does not need any fresh cash: “We do not want new loans, we need time, not money to implement reforms” – the Greek premier said in an interview to the German weekly Stern.  But a spokesman for the Commission commented: “We fear that the available liquidity is shrinking faster than anticipated”.

Monday 16 February was supposed to be the day of reckoning. But the Brussels meeting of Eurozone Ministers of Finance with Tsipras and Varoufakis ended with a bitter row, with general recriminations and yet another postponement of the final decision until no later than Wednesday next.  The Union offered Greece only the extension of the pre-existing agreement, at the same conditions; the Greeks rejected the proposal as “absurd and unacceptable”

Time is running short, for some countries, like Germany, the Netherlands, Finland and Estonia, need parliamentary approval not only for a new Memorandum but also for an extension of the last one.

One might think that the difference between the positions of the two antagonists is minimal and purely formal. After all, what big difference there might possibly be between the extension of a pre-existing agreement subject to consensual renegotiation within six months, and a slightly different stipulation also subject to consensual renegotiation within the same term?

The difference however is immense.  The extension of the current agreement would involve the acceptance not only of the general principle of austerity but also of new privatizations of public assets at derisory prices, and the reversal of policy measures already taken by the Tsipras government, such as the reinstatement of public employees especially if unfairly dismissed, the adoption of a higher minimum wage and higher pensions.  It would be a capitulation on the part of the Greek government, involving the rejection of the main principles of their electoral campaign and popular mandate.  And for the kakistos European leaders it is a serious question of asserting who is really Master in Europe.

We could say that the Troika, like Shylock The Merchant of Venice, is demanding of Greece its pound of flesh in payment of its debt, whereas Greece is willing to pay a pound of its flesh only on condition that it does not include any of its blood.  This Shakespearean drama is being replicated next Wednesday, with an open ending. 

Greeks and eurozone agree bailout extension

“Greece and its eurozone bailout lenders agreed an 11th-hour deal to extend the country’s €172bn rescue programme for four months, avoiding bankruptcy for Athens but setting up another potential stand-off in June when a €3.5bn debt payment comes due”. Financial Times, 20 February 2015, 8.18pm

Hip Hip Hip! Hooray!


Bobo said...

I suppose Tsipras could always play his Russian card, for instance offering to privatize one of Greek ports selling it to Vladimir Putin for cash or offering it as security of a loan?

D. Mario Nuti said...

Yes of course. Vladimir Putin has already made friendly noises. At the moment Russia is in a poor economic shape, suffering from the oil price fall, the Ukrainian crisis, and the cost of Ukraine-related sanctions. And Putin already has Sebastopol and he is going to keep it, so he is not desperate for another warm-water port. And there is also China as a possible alternative source of financial assistance.

But even that option has a potential cost. Greece only complained at not having been consulted about sanctions against Russia, and it was immediately threatened with expulsion from NATO.

D. Mario Nuti said...

I have great hopes of some version of the Moscovici plan, that Varoufakis said he was ready to sign, but was removed from the table last Monday. The plot is much thicker than it seems, see

D. Mario Nuti said...

This is the letter that the Greek Minister of Finance Yanis Varoufakis sent two days ago to the President of the Eurogroup.

Athens, February 18, 2015

Dear President of the Eurogroup,

Over the last five years, the people of Greece have exerted remarkable efforts in economic adjustment. The new government is committed to a broader and deeper reform process aimed at durably improving growth and employment prospects, achieving debt sustainability and financial stability, enhancing social fairness and mitigating the significant social cost of the ongoing crisis.

The Greek authorities recognise that the procedures agreed by the previous governments were interrupted by the recent presidential and general elections and that, as a result, several of the technical arrangements have been invalidated. The Greek authorities honour Greece's financial obligations to all its creditors as well as state our intention to cooperate with our partners in order to avert technical impediments in the context of the Master Facility Agreement which we recognise as binding vis-a-vis its financial and procedural content.

In this context, the Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination during which period we shall proceed jointly, and making best use of given flexibility in the current arrangement, toward its successful conclusion and review on the basis of the proposals of, on the one hand, the Greek government and, on the other, the institutions.

The purpose of the requested six-month extension of the Agreement's duration is:
(a) To agree the mutually acceptable financial and administrative terms the implementation of which, in collaboration with the institutions, will stabilise Greece's fiscal position, attain appropriate primary fiscal surpluses, guarantee debt stability and assist in the attainment of fiscal targets for 2015 that take into account the present economic situation.
(b) To ensure, working closely with our European and international partners, that any new measures be fully funded while refraining from unilateral action that would undermine the fiscal targets, economic recovery and financial stability.
(c) To allow the European Central Bank to re-introduce the waiver in accordance with its procedures and regulations.
(d) To extend the availability of the EFSF bonds held by the HFSF for the duration of the Agreement.
(e) To commence work between the technical teams on a possible new Contract for Recovery and Growth that the Greek authorities envisage between Greece, Europe and the International Monetary Fund which could follow the current Agreement.
(f) To agree on supervision under the EU and ECB framework and, in the same spirit, with the International Monetary Fund for the duration of the extended Agreement.
(G) To discuss means of enacting the November 2012 Eurogroup decision regarding possible further debt measures and assistance for implementation after the completion of the extended Agreement and as part of the follow-up Contract.

With the above in mind, the Greek government expresses its determination to cooperate closely with the European Union's institutions and with the International Monetary Fund in order: (a) to attain fiscal and financial stability and (b) to enable the Greek government to introduce the substantive, far-reaching reforms that are needed to restore the living standards of millions of Greek citizens through sustainable economic growth, gainful employment and social cohesion.

Yanis Varoufakis
Minister of Finance
Hellenic Republic

DMN: If it does not work it will not be for lack of trying.

Demos said...

Is enthusiasm for the four months breathing space just given to Greece really justified?

D. Mario Nuti said...
This comment has been removed by the author.
D. Mario Nuti said...

Enthusiasm? No, but strong relief yes.

Admittedly four months are not a long enough period to formulate alternatives and get them approved after negotiations.

We will know the conditions on Monday but we already know that the primary surplus target is to be reduced from 4.5% ti 1.5% only for 2015; that the government decision to re-hire public employees and raise the minimum wage and pensions is frozen and subject to subsequent re-negotiation.

But failure to get any breathing space would have been catastrophic. Hence the relief. See Frances Coppola, at

Pompa said...

Will Schauble resign?

Alberto Chilosi said...

The way out for Greece is to increase the number of state employees and reduce the number of pensioners, while taking advantage of the multiplier.

According to national accounting the contribution of the state administration to National Income is estimated on the basis of its costs. Public expenditure for paying the wages of state employees enters in the GNP, pensions do not. If you transform all the pensioners (such as the unmarried daughters of state employees who in Greece alone are enjoying pension rights) in state employees, paying them wages instead of pensions you instantaneously increase correspondently GDP and reduce the all important relation of Debt to GDP. Even more, if you increase public employment you may take advantage of a multiplier greater to zero: every new employee increases national income by the amount of his wage, moreover the new expenditure, through its spill-over, increases effective demand. By increasing adequately the number of public employees, and even more by increasing state employee wages, the relation of Debt to GDP can be rendered arbitrarily low, and the Greek economic problem can be very easily solved. All too bad that the notorious Troika is unwilling to put forward the needed monetary resources. They obviously are advised by really incompetent economists!

Alberto Chilosi said...

Correction: in my previous comment the multiplier is obviously greater than 1 (as rightly argued by the IMF).

D. Mario Nuti said...

Will Schauble resign? I do not think so, he is still very angry, apparently, about the cartoon published in the Avgi weekly.
Should he resign? Some of the concessions obtained by the Greeks are purely cosmetic: if you call the Troika "the three institutions", or if you call "partners" yolur creditors, it makes absolutely no difference. But what is now "the arrangement" between Greece and the three institutions is not at all the same thing as the previous Memorandum. If you look at the twelve conditions accepted yesterday by Greece and endorsed by the Troika, some of Syriza's electoral promises may have been cut, marginally, but lots of questions settled to Greece's disadvantage in the previous Memorandum have been re-opened, though not settled and still subject to negotiation and approval with the Troika.

So perhaps Schauble should resign, but I very much doubt that he will.

D. Mario Nuti said...

You may be speaking tongue-in-cheek, Alberto, and a fiscal multiplier higher than one is not a sufficient condition for higher public expenditure to lower the Debt/GDP ratio. But what you are suggesting is a real possibility.

Namely, there are precise conditions under which a fiscal consolidation (tax increases plus government expenditure cuts) will always necessarily result in an increase instead of a decrease of the Public Debt/GDP ratio, with respect to what that ratio would have been in the absence of fiscal consolidation.

Suppose that you start from a balanced budget position, and the fiscal multiplier – or more precisely the weighted average of fiscal multipliers applicable to the actual composition of the fiscal package – is greater than the inverse of the country’s Public Debt/GDP ratio.

In such circumstances fiscal consolidation, contrary to received wisdom, will make Public Debt more rather than less costly to re-finance, and therefore less instead of more sustainable. In plain words, fiscal consolidation works only in those countries that, having a sufficiently low Public Debt/ratio, do not actually need a consolidation. See my earlier post on perverse fiscal consolidation).

Sean said...

In conclusion, who won the confrontation between the Troika and Greece?

Alberto Chilosi said...

Yes, indeed I was tongue-in-cheek, but I wanted to make a couple of serious points: 1. that part of the loss of Greek GDP may be simply a matter of accounting: if you lay off redundant public servants who would make no sizable contribution to the provision of administrative services, their redundancy would reduce accounting GDP to the amount of their salaries but not in a substantial sense. 2. As far as the burden of debt is concerned the relation Debt/GDP is relevant but should not overstated. In my fictional example you could reduce the ratio only in an accounting sense: by increasing the expenditure for public employees you increase the level of GDP only in accounting sense (aside from the multiplier, but there are better ways to push the multiplier through more sensible types of state expenditures.
Finally I wish to raise the matter of the austerity and of the Troika. Austerity seems to me a convenient catchword for budget constraints. It would be wonderful to do without budget constraints and have somebody else foot the bills, but it does not seem very sensible. As to the Troika there is a lot of complaining for the unpopular forcing of budget constraints, but I don't know any independent study of its policies. In particular what specific policies were forced by the Troika and what choices could be instead attributed to the Greek government in the framework of its budget constraints?

D. Mario Nuti said...

Sure, Alberto, long live budget constraints. But do not forget wealth constraints, which are over-riding budget constraints. And do not forget that future policies can be changed, sustainability is neither here nor there if it involves unchanged policies. The problem then is credibility of the prospect of desirable policy changes.

D. Mario Nuti said...

Who won, Sean?

Undoubtedly the Greeks won the first round, as demonstrated by Draghi and Lagarde and Schauble being upset the day after, but the game is still open.

As I pointed out some of the changes are purely cosmetic, the Troika was renamed "the three institutions" and creditors have now become "partners", which makes no difference.

But several crucial questions have been re-opened - from the size of the target primary surplus to the scale of new privatisation - and the new "arrangement" is most definitely not the same thing as the previous "Memorandum".

We will simply not know who the winner is until the end of April when the Greeks will have to submit the details of their new proposed programme and get it approved by the "three institutions".

D. Mario Nuti said...

From Frances Coppola's Blog:

The Germans give nicht;
Grexit looms quick.
Drachmas at last on the ground.
The Euro will tear!
Send back the clowns.....

The union's adrift -
an Ordoliberal split:
Podemos is gaining ground.
But the centre won't move.
Why are there clowns?
Send back the clowns!

Let them stuff T-bills
In banks,
Extend a loan, defer, then they're yours.
Another long meeting again, and wit is quite spare.
Few there are kind....
Sense is not there.

Don't you love farce?
Whose fault? It's clear:
We all colluded and winked,
Now Greeks they pay dear.
The Eurogroup clowns,
Oh, those scary clowns,
Oh bother - they're here.

The centre is rich,
Periphery blitzed,
It isn't a union, you know.
Common currency, it's clear
Designed by clowns
And run now by clowns
Well shielded, it's clear.

D. Mario Nuti said...

See the following German link (with English subtitles):

If Germans can laugh at themselves like this, there is still hope.

D. Mario Nuti said...

"Greece’s provisional agreement with creditors to avert a default started to crack as European officials said the country’s latest proposals fell far short of what was put forward two weeks ago and Greek ministers floated the prospect of a referendum if their reforms are rejected." (Bloomberg 08/03/2015).

Time for pessimism, and for serious consideration of the most likely mode and implications of Grexit. In the hope that this might have a sobering impact on all parties.

D. Mario Nuti said...

From today's FT: "Alexis Tsipras, Greek prime minister, claims Athens is owed €160bn in compensation for a forced loan to Nazi occupiers and destruction of the country’s assets during the second world war."

What took you so long, Alexis?

Alberto Chilosi said...

What about compensation for the proditorious attack and occupation by the Italians? After all it was the Italians who started the war with Greece, not the Germans. Moreover the Italians purported to be heir of the Romans who conquered and occupied Greece in the first place, so the compensation should include also the mischiefs caused by the Romans (inclusive of the rendering into slavery part of the conquered Greek).
And how much should be the compensation for the occupation and harsh rule by Ottoman Turkey (inclusive for the crime against the Greek and world cultural heritage for using the Partenon as an ammunition dump leading to its blowing up by the Venetians. By the way another Italian war crime.)
It seems to me that Tsipras and his finance minister are doing everything needed to make a Greekexit inevitable, so that they can print as many Dracmas as they need and enjoy (together with their Fascist allies in government) the fraternal help of Putin's Fascist Russia.

D. Mario Nuti said...

Well, "Graecia capta ferum victorem cepit [et artes intulit agresti Latio", Horace]. And German war crimes are still fresh in living memory (for instance my own). And even if you take the view that "A’ la guerre comme à la guerre", a loan is all the more subject to be returned with interest for the fact of having been forced. And "Inadimplenti non est adimplendum".

D. Mario Nuti said...

And, Alberto, on the question of German war reparations Italy and Greece turn out to be on the same side in their attempts to get compensation for war victims through the courts. See La Stampa,