Tuesday, February 03, 2015

Varoufakis' new bonds, a new chapter of fraudulent Greek accounting

Greece's Yanis Varoufakis is just another dirty Marxist. He is also a "scholar" of a sort who has co-authored a "critical" introduction to game theory and was an economist at Valve Corporation, a PC game company.

By now, he has understood that there won't be a new haircut, at least not under this name, so he proposes a new plan he calls "smart debt engineering". It's only "smart" to the extent to which the lender is completely stupid, however.

He proposes the Greek government bonds that are held by the European Central Bank to be replaced by two new types of bonds: growth-link bonds and perpetual bonds.

It's not hard to see that the value of both bonds is nearly zero so the "swap" is almost exactly equivalent to the cancellation of the debt. Varoufuckis' sleight-of-hand is just another cheap fraudulent maneuver similar to the tricks by which Greece has convinced some other European politicians that it had satisfied the conditions needed to join the eurozone.

As the name indicates, his "perpetual bonds" are either bonds without any maturity date – i.e. bonds that never have to be repaid – or bonds with (almost?) no interest or both. Whatever the details are, it is pretty clear that their value is nearly zero. If they don't have to be repaid, they will never be repaid, so their value is zero. Moreover, if they may be permanent but the interest is zero or much lower than the market interest rates for Greek debt, it means that the new debt would be getting negligible in comparison with the actual debt very quickly.

If you want a compensation for the bonds that is honest and perpetually linked to Greece, there is a solution. This honest version of the "perpetual Greek bonds" is known as "cash from Peloponnese". Just sell the peninsula, or something of the same kind, and use the cash to buyback the bonds. Anything that is qualitatively different is a cheap form of scam that belongs to Nigeria, not to civilized 21st century Europe.

The perpetual bond may also mean a bond that only pays interest, forever, but the principal is never repaid. Well, the adequate interest would have to be at least 20% of the principal for the swap to be "fair" and at least in the near future, Greece would be even more unable to pay the interest than it has been so far. Even the liquidity for this interest-only bond would soon be inaccessible, default...

And the growth-linked bonds? I had to laugh out loud. Surely you're joking, comrade Varoufuckis.

I suppose that they're bonds that are only being repaid, or bonds that only generate interest, if the borrower is doing fine, namely if the GDP growth exceeds some predetermined level. This is crazy. It's very easy for the borrower not to pay: just keep the GDP low enough. The borrower is literally motivated to keep his economy in bad shape. Some Czech commenters at idnes.cz made many jokes – it's like to borrow money and to buy lottery tickets for the loan so that the bank will get some of the money (only) if one of the tickets happens to be winning. ;-)

Even if this motivation didn't exist, there will simply be no GDP growth in Greece for quite some time. First of all, Greece will have to get to sustainable finances soon or later. This will require the GDP to drop by a factor of 2-5 relatively to the current GDP which is (still) spuriously inflated because the new debt or donations from other countries is effectively counted as GDP, perhaps with some amplification (because it keeps many people serving each other afloat although they are uncompetitive and have to go out of business when the external subsidies disappear). Only dramatically lowered salaries etc., and therefore also the local prices and GDP, can help to restore the balance.

But even if and when the GDP stabilizes at some realistic value, like 30% of the current Greek GDP, it's unlikely that there will be substantial episodes of the GDP growth in that country if it is likely that parties like Syriza will remain in power. And it does seem very likely that they will. If more sensible politicians overtake the government, it will always be a short-lived exception (Samaras' recent two years was really the first example of that).

So we may assume that all the communist populist anti-growth policies will be at place, and it's therefore very reasonable to expect a negative growth for many years or decades to come. Bonds that are only repaid if Greece is doing fine will be worthless for a very, very long time.

The policies that Syriza wants to establish are really lethal hits against any viability of their economy. Aside from the terror against the domestic financial lenders, nonsensical minimum salaries, free electricity for the poor, 13th or 14th salaries, rehiring of millions of useless government bureaucrats, bonuses for their ability to click with the mouse and for their being at work in time, and subsidies for ouzo, they have also shown what they want to do with the tax collection.

Of course that they want to tax the rich and successful!

Sorry, Syriza, but that won't work because you and 40 years worth of your left-wing predecessors have de facto exterminated all rich and successful Greek people. There are none left – surely not enough to serve any significant part of your budget or your debt. Only Greeks who are losers and parasites have survived the 40 years of the treatment by populist, "progressive" policies. So if you want to collect some money, you will simply have to focus on the losers because nobody else lives in Greece. It's that simple.

To say "OK" to these "creative" plans by Varoufuckis would be as unforgivable a mistake of the officials in other European countries as the mistakes that had led to Greece's membership in the eurozone. So please say "nein" and say it very, very loudly. Thank you very much. If you don't want to continue with Samaras' policies – and you really need to do them more properly than he did in recent years – then it's default, it's unacceptable to use any other word for that, and it's as full-fledged dirty default as you can get, with all the expected consequences.

Germany can't afford to "forgive" debt in this way. The Greeks have screwed their own life and can't be treated as little children. An example of the genuine challenges that Germany must be ready for, it may soon face a €4 trillion lawsuit (slightly above 100% of the German GDP) by a Russian nationalist party for the Second World War reparations. West Germany has never paid reparations to the USSR so this lawsuit is claimed to be legally promising. The justification for this claim is surely much sounder than Greeks' justification for their debt to be forgiven.


  1. The Greek people are suffering a full-blown 1930's style depression, so craziness is to be expected.

    You can argue that they accepted obviously fraudulent deals from corrupt politicians that supposedly improved their lives, but all peoples at all times have done the same. The only difference between Germany and Greece is that Germany actually has an economy other than olives and tourists. But all the welfare states will eventually collapse, because they all are based on Greekonomics.

  2. I love your northern European logical reasoning. It seems to me that similar reasoning is used by the Neocons to explain American "Exceptionalism". But if you loan somebody money and they don't pay you back then whose "fault" is it. I say it is at least half your fault because you should not have loaned money to a "deadbeat".
    The purposed finance method that you don't like has nothing to do with the conflict between Capitalism and Socialism, it is instead an attempt to "kick the can down the road" to prevent the collapse of the Euro monetary system. I don't think many people understand the pending disaster that will be caused by the eventual collapse of the Euro system, which has resulted in a permanent imbalance between Germany and associated countries ( which benefit from having a cheap currency and captive market), and the rest of southern and eastern Europe. The Euro system was only established by the use of politically supported loans and other incentives such as "payoffs". Checkout the leverage of major European banks (possibly 50 to 1) or the derivatives issued by the largest German bank (which possibly exceed the entire world's GDP).
    The problems effecting Greece and other European countries including Ukraine, are a result of a misguided attempt to create a European version of the "New World Order". Surely, this has now caused "exceptional problems".

  3. Varoufakis doesn't need a haircut, and neither does Greece. They could have been allowed to leave the Euro four years ago, but we was all scared. It's not too late now that we've had time to brace for it. On the other end of the sea-saw, Switzerland also just gave up their Euro target, and no collapse so far.

  4. Be very sure that Germany and none of the eastern and northern countries belonging to Eurozone would experience any "disaster" if they left together the Eurozone.
    The good news that you apparently ignore is that the introduction of a new currency had always been and will always be a perfectly reversible operation.
    The only parameter to be fixed is the initial exchange rate.
    After that the market fixes and makes evolve the exchange rate according to the concerned nation economy fundamentals and competitivity.
    Of course, because the latter are not identical between the different Eurozone countries, there will be loosers and winners.
    Guess once who the loosers will be.
    It will be countries with high debt, high unemployment, high budgetary deficit and low competitivity.
    And guess twice.
    What are the countries that fit the bill ?
    Certainly not Germany, Austria or even Estonia for that matter ;)
    All these countries could use the mark, the crown, the zloty or whatever name they would find nicely sounding.
    But for a marxist Greece .... even the rotten Syriza brains were able to understand what would happen to them if THEY left the Euro for some Drachma and that's why they would have to be dragged out of Euro kicking and screaming.

  5. And also STILL (in historical terms) the best producer of 30.5 cm heavy artillery!

  6. The difference is that (i) the Germans can actually afford their welfare system based on their steel economy, and (ii) they enacted all those reforms in the naughties. The Swiss economy is also largely dependent on Germany, and they're doing just fine!

  7. "West Germany has never paid reparations to the USSR so this lawsuit is claimed to be legally promising."

    I dont think so, its a ridiculous PR quest by a random russian MP and nothing real will come from it. And I dont think that Russia really wants to open this historical reparations can of worms, because then all Soviet satellite states will bring up 40 years of Soviet Union totalitarianism which Russia was responsible for. If you want to play the reparations game, you must be pretty much free of historical guilt yourself and Russia is anything but that.

  8. Greece has now a lot of power over their helping European states. If they decide to stay in the Euro zone we have to keep paying for them and we go down. If they decide to leave we'll never see our money back but at least we stop paying. It is for Mr Tsipras to choose... Are we all Greeks I wonder ?

  9. 'however, the "unrealized" diagonal entries of the matrix (probabilities
    of outcomes that won't come true) are never "physically" set to zero
    because their interpretation always remains probabilistic, even when the
    classical approximation becomes acceptably accurate'

    This is interesting, and might help my confusion. I always interpreted measurement as the completion two separate events:

    1) The diagonalisation of the density matrix
    2) The setting of all but one of the diagonal elements to approximatelyt 0, and one element to 1.

    Does 2) never happen? Roland Omnes, if I understand him correctly, says this is "the only point for which theory does not provide an explanation, nor a mechanism, nor a cause for what is observed".

  10. The very best way for two countries to have a peaceful relationship is to do business together. I expect Germany and Czechia to be friends forever.

  11. Congratulations to Czechia and to Pilsen for a job well-done! Skoda also has train cars running in Portland, Oregon, as you know well.
    I hope that Skoda can make the investments needed to be in a sustained top spot world wide. They do make excellent products and production costs will drop as production increases. It’s quite an opportunity, I think.
    Even the stupid environmentalists should be happy if they Skoda becomes very large. After all, they would be helping to save the planet!

  12. A nice example of waffle from our socialist spokeperson Cambadelis: "By helping Greece, the French people help themselves".... LOL!..

  13. They have already accepted France to FPIGS. Congratulations to a rosy future. ;-)

  14. Dear Gene, right, the pencil point as made by Milton Friedman. ;-)


  15. I am neither surprised nor disappointed, Lubos. I agree with almost all of your observations of my country’s current direction.
    I disagree with those in the US who say that Islam, itself, is a problem but am much more strongly opposed to anyone who is intolerant of these people’s opinion's.
    Intolerance, like corruption, is an incurable disease that can be controlled by people of good will but never entirely eliminated.
    I do certainly concur with your admiration for Germany and its people.

  16. Reality is crazier than even the crazy people can imagine:
    (Greek Court rules Greek judges' pension cuts unconstitutional)

  17. Dear Gene, I was watching The Patriot (2000) with Mel Gibson last night, about the 1776 War on Independence.

    Some of the pro-British generals were real jerks and I was rooting for Gibson and their punishment, of course.

    But at the end, I have substantial doubts about this anti-British mythology at the roots of the U.S. as a nation, of course. The king was demonized as a complete lunatic even though virtually no one in the U.S. had ever seen him, and even what they heard was so extremely distant and indirect - with messengers in the middle - that it couldn't have been trusted.

    And of course that continuing with the unified British empire made some sense, too. But what I want to say is that this U.S.-U.K. relationship is somewhat similar to the German-Czech one. There is some "big conflict" in the history but it isn't really bringing hostile relationships because it was an episode in which the polarization was forced upon the two nations, but they still think very similarly.

  18. Wow. It often looks like these people really don't get the simple point that the public sector employees may only live as luxuriously as their nation - whom they are serving - is able to produce.

    The arrogance behind this "entitlement" is particularly stunning because they decide about their own salaries. Of course that even lawmakers everywhere etc. sometimes decide about their salaries, and usually raise them etc. but saying that it would be "unconstitutional" for them to copy the dropping incomes around is a tough caliber. They are effectively converting their constitution to a piece of dirty toilet paper serving personal greed, too.

  19. Gosh, they really don't get it.... Never will. Imagine the corruption after a few months with this government.

  20. So here I am writing my thesis regarding the viability of monetary unions and their role in 21st century economy, and while searching for information regarding Greece’s current situation I run into this blog.

    Normally I would immediately disregard such a ridiculous looking snowflake infested website, however for some reason I am compelled to read. It is just plain surreal, I
    mean come on, a Czech guy (self-proclaimed physicist) that looks like a clown is going on and on and on with absurdly lengthy posts about the situation in Greece? My curiosity got the better of me, I admit.

    The heck with it, I already lost 10 minutes of my life reading this sheer nonsense, so I might as well spend another 5 minutes to comment.

    You sir are 100% clueless about economics and political science, your facts are wrong, the hypothesis you try to defend is ridiculous and the instruments you use to try
    and correlate your fictional facts and reach to logical conclusions are just stupid.

    Simply put you are saying that a 10 million country like Greece (which happens to be a made-up Balkan country that is a protectorate from its very existence) tricked
    the western world repeatedly for 100s of billions. The Greek borrowed money so they can all live like princes and everybody in the western world was coerced into
    burning their hard-earned cash into the black hole of the Greek economy. This is the dumbest economic analysis I have read in ages.

    Here is some advice.

    1) Get a life, obviously you don’t have and you spend your days writing nonsense.

    2) Stick to physics, economics is not your thing.

    3) If you got a personal grudge with Greece (got molested while on vacation there or something) go see a psychiatrist, you can’t self treat your condition by blogging.

    Best Regards,

  21. Not so dear individual, I deliberately approved your obnoxious, nasty, dishonest, personal comment in order to amplify all my points.


    Your IP address is which means Athens. Stupid yet aggressive scum like you should beg on the street. In Athens, scum like you is being hired to write a "thesis on economics". If you don't understand some of the basic wisdom that was written in this blog post of mine, then your understanding of economics is worse than that of a schoolkid.

    For some reason, it's enough in Greece to work on a degree in economics. Your nation is really, really, really fucked up.

  22. We do not murder people over loans. They know it. Just kidding. You cannot steal someone's apples, sell them back to them, and give them a loan to pay, and expect repayment. Reorganizing trade, necessitates societal sustaining payments until they have a plan for production,then they can default, and keep above board. The banks know this and undoubtably have taken it into consideration.

  23. Sorry but I find pretty much every single sentence in your comment weird.

    If someone fails to repay a loan, he won't be killed but all his non-essential assets will be confiscated by the executor and used to repay as large a portion of the liability as possible.

    The bankrupt person may keep his or her underwear. Personal bankruptcy is a "compromise" solution that allows the bankrupt person keep some assets but they are still very small and in practice a negligible fraction of what they have.


    The bankruptcy may be prevented by a previously consensually agreed reorganization of the debt but it's up to the borrower to invent a plan that will be acceptable for both sides and if one doesn't emerge, the full-fledged bankruptcy and confiscation of the remaining assets has to proceed.

    Marriage isn't a loan and no one was talking about actively killing the borrower so your comments about the murders of divorced wives is doubly off-topic.

    Moreover, your idea about what happens with the assets after divorce is confused and deeply misleading, at least in most of the civilized world.

    The idea that banks or lenders are responsible for someone's life's being sustainable is how it may work in Cuba or Lalaland but surely not in the civilized world. A country with such rules for loans would pretty much instantly collapse.

  24. It's similar to what?

    We are talking about the Greek debt - the debt of the Greek nation, as represented by the Greek government. The Greek debt is the accumulated money in the loans that Greece owes and the conceptual logic of *everything* surrounding these loans is completely analogous to the loans a person makes to buy a car or a house (mortgage).

    What does it have to do with war reparations - or some totally incoherent sentences about reparations that you wrote down?

  25. Payments extended to governments, are not the same as civil loans. Germany, between the wars, had reparations imposed on them, they could not obviously repay without some trade agreement that permits it. This might be viewed as similar, since these countries lost their production through the agency of the banks..

  26. "bonds that never have to be repaid – or bonds with (almost?) no interest or both." So he's a Muslim, so what? Replace the Greek Orthodox Church with Sunni Islam, then claim EU repaymetn demand is religious discrimination.

    Zimbabwe, the breadbasket of Africa, expelled its Caucasian farmers. Grain production plummeted (bad luck), causing famine within Zimbabwe. The solution was, in retrospect, Grecian,


  27. Why don't you explain what is going as an expert on instead of going on and on about nothing.
    Anyway, no matter how our views differ from Lubos, he is a well known physicist and not self proclaimed, so maybe you should abstain from things you don't know about.

  28. Andrew: I have to agree with your view that economics and, even more so, finance and the theory of money, are not Luboš 'thing'. He's good on climate tho'. And always an entertaining read, which is why I Iook in here quite often.

  29. This maybe a good advice for Greece.

    Innovate constantly to stay ahead:


  30. Your reference frame is the Czech nation, so you are smug. The US, also cannot pay its debt, and with a reduction in Chinese output not related to oil, the US is forced to reduce expenditures, but they cannot ever pay down the debt without a new trade agreement and a default.

  31. "...I am writing my thesis regarding the viability of monetary unions and their role in 21st century economy..."

    I'm very interested. Forget about Greece for the moment, what's your view on the euro itself, the reasons for its introduction and the likely prognoses, both at its inception and today? I really would like to know.

    Incidentally, and out of courtesy, perhaps I ought to let you know that I have a view on this and it hasn't changed over in four decades. I won't bore you with the details but I will just say this: I'd like to see its architects and all those who assisted in bringing it into being all tried for treason, forfeiting all personal assets, being hanged, drawn and quartered, and with their severed heads eventually stuck up on spikes to rot and feed the crows, pour encourager les autres but mostly for sheer bloody revenge. History shows such acts are necessary from time to time. Meanwhile the rest of their carcasses would be fed to the pigs.

    However, I don't want my view above to affect how you respond to this as I want to know YOUR view.

    P.S. Dear Luboš, I beg some forbearance on you part as I am interested to hear what Andrew has to say in this. If you get my drift? ;)

    Which I know you do! :)

  32. If Greece borrow money using Islamic finance it would very good for it, Islamic finance system is very strict, it does not allow borrowing willy nilly.


  33. OT, but of interest re. SE UA, NAF has got jets, also (and this is now well-verfied) the Debaltsevo 'kotel' is now sealed:


  34. Bring back the Turks, get some real value work out of the Greeks. Alas, the first round lost most Macedonian blondes and redheads.