The end game or a new beginning for Greece? We have seen all this before

Ever since I started my blog in 2011 Greece has been on the verge of banking crisis, sovereign default and euro exit. It now looks as if we might get all of that very soon and very quickly.

This is from CNBC today:

Talks fell apart between the Greek government and its creditors, and European officials said Athens’ bailout program will expire on Tuesday.

Euro zone finance ministers met to try and thrash out a reforms-for-rescue deal for Greece after the country’s prime minister threw a curveball of a referendum on the deal late Friday night. During Saturday’s meeting, the finance ministers rejected Greece’s request for a one-month bailout extension, meaning that Athens could soon face very serious economic issues.

“It’s not a question to see what might happen on Monday. In terms of a crisis (for Greece), the crisis has commenced,” Irish Finance Minister Michael Noonan said after the day’s second meeting.

Greece is due to pay the International Monetary Fund 1.5 billion euros Monday and without a deal this weekend risks missing that payment.

I can’t say I am surprised we are here now – maybe I am surprised that it has taken this long – but the rest is unfortunately not that surprising to anybody who has studied economic and monetary history. We have seen all this before.

I wrote about that already back in 2011:

The events that we are seeing in Greece these days are undoubtedly events that economic historians will study for many years to come. But the similarities to historical crises are striking. I have already in previous posts reminded my readers of the stark similarities with the European – especially the German – debt crisis in 1931. However, one can undoubtedly also learn a lot from studying the Argentine crisis of 2001-2002 and the eventual Argentine default in 2002.

What this crises have in common is the combination of rigid monetary regimes (the gold standard, a currency board and the euro), serious fiscal austerity measures that ultimately leads to the downfall of the government and an international society that is desperately trying to solve the problem, but ultimately see domestic political events makes a rescue impossible – whether it was the Hoover administration and BIS in 1931, the IMF in 2001 or the EU (Germany/France) in 2011. The historical similarities are truly scary.

I have no clue how things will play out in Greece, but Germany 1931 and Argentina 2001 does not give much hope for optimism, but we can at least prepare ourselves for how things might play out by studying history.

I can recommend having a look at this timeline for how the Argentine crisis played out. You can start on page 3 – the Autumn of 2001. This is more or less where we are in Greece today.

I wrote that back in 2011. It has been four more years of economic and social pain for the Greek population so you got to ask yourself – just how bad can the alternative be?

And finally a – highly speculative – note: If we in fact get Grexit then my forecast is that we will have a couple of quarters of negative GDP growth (as a result of the bank run we already have seen), but then Greece will see the mother of all recoveries as the New Drachma plummets (likely 70-80%).

This will be the positive result of ending the monetary strangulation of the Greek economy. However, structurally and politically it is hard to be positive – and hence Greece will then again within the next decade face another crisis likely in the form of weak growth and this time around high inflation as public finance problems will likely remain unsolved. At least this is how it played out in Argentina…


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  1. Ravi Varghese

     /  June 28, 2015

    I agree that Greece would have “the mother of all recoveries”, but it’s interesting how many people focus on the exports mechanism alone, saying that a depreciated New Drachma won’t stimulate Greek exports other than tourism.

  2. markD

     /  June 28, 2015

    “If we in fact get Grexit then my forecast is that we will have a couple of quarters of negative GDP growth”

    Who is “we”? Greece is a tiny economy. WHO will have a couple of quarters of negative GDP growth?

    • Negative growth in Greece…I don’t think this will have any major near-term import on the euro zone overall.

      • markD

         /  June 28, 2015

        Thanks Lars. Sure seems like the media and poltiical play is all a heck of a hullaballoo then, all the noise the first time around and this. And the way their negotiations and loan deal are going with Russia to get the Russian gas pipeline through Ukraine re-routed, Greece will be an easy loan-rescue new-Russian-satellite anyway and can look to Russia for floating-funding and ultimately puppet-state status from the Russians for not a lot of Rubles anyway. I’m sure the socialist-communist beliefs and format of Greece fits very much more will Russia anyway. What do you think about that?

  3. “…but then Greece will see the mother of all recoveries as the New Drachma plummets (likely 70-80%).”

    There are a couple of big assumptions in the previous phrase that you aren’t making explicit:

    1) You’re assuming Greece can actually debut a positively-valued monetary unit in the midst of chaos.
    2) Let’s agree that it can. You’re assuming that people will choose to use that new drachma as a unit of account, i.e. that they will de-euroize sticker prices. We know from African and South American examples that it can take years to de-dollarize. A plummeting drachma is no use if Greeks are still setting prices in euros.

    But if your assumptions are right, I agree with you.

  1. Greece’s continued suffering | The Market Monetarist

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