The conversation was going nowhere. But I still believed our friendship, one of the few remaining bridges between opposing camps, was an asset that could be harnessed for the greater good. Just before we parted, I said that the two of us had a responsibility to remain friends. He seemed to be heading towards some lofty government position whereas my ideas were taking me in the other direction, towards the opposition. But above all else we should not allow ourselves to be turned against one another at a human level. He nodded in agreement and we parted ways with a hug that, thinking back, was on the lukewarm side.
Two months later, just before the June 2012 election, the University of Athens Economics Faculty was considering my application for leave without pay, so I could return to Austin and continue to teach there. Such a request was perfectly normal and the faculty’s vote to accept it little more than a formality, but this application occasioned a tumultuous debate. The reason was that Stournaras had presented the faculty with the following question: why should the University of Athens grant me leave to return to the United States when my purpose there was to collaborate with George Soros in the shorting of Greek bonds?
To short a government bond means to make a bet that its value will fall, effectively speculating that the country’s public debt will become unattractive to investors. If enough people spend enough money shorting a bond, confidence in the bond falls, it loses value and the short becomes self-fulfilling. Stournaras’s bizarre accusation was that I was speculating on the New York money markets in cahoots with George Soros in order to profit from a downgrade of the Greek state’s creditworthiness.
Allegations such as this – that I was a self-serving opportunist working towards bankrupting the Greek state – were a favourite of my opponents. Anti-Semitic rightist conspiracy theorists had attacked Soros as a Jew for leading a campaign to bring Orthodox Christian Greece down. From 2010 onwards, when I started arguing that the Greek state was bankrupt and advocated embracing our bankruptcy, these circles insinuated, and later proclaimed, that I was his stooge. The first time I heard the accusation, in 2011, I was merely amused. Now Stournaras had added a whole new twist to these ludicrous charges, presumably based on my account of my discussion with George Soros in Berlin.
The simple facts are that I have never bought or sold – let alone shorted – a bond or a share in my life, and I had never before met or communicated with Soros except at our shared panel event in Berlin in the spring of 2012.
Upon hearing of his outrageous allegation I picked up the phone, seething with anger, and called Stournaras to ask, as calmly as I could, why he had made it. He apologized immediately, citing ‘stress’ and the ‘bad influence’ of media reports that I was working for Soros. I said I accepted his apology, but in my heart I knew Stournaras had crossed the Rubicon to a terrain incapable of supporting any bridge between us.
A few days later, after the June 2012 election ushered in Antonis Samaras’s coalition government, I heard on the news that Stournaras was to be the country’s next technocratic – unelected – minister of finance. He stayed in the job for two years, using his tenure to implement the loan conditions of the second bailout as faithfully as he could – so much so that the swingeing austerity introduced in wave after wave of cutbacks and tax hikes accelerated the recession, terminally destabilizing the Samaras government. Less than two years after its election victory, in the May 2014 European parliamentary election, Samaras’s New Democracy received fewer votes than Syriza and subsequently fell well behind in the opinion polls. A month later the term of the governor of Greece’s central bank expired, and Samaras used the opportunity to appoint Stournaras. Were the establishment parties to lose the next general election, at least they would leave behind someone at the central bank who was willing and able to undermine the incoming Syriza government. Which is precisely what Stournaras did.
The hotel café where we met in April 2012 had, as things turned out, witnessed our friendship’s last gasp.
Success story
While Stournaras was taking over at the finance ministry during the hot summer of 2012, the folks at the EU and IMF were trying to solve a little conundrum of their own. The loans for the second bailout had been delayed by the twin Greek elections and would not start arriving before the autumn. Unfortunately, Athens was meant to send just under €3.5 billion to the ECB, one of its many unpayable debt repayments, on 20 August. How could that happen given that the coffers were empty?
When the troika has a will it discovers a way. Here is the wizardry they used to conjure up the necessary illusion, narrated in slow motion so that the reader can fully appreciate the magic.
• The ECB granted Greece’s bankrupt banks the right to issue new IOUs with a face value of €5.2 billion – worthless pieces of paper, given that the banks’ coffers were empty.
• As no sane person would pay money to buy these IOUs, the bankers took them to the finance minister, Stournaras, who stamped on them the bankrupt state’s copper-bottomed guarantee – in reality a useless gesture since no bankrupt entity (the state) can meaningfully guarantee the IOUs of another bankrupt entity (the banks).
• The bankers then took their worthless IOUs to the Central Bank of Greece, which is of course a branch of the ECB, posting them as collateral for new loans.
• The Eurogroup gave the green light to the ECB to allow its Greek branch to accept these IOUs as collateral and, in exchange, give the banks real cash equivalent to 70 per cent of the IOUs’ face value (a little more than €3.5 billion).
• Meanwhile, the ECB and the Eurogroup gave Stournaras’s finance ministry the green light to issue new Treasury bills with a face value of €3.5 billion – IOUs issued by the state, which of course no investor would touch in their right mind given the emptiness of the state’s own coffers.
• The bankers then spent the €3.5 billion they had received from the Central Bank of Greece – in fact from the ECB itself – when they pawned their own worthless IOUs in order to buy the state’s worthless IOUs.
• Lastly, the Greek government took this €3.5 billion and used it to pay off … the ECB!
Such ingenuity propels Art and Conn’s logic to stunning new heights. It eclipses many of the shenanigans that made Wall Street bankers the object of worldwide opprobrium. It adds a whole new dimension to Walter Scott’s famous lines ‘Oh, what a tangled web we weave: / When first we practise to deceive!’ Then again, without such tangled webs, how could the world be deceived that Greece was solvent and on the mend, now that the right government had been voted in? But as soon as one such web had been woven another became necessary.
Around the same time as this was going on, Christine Lagarde was being put under pressure by non-European IMF member states – countries such as Brazil, India, Japan and Malaysia – to stop the charade and tell Berlin in particular that unless Greece’s debt was restructured the IMF would walk away from the whole mess. In the autumn of 2012, as the second bailout was being finalized, Lagarde made a remarkable move revealing quite how intense this pressure had become: she approached Stournaras suggesting that they walk together into the Eurogroup and demand from Wolfgang Schäuble, Germany’s finance minister, a drastic haircut of Greece’s debt.
But instead of jumping at this unique opportunity to forge an alliance with the IMF, Stournaras informed Schäuble of Lagarde’s proposal to band together against him and asked the German finance minister’s permission to accept it. Naturally, Schäuble instructed Stournaras to ‘forget it’. Which Stournaras proceeded to do.26
At that time I happened to be attending a banking conference in the United States. There I bumped into one of the IMF’s bigwigs. ‘What was he [Stournaras] thinking?’ he asked angrily. ‘Do these guys have a better idea of how to make ends meet? Is there a plan? I just don’t get it.’
They did have a plan, I informed him. Except that it was a plan for staying in government under the pretence that the country was on the mend. Its code name was (I like to think) Greek Success Story.
The Greek Success Story plan had four sequential elements: the Merkel Boost, the Speculative Bubble, the ECB Put, and the Pretend Debt Restructuring. The first of these, the Merkel Boost, was already in place. In September 2012 Chancellor Merkel, egged on by Mario Draghi, the ECB’s president, and probably Beijing, stopped over in Athens on her way from China to Berlin.27 In the few hours of her stay she patted Prime Minister Samaras on the back, signalling to the world media that Grexit was off the table and that Greece, having chosen the right government, would be allowed to stay in the eurozone.
This brief piece of theatre was sufficient to create a minor rally in Greek property values, which had gone through the floor during May and June 2012 when the world was abuzz with talk of Grexit in the face of Syriza’s rise and the hung parliament in Athens. As previously explained, if Greece were bundled out of the eurozone, all prices would be redenominated in new drachmas, whose exchange rate would instantly plummet, shaving considerable value from shares, villas and yachts. But markets have a tendency to overreact. When they fall they fall inordinately, and when a good news story arrives they rebound unreasonably. The Merkel Boost was just such an event: a market that had almost died suddenly rallied with irrational exuberance.
The plan’s second element, sanctioned of course by the troika, was to turbocharge this exuberance by creating a Speculative Bubble around the Greek banks. The idea was simple. As financiers began to look at Greece as an underpriced investment opportunity thanks to the Merkel Boost, the government would offer them a deal they could not refuse: buy shares in Greece’s bankrupt banks now, and if their price rises in the future you will be guaranteed more shares at the original low price, while if they fall your losses will be generously absorbed by the Greek taxpayer. What financier could resist?
The idea here was to create a flow of speculative money into Greece’s dilapidated banking system and to present it as evidence of recovery, thus attracting other speculators in real estate, the natural ally of any financial bubble. Having demonstrated to Berlin and to the ECB that the new troika-driven government was turning the ailing ship around, Athens would then hit the ECB with its request: back our debt just as you are backing Ireland’s, Portugal’s, Spain’s and Italy’s.28 If Prime Minister Samaras and Finance Minister Stournaras could secure this backing, there would be nothing to stop them from selling new Greek debt to private investors: even if Greece were sinking further into the quicksand, investors’ bonds would be guaranteed by the ECB. Greek voters could then be told that their country was once again trusted by international investors and ergo no longer bankrupt. This was their plan’s third element, the ECB Put.
The fourth and last element of their plan was a wholly inadequate yet symbolically important Pretend Debt Restructuring. In a Eurogroup meeting that took place in November 2012, around the time Stournaras was giving Lagarde the cold shoulder, Schäuble rewarded Stournaras with the promise of a possible, albeit superficial, debt restructuring by the end of December 2014. The condition was that Athens would remain loyal to the troika programme, complete it as agreed and balance its books.29
The hope was that these four elements of the Greek Success Story would produce and maintain a feeling of recovery that would reach its climax by late 2014, just in time for a new election in early 2015.30 But after a strong start, with the financial variables reflecting a robust Merkel Boost and a promising Speculative Bubble, the government’s plans got stuck in the mire of an unforgiving reality. For while the variables that affect the bottom line of Wall Street speculators such as the infamous John Paulson – who rushed in right on cue to profit from the bubble around Greek bank shares – were flourishing, the variables of daily life for normal Greeks were becoming even more unbearable.
The government began beating the drum for the Greek Success Story in early 2013. That year Greeks’ total income fell by a heart-wrenching margin of more than 5.6 per cent, a figure that would have caused a revolution in countries such as Britain, Germany or the United States. In Greece it was the fifth successive year of precipitous falls. It wasn’t just the poor who were unconvinced by the government’s story, though. In a bid to produce the primary surplus it had promised Schäuble in return for its debt restructuring the following year, the government introduced a land tax that lost it the support of the upper echelons of the middle class, who might have remained asset rich but whom the recession had rendered income poor like everyone else. A new joke did the rounds in which parents threatened to bequeath to their offspring all their property if they didn’t behave.
The government presumably then realized that its story was falling on deaf ears because around this time influential conservatives in Prime Minister Samaras’s inner circle considered approaching the Golden Dawn party to bolster its support, even seeking an electoral pact with the Nazis, albeit in a rebranded incarnation.
In April 2014, with the opinion polls firmly against it and the European parliament elections looming, the Samaras government launched the ECB Put. With the behind-the-scenes assistance of the ECB, which hinted at its willingness to back the government’s new bonds, the finance ministry proudly celebrated its return to the private debt market and the end of bankruptcy, borrowing a few billion from institutional investors who had agreed in advance to participate in the charade. It fooled no one. Investors and voters could see that incomes were continuing to shrink and debts to rise. A month later, in the elections to the European parliament, Syriza topped the poll. For the first time the Greek Left had won a nationwide election, albeit a European poll but paving the way for the real thing in early 2015.
In one of my meetings with Germany’s finance minister, after the Greek Success Story had collapsed in January 2015 and Syriza were in government, I asked him out of curiosity and without expecting an answer, ‘Wolfgang, when did you decide to cease supporting [the] Samaras [government]?’
‘In June 2014’ was his unhesitating and disarmingly honest response.
It made sense. Samaras had lost the European parliamentary election of May 2014 despite the boost he had received in April from the ECB-mediated bond sale. In Schäuble’s eyes Samaras was a lame duck. Schäuble must have been sick and tired of worrying that every time a bill went to the Greek parliament Samaras’s paper-thin majority would evaporate. Moreover, after his defeat in the European elections, Samaras lost some of his zeal and began to drag his feet when it came to implementing the troika’s directives. Schäuble was no doubt mightily displeased. No wonder he gave up on the Samaras government that month.
It was no accident that June 2014 also witnessed Stournaras’s move from the Ministry of Finance to the newly vacated governorship of the Central Bank of Greece. He too was abandoning a sinking ship.
A five-pronged strategy
Throughout 2013, ensconced in my Austin sanctuary, I was doing all I could to help Alexis develop a credible strategy while steering clear of Syriza’s internal struggles. The year began with an opportunity to help him win friends in Washington, DC, where he was due to address the prestigious Brookings Institution. Pappas asked me to write the speech, which I was glad to do, using it to convey to American policymakers two now familiar but fundamental points. First, that Syriza was a pro-European party which would do its utmost to keep Greece in the eurozone, but that that did not mean accepting failed, self-defeating policies; to stay in the eurozone, indeed for the eurozone to survive, a new programme was needed that placed debt restructuring first and foremost, followed by reforms that undermined the Greek oligarchy’s stranglehold on the economy.31 Second, the United States had nothing to fear from a Syriza government’s economic or foreign policy, a point that I reinforced a little later in a New York Times op-ed jointly written with Jamie Galbraith.32 As previously mentioned, my thinking was that when we were about to open a front against Brussels, Frankfurt, Berlin and Paris, a second front against Washington was pointless, but of course many in Greece, including in Syriza, took the opportunity to portray me as an American stooge.
Two months later, in March 2013, news reached me from Cyprus that stopped me dead. Immediately I sat down to write a long angst-ridden email to Pappas, for his and Alexis’s eyes. ‘I implore you to take seriously what is happening in Cyprus,’ I wrote. ‘Think of it as a dress rehearsal of what the troika will do to you the day after you win power.’ A new government had just been elected in Cyprus. The following day the troika closed down the island’s banks, dictating terms to the new president for their reopening. Incredulous but unprepared, the new president had signed on the dotted line.
‘They are trying this tactic out today in Nicosia,’ I explained, ‘not because Cyprus is that important but rather because of its relative unimportance, which makes it the perfect shooting range to test their new bazooka on before using it against you, against our comrades in Spain, Italy, etc. They are doing this for its demonstration effect, so that you know that the troika is willing and able to shut down a country’s banks to impose its will upon the government – especially a newly elected one that demands some sovereignty back. Watch and learn!’
The next day Alexis and I spoke on the phone, his voice conveying considerable trepidation.
‘Is there anything we can do to deter them?’ he asked.
‘Yes, but you will need not only the right deterrence strategy but also a tightly knit team to work on making it operational,’ I replied.
‘Send me a proposal’ were his last words.
I promised to deliver it in person.
In Athens that May, in his spacious office in Parliament House, I met Alexis’s economic team for the first time. As well as Pappas and Dragasakis, the shadow finance minister, it included two other Syriza members of parliament whom I knew and liked well: Euclid Tsakalotos, a dear colleague at the University of Athens, and George Stathakis, an economics professor from the University of Crete. At that meeting I presented the proposal Alexis had requested, which was an enhanced version of the strategy paper I had provided in June 2012: A Five-Pronged Strategy for a Sustainable Greece in a Sustainable Eurozone.
The mood in the room was ebullient, which confirmed that my earlier efforts to dissuade Alexis from turning Grexit into an objective, or from using it as a threat, had not been wasted. While I lost a great many friends on the broader Left and within Syriza, who never forgave me for my role in expunging Grexit from Syriza’s policy objectives, Alexis’s inner economic sanctum was evidently keen to pursue a viable solution within the eurozone. The purpose of the Five-Pronged Strategy was to persuade them that this was not just desirable but actually possible, that a Cyprus-like coup could be avoided and to propose how it might be done. First came the deterrence strategy.
1. KEEPING THE ECB AT BAY AND THE BANKS OPEN
From late 2012 onwards, Mario Draghi, the ECB’s wily president, managed to hold the creaking euro together by promising to buy mountains of debt from Europe’s failing economies – Italy, Spain, Ireland and the rest – in the form of government bonds.33 Despite securing Angela Merkel’s green light for his plans, Draghi’s greatest foe was the German central bank, the Bundesbank, whose president challenged Draghi’s right and authority to buy potentially bad Graeco-Roman debts – indeed, doing so directly was in violation of the ECB’s charter and Draghi had had to come up with some ingenious methods to circumvent it. The Bundesbank took Draghi to court over the matter.34 If Draghi’s promise to buy such debt were consequently to vanish in the face of this formidable legal challenge, then the only thing keeping the euro alive would be gone. The Bundesbank’s argument against Draghi was that he had no legal basis for accepting losses from government bond purchases. This gave any Greek government significant leverage because tens of billions of Greek government bonds remained on the ECB’s books: these had been purchased by the ECB under its previous President as part of the Securities Market Programme (SMP) between 2010 and 2011. My advice to Syriza was that if the ECB threatened to close Greece’s banks their government’s response should be unilaterally to haircut the so-called SMP bonds – thus strengthening the Bundesbank’s legal challenge to Draghi’s plan to buy French, Italian, Spanish, Irish and Portuguese bonds in order to save the Eurozone – and they should make this intention clear to him. This would make Draghi very reluctant to do to Greece what had been done to Cyprus.
2. DEFANGING THE BANKRUPT BANKERS
