In this chapter, Varoufakis describes his relationship with Syriza through the period of 2011 - 2015. Syriza is the Greek left wing party that would eventually come to power in 2015 with Alexis Tsiprias as their leader. Throughout this period Varoufakis regularly meets and communicates with Tsipras, advising him and giving his analysis of the evolving economic situation and how to best get Greece out of debtors prison.

  • The Greek banks in 2011 were bankrupt. In order to get access to bailout money offered by the EU they needed to show external capital investment. In order to show the EU that they were getting investment they did the following:
  • Two bank owners would get together in order to generate capital investment. The first bank would take some of its money and loan it to an offshore account belonging to the second bank. The second bank would then invest that money with the first bank. So the first bank now has capital investment to show the EU. The second banker would do the same thing. Now both banks were eligible for the bailout money from the EU, and they would both quietly write off the loans they made to the offshore accounts.
  • The second bailout in 2011 included a €100bn haircut of the debt, not any of the debt held by the troika, but that held by private individuals, Greek pension funds and the Greek banks. In this bailout €32.8bn of Greek bank debt was written off. However for the banks that could prove capital investment they received €41bn from the new bailout.
  • The troika forced the Greek state/people to borrow money from all the other EU nations (and globally through the IMF contribution), which it then lent to the Greek banks to cover their losses, effectively moving private bank losses onto the public ledger.
  • In 2011 Varoufakis presents two arguments to Tsipras to help Greece.
  1. The state debt and the bank debt must be decoupled. He argues for the Greek banks to be handed over to the EU, owned by the EU people who had recently bailed them out. This way the failures of the banks would not drag down the state, and any failure of the state would not impact the banks. It would also mean the Greek State would not be responsible for the money loaned to the Greek banks by the EU.
  2. Once decoupled from the banks, the state can focus on repaying the restructured debts to the EU when the economy gains some level of momentum.
  • Then comes Varoufakis consistent message, seemingly throughout the book. Syrzia should not seek Grexit, they should seek to negotiate a debt restructuring scheme that would allow Greece to recover its economy and Syriza, if in power, should not take any more bailout loans from the EU, whatever the cost, even if that cost is Grexit.
  • In 2012 there is a convoluted procedure for the Greek government to receive money from the ECB until the bailout can be finalised, as previous bailout repayments are due imminently, but the government has no money. The ECB is not allowed to directly lend money to the Greek government. So this is what they did:
    • The ECB granted the bankrupt banks of Greece to issue new IOUs worth €5.2bn for investors to purchase.
    • As no investor would buy an IOU from a bankrupt Greek bank, they took the IOUs to the Greek finance minister to stamp with the bankrupt state's guarantee.
    • To be clear: the bankrupt banks now have IOUs with a face value of €5.2bn that are guaranteed by a bankrupt state, so they are still worthless and will not be bought by any investor. The banks take their IOUs to the Greek central bank (a branch of the ECB) and use them as collateral to borrow cash @ 70% of their face value, €3.5bn. Note the ECB has not lent any money to the government, but it's Greek branch has lent money to the Greek banks.
    • The Greek state now issues it's own IOUs, in the form of Treasury bills, for €3.5bn, which of course no one will buy, except for the Greek banks, handing over the money they just got from the ECB to the Greek state.
    • The Greek state uses this money to make the next €3.5bn payment on the first bailout.
  • I'm not a financial expert, but it seems to me, in the process of making a payment on the first bailout, the Greek banks have created a debt of €5.2bn to the ECB (via Greece's central bank) in order to get €3.5bn of cash. The Greek state has then created a debt of €3.5bn to the banks in order to make its bailout repayment. I don't know if that works out as €8.7bn or €5.2bn borrowed to repay €3.5bn. Regardless of the total sum of debt here, we should reach for the much beloved, oft incorrect, comparison of national finance with personal finance. In this particular case I think the comparison is apt, you should never get a loan to make a repayment on your existing loan (credit card to pay off home mortgage).
  • In March 2013 the EU closes down all the banks in Cyprus, and takes any money from savers with over €100,000 in the banks, all in order to save Cyprus from exiting the Euro. Varoufakis informs Syriza leadership that this tactic will be used against Greece the day after they come to power.
  • At this point Varoufakis has convinced Tsipras that Grexit should not be an objective of a Syriza government. He presents Tsipras and other Syriza leaders his 5 pronged plan to save Greece.

1. Keeping the ECB at bay and the banks open

This is the most interesting part of the plan. It all relied on leverage the Greek government would have over the ECB provided by none other than the German central bank, the Bundesbank. In 2011 - 2012 the head of the ECB, in a desperate attempt to stabalise the Euro, had indicated that the ECB would buy all debt (bonds) from failing European economies, Italy, Spain, Portugal etc. The Bundesbank were outraged by this and actually sued the ECB. When the ECB was set up, part of the its charter stated that it was not allowed to facilitate the transfer of losses from economically weaker nations (Greco-Roman) onto economically stronger nations (🇩🇪Germany🇩🇪)*. The outcome of the legal case was that ECB could continue to buy the bonds of the European economies so long as it didn't lose money doing so, therefore saving the Euro, without technically transferring any losses onto Germany.

Unfortunately for the ECB in 2010 during the 2010 - 2011 Securities Market Programme (SMP), which was an earlier version of the bond buying exercise, it had bought bonds from Greece. Varoufakis proposed that Syriza should indicate to the ECB that should they attempt to shut down the Greek banks in order to make Syriza sign a new bailout agreement, Syriza would in turn give those bonds a 'haircut', meaning cut their value, which would cause the ECB to be in breach of the decision in the case with the the Bundesbanks, which said they could not lose money on any of the bonds bought from EU nations. The knock on effect could be that they would not be able to buy any more debt from EU nations and the Euro would probably collapse.

2. Defanging the bankrupt bankers

By handing the banks over to European tax payers to run and nurse back to profit.

3. Sensible fiscal policy and debt restructuring

Aim for a modest 1.5% government surplus, but demand help from the EU with debt restructuring so that a 1.5% surplus would allow the economy to grow and let them meet their restructured debt repayments. Here there was a requirement during the negotiation to keep the government going by any means necessary including high taxes for the highest paid and reducing the most generous pensions.

4. Emergency plan to combat the humanitarian crisis

Varoufakis wanted to implement an ID card debit system which would give the poorest in Greek society the ability to buy necessities at supermarkets and pay for shelter and electricity. Essentially electronic, low cost, benefit system without the need to issue cash directly.

5. Modest proposal for rendering the Eurozone viable

Varoufakis says Syriza should go to Brussels and champion the poor and the indebted populations throughout Europe and work with the EU to make the Eurozone viable using the proposals in a paper that Varoufakis and other economist had been working on for a while called Modest Proposal for Resovling the Euro Crisis.

In this summary I have glossed over the political intrigue and personal side of the story. While I find these parts interesting, I won't want to recall them at a future date. For example whether Varoufakis moved to the US for a period of time or how his academic friend seemingly betrayed him in order to take powerful positions within the Troika backed technocratic government.

* This was literally the only way the German nation would agree to share it's treasured Deutschmark (the Euro) with the riff raff of Europe.