Wednesday, July 1

Greek tragedy unfolding

The Greek tragedy is gaining in momentum as yet another milestone passed with an official debt default and ominous signs the government coffers are empty.
Their PM has bailed out of talks with the EU and IMF and called for a July 5th referendum, seeking to convince voters a no vote against the EU proposals will strengthen his hand in negotiating a better deal in exchange for additional bailout funds of 15.3 billion Euro. Unsurprisingly the referendum has not impressed the EU and initially spooked global markets as the fear of a Greek exit might lead to contagion to other weak links in the Euro zone and to banking collapses. A Greek default would cause Greek banks into bankruptcy and their losses would spill over and effect the solvency of European banks, particularly those located in Germany and France, who hold about over €34 billion in Greek debt. But this is dwarfed by the governments of the euro zone who are owed 184 billion. 

The Greek PM is banking upon this fear in this high stakes game of brinkmanship, thinking the EU will cave in and accept less austere measures than are currently demanded.
Although his view has gained some traction I would not be surprised if a yes vote carries the day and the current government is even ousted from office. 
Moving outside the Euro zone a small player such as Greece is hardly going to make any impact so that my concern would be for the local citizens whose savings and capital would be decimated. At the time of writing, the Greek banks are all closed and citizens are restricted to €60 to be taken out of an ATM at any one time. Whilst emergency services are exempt as time runs on stocking and purchasing of goods will become more difficult to further impact upon this beleaguered economy.
Bare in mind the Greek banks were only currently able to operate because of ECB support amounting to cash injections of 100 billion Euro. Now that Greece has defaulted on its €1.5 billion payment to the IMF, the bailout program has come to an end.
The interesting point is 70% of Greek citizens want to remain in the Eurozone but only a smidge over 50% want to stay if it involves accepting the current austerity package on offer. I think one could argue the country would be better off accepting the current package and press on with negotiation for some form of debt forgiveness in the longer term in relation to the $320 billion owing. It is becoming increasingly obvious Greece is never going to be able to repay the debt or even afford the interest bill and some form of debt haircut will have to be negotiated for it to remain as a viable member.  
Whereas if Greece exited this would require a reinstatement of the drachma, with the appealing prospect of ending the misery of austerity measures. But this appeal would be short lived as reality sinks in, for without any reserves, the only option would be to print more currency and allow for a substantial devaluation to encourage exports and lower costs for tourists. In the meantime the country would be plunged into poverty with a falling drachma resulting in hyperinflation to decimate citizen’s savings and capital. In the longer term recovery of sorts would emerge, but only after a prolonged period of adjustment which would be extremely painful for its citizens.
Looking back
One might well ask how on earth Greece managed to reach reach such a precarious position and what role the EU had in failing to ensure to EU standards of performance were maintained.

Greece has suffered from very poor governance stretching back many years where tax seems to have become an optional extra.
But the seeds of this tragedy had its nemesis in 2001, when Greece first adopted the Euro as its currency. The beginning could not have had a less auspicious start as it initially was predicated on hiding the excessive Greek debt levels to gain entry to the Euro Zone. The authorities entered into a complicated transaction with the help of Goldman Sachs, which, according to Bloomberg swapped debt issued by Greece in dollars and yen for euros using a historical exchange rate, which implied a reduction in debt.   

Upon entry to the Euro zone Greece then took advantage of much lower interest rates and undertook extensive borrowing and investment so that its debt continued to rapidly rise, to continue to operate well outside its obligations under the Maastrict Criteria. Greece later confirmed it had not been initially truthful, about the extent of its borrowings, but the EU decided it must defend its member nation to ensure she did not default or leave the Eurozone. Furthermore as both France and Germany were also spending above the limit it was felt it would be unfair to impose sanctions on Greece so the EU opted to allow the nation time to implement their own austerity measures.

The extent of the black hole became clearly visible in 2009 when Greece’s budget deficit stood at 12.9% of GDP, against a maximum of 3% allowed under the treaty. In response Greece announced an austerity package designed to ensure deficit were reduced to 3% of GDP in just two years. Subsequently the EU and IMF provided €240 billion in emergency funds to facilitate support as the nation made the transition to be self-sufficient.  
But at this stage the austerity measures began to bite with evidence of widespread civil unrest and pockets of rioting in the streets as the economy slowed and unemployment ratcheted up to 25%.
In 2011 a Euro 190 billion from the stability fund was added to existing bailouts as Greece's debt to GDP rocketed to 175% of GDP. 
The position was dire but some relief was granted as Bondholders finally agreed to debt forgiveness by exchanging $77 billion in bonds for a debt now worth 75% less.

Since then Greece has made some progress in reducing the size of budget deficits but not the amount it owes.

Either way the future does not look bright, but if integrity is given a chance, there still is the possibility of compromise being reached. Personally I think a yes vote is what is needed and less brinkmanship and a more pragmatic approach to allow for some considerable debt forgiveness as part of an overall package is in the best interest of all parties.


susan said...

I've read a number of articles about the ongoing situation in Greece, Lindsay, but yours is one of the most straightforward I've come across. What is so irksome about the whole process is that only a very few Greek people had any say at the beginning - and I'm sure most of the populace in general had no idea about their financially weak position regarding the country's obligations under the Maastrict Criteria. These things always get sold to people by those (like GS) who see profit for themselves. I've read the real unemployment rate in Greece among the young is at least 50% and many of them are surviving with the assistance of (already 40% reduced) pensions of their elders. I agree with you that the only reasonable solution at this point is debt forgiveness and overall compromise.

Tom said...

I agree with Susan that this is a straightforward account of the situation in Greece. I would suggest, however, that it is an incomplete analysis. That is to say that, understandably, certain threads have been ignored. Besides the dishonesty to which you refer, there is also the greed, both on the part of the Greek people who saw a chance to gain benefits without earning them, and on the other side their creditors who saw a way to make money (in some cases, lots of it) by investing in the Greeks monetary misery.

What has also been highlighted is the weakness of the democratic system in which an electorate votes for mutually exclusive policies. (We don't want austerity, but we want your money.) Added to this is the apparent insistence on the part of the creditor bodies to impose conditions that run counter to those democratically voiced wishes of the Greek people. Greed and Ego make for a disastrous marriage. And on top of all that we have the Mediterranean migrant problem!

Lindsay Byrnes said...

Hi Susan & Tom
Thanks for your comments. I did set out to present a more straightforward commentary and conclusion. I would agree in the early days many would have had no idea of the extent of the dire financial position and the ongoing treaty responsibilities. The extent to which others took advantage is also a factor as these guys seemed to think it was a rightful part of their inherited DNA to exercise clever deception in a highly sophisticated form of what was in effect stealing from the people.

Hence I agree there are many threads left unexplored, such as a flawed political systems and so forth, which would have meant the post ran on considerably, so I elected to remain fairly basic in my analysis and summation. Thanks again for succinctly adding in these important factors.

Best wishes

susan said...

Hi again, Lindsay,
I've just read this article by Joseph Stiglitz about the situation in Greece and thought you might be interested in his summary.
I must admit I'm hoping for a 'no' vote. The effect on the people will be terrible either way but at least voting no might allow some room for rebuilding their lives.
Best wishes

Lindsay Byrnes said...

Hi Susan -thanks for your continuing interest and the reference which I read with great interest. All one can say for sure is there are many different perspectives as I alluded to in my previous comment, so that the unfolding Greek tragedy could easily fill up a rather large book if one wanted to cover all of the angles comprehensively.

What I think one can say the united Eurozone was always a high risk concept and that nations like England may have been wise to refrain from joining. The problem is, once one country experiences a severe downturn, you don’t have the flexibility of an exchange rate devaluation to ride out the difficulty and the only option then is to revert to ongoing bailouts and to implement austerity measures to meet the rules. In other words you have this self-imposed straight jacket that risks making things worse as is the case for Greece. But other larger member countries in difficult circumstances, such as Spain, have implemented the dreaded measures more emphatically earlier on but also managed to trade out of their predicament and are now looking much stronger to remain critical of Greece. In fact this factor remains true for practically all of the member states who see things from the other side of the fence so to speak. If one was living in say in France or Germany for instance its possible one might have a very different perspective.

But as I have said, under the Eurozone you do risk austerity measures making things worse, but bear in mind in relation to the Greek economy it was in bad shape even before they joined. Their debt to GDP went from 109% to 146% from 2008 to 2010, when their government debt was downgraded to junk, to mean the interest rates would have been horrendous without support and poverty ensued without the bailout funds provided at the time by European Commission, the European central bank and the IMF. Since that time Greece has made some headway in reducing its deficit but not its debt which has come at some considerable cost.
Hence I came to the conclusion some form of substantial debt forgiveness is the only way forward if she is to have any workable strategy of extraditing herself out of the current mess.
As you say the effect on the people will be terrible either way but I’m not sure you can make the case that at least voting no might allow some room for rebuilding their lives. You will need some form of ongoing support from other member nations to do that, since the government coffers are empty and who is going to invest in Greece if she does in fact beak way in the short term. How will pensions and other programs be paid in the short term ?
Best wishes