Greek Crisis, Redux

(This is an unedited version of my Sunday Business Post column from last week).

If you are a 20 year old Greek man, Greece has been in a depression for all of your adult life. You have never had state-sponsored health care. More than 50 percent of your generation are unemployed. Greece has now endured more austerity and economic misery than Germany did after World War 1.

There is now no comparison which can be made to the sacrifices the Greek people have made in service of a large primary budget surplus to pay off its creditors without invoking wars. That should tell us something.

Greece is an economy with an unsustainable stock of debt. Everyone knows that. All of the parties involved have done their analysis of the sustainability of Greek debt. Every independent analyst’s spreadsheet has ground out a big fat Greek ’no’ to the question of whether this tiny, embattled economy can ever hope to pay off its debts.

We have reached the end of the road of the extension of the problem by political means. Essentially by reducing the flow of interest payments on this massive stock of debt to nearly nothing in the short term in exchange for truly horrendous austerity measures, the leaders of the Eurozone hoped economic growth, spurred by implementing ‘structural reforms’, whatever they are, would solve the sustainability problem. Growth hasn’t solved the problem of Greek debt.

Negotiations between the left-wing Greek government and their European partners are not going well. Both sides are intransigent, and both for good reasons. What is at stake is whether Greece stays within the Eurozone, perhaps even the European Union. The last minute agreement to look at maybe extending the Greek bailout doesn’t change the underlying dynamic.

WHAT ARE THEY NEGOTIATING ABOUT?

The negotiations centred around an extension to the loan package from the ECB, EU and IMF to Greece worth around €240 billion which expires at the end of February. Greece’s new government wanted bridging funds to come up with a series of new reforms, but did not want to agree to uphold the austerity commitments entered into by previous governments during this period. Greece wants to ‘own it’s reforms’ as Finance Minister Yani Varoufakis wrote to the Eurogroup of Finance Ministers a few days ago. The creditor countries, and in fact many of the debtor countries, including Ireland, Portugal, and Spain, wanted Greece to continue the austerity policies of its predecessor government, and then some.

Negotiations have not been serious at all up to this point. If there were points for shape-throwing they would have to go to Germand Finance Minister Dr Wolfgang Schauble for his ‘hard man of Europe’ act, but right behind him stands the Greek government, personified by Finance Minister Yanis Varoufakis. Negotiations have been strained by the insistence of the Greek authorities on leaking like a broken fridge every time any document passes into their possession. Much has been made of the refusal of Germany to even countenance a better deal for Greece in rejecting their proposal for bridging funds, and of the Greek authorities lack of understanding of the rules of the game at the European level. My firm sense is that the Greek authorities do understand the dynamics of the game if not the detail, and want very much for the outcome to be politically acceptable to the citizens of Greece. In the long run, the negotiations won’t fall on a technicality. The devil is in the dynamic, not the detail. Too much pressure from the creditor side, and Greece may be in serious trouble in March as large bond repayments to the IMF fall due.

TENSIONS

 

The tension is not just between debtor/creditor, but between democratic and technocratic institutions. Many of the debtor nations you might think would express solidarity with Greece, like Ireland and Spain, are not helping Greece, at least publicly, because their own domestic politics argues against that. The argument goes that any concessions to Greece’s Syriza would automatically apply to Spain’s Podemos and to Ireland’s Sinn Féin. So from the Euroogroup’s point of view, there should be no deal with Greece by backward induction. The text agreed late on Friday night is proof of this. The language is hard but opaque enough to allow the Greeks to sell their policies as a partial victory.

 

REFORMS IN EXCHANGE FOR WHAT

 

The Greek government wants to reform its country by breaking the hold oligarchs have over the state, smashing the country’s endemic corruption and delivering smarter reforms based on deeper knowledge of their economy. For example, the Troika wanted to increase VAT on the Aegean islands, but the Greeks argued this would kill of their crucial tourist trade. 81% of Greek citizens want to stay within the eurozone. But they won’t stay at any price. The key tradeoff, as the negotiations continue, is what the new Greek government gets in exchange for its continued membership of the European currency project. Right now the benefits to membership are clear. But that might not last forever, especially if we see a wave of bankruptcies and non payments within Greece herself as a result of capital controls.

 

IT’S ALL ABOUT THE BANKS. NO TROUBLE.

 

While a focus on Germany isn’t necessary to understand the crisis, it is telling that Greece’s biggest public creditors are Germany and France, and it’s biggest private creditors are French and German banks. The extent of the fiscal transfer is large, but not huge by the scale of the eurozone.

 

From the first programme of assistance alone, Greece owed €185 to every Finn, €118 to every Slovenian and €141 to every Spaniard. €15.2 billion to the German KfW bank, but not to the German taxpayer, and €11.39 billion from the French taxpayer. The rest is owed to the IMF, ECB, and several European rescue funds.

Loan exposure to Greek Sovereign,€Bn. Source: EFSF.
Loan exposure to Greek Sovereign,€Bn. Source: EFSF.

Any German citizen would want that €15.2 billion back. Any Irish person would want their 347 million back. But it ain’t gonna happen. Worse, any amelioration of conditions for further loans look like political weakness now that Greek ministers have ratcheted up the rhetoric around not giving in to ‘psychological blackmail’. Many Greek leaders believe most of the previous bailouts of 2009, 10, and 11 actually went to pay off creditor banks like Deutche Bank, Societé Generale, and HSBC, rather than help the Greek people. One estimate by a former Greek labour minister is that only about 11% of the total bailout actually went to pay for Greek social services, public pay, and pensions. The rest paid off bank-related debt and sundry creditors. The figure shows just who gave the Greek government what over the last few years. Ireland’s €347 million bilateral loan isn’t even a flash in the pan relative to the IMF and European Financial Stability Facility (EFSF).

The uncertainty around the Greek economy is enormous at the moment. Greek industrial turnover fell by 8.9% in December as their manufacturing capacity fell apart when orders disappeared.

Greek banks are losing deposits and loan creation is at a standstill. The ECB has authorised Emergency Liquidity Assistance (ELA) increases but in relatively tiny amounts, around 3 billion in 2 week windows. This number will keep increasing. The ECB has already increased it ELA dispensation twice in recent days, to €65 billion from €60 billion on February 12 and again to €68 billion on Wednesday of this week.

So what have these tortuous negotiations gotten Greece? Some breathing room, some ‘constructive ambiguity’ in language, a looser target to hit in terms of its primary surplus, but nothing more. Syriza can sell it as a partial victory, but there is no doubt who is in charge: The creditor countries, and the banks. Greece will have to be managed carefully over the next few years by the institutions. We’re not allowed call them the Troika anymore.