Greece may see elections early next year, and a new poll just out has the radical leftist Syriza party in first place by more than 3 percent. If Syriza takes power, the relative calm of Greek financial markets could be rocked.
Rarely has a country repaired its image with creditors so quickly. The world’s attention has moved on since the Greek debt crisis (a lot has happened since), but it’s worth stopping for a moment to look at what went right, as well as the huge challenges that remain.
First of all, I quite often encounter people who claim that Greece never really did austerity. I guess this is based on national stereotypes, or something, because the numbers are actually awesome. Here’s non-interest spending as projected in the original agreement versus actual spending since 2010. Because the troika kept increasing its demands, Greek spending has ended up far lower – austerity has been far more intense – than anything envisaged at the beginning.
One reason cited [1] for why Syriza will be able to talk tough with the Troika, presuming it wins today, and can form a government, is that it has a healthy [circa 5%] primary budget surplus. That’s the difference between revenues and spending, once we ignore the cost of servicing debt. The hypothesised threat is that the new Greek government renounces the debt and has no more need to borrow from capital markets, taking more in taxes than it spends. However, this is not the whole story. Cut adrift from the Troika, the Greek government does not have the funds to stand behind its own banks. They would be left insolvent by a Greek default [economically, they are already, really]. A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.
Nobel Prize-winning economist Joseph Stiglitz told CNBC on Monday that the euro zone should stay together but if it breaks apart, it would be better for Germany to leave than for Greece. "While it was an experiment to bring them together, nothing has divided Europe as much as the euro," Stiglitz said in a "Squawk Box" interview.
For tomorrow’s column I went back to the original, May 2010stand-by arrangement for Greece, to see what the troika was demanding and predicting at the beginning of the austerity push, and how it compares with what actually happened.
First of all, I quite often encounter people who claim that Greece never really did austerity. I guess this is based on national stereotypes, or something, because the numbers are actually awesome. Here’s non-interest spending as projected in the original agreement versus actual spending since 2010. Because the troika kept increasing its demands, Greek spending has ended up far lower – austerity has been far more intense – than anything envisaged at the beginning.
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International Monetary FundCredit
So how can Greece still be in debt trouble? The original agreement assumed a brief, fairly shallow recession followed by recovery – nothing like the reality of depression and deflation. Here’s nominal GDP as predicted versus actual outcome. Naturally, the collapse of GDP reduced revenue and raised the debt/GDP ratio.
Photo
International Monetary FundCredit
Oh, and unemployment was supposed to peak a bit under 15 percent, not hit 28.
How did they get it so wrong? In the spring of 2010 both the ECB and the European Commission bought fully into expansionary austerity; slashing spending wasn’t going to hurt the Greek economy, because the confidence fairy would come to the rescue. The IMF never went all the way there, but it used an unrealistically low multiplier, which it arrived at by looking at historical examples of austerity while ignoring the difference in monetary conditions.
The thing is, we now have essentially the same people who so totally misjudged the impacts of austerity lecturing the Greeks on the need to be realistic.
One point that seems relevant to talk about Grexit (Greek exit from the euro) and all that: at this point it’s not clear that Greece needs a big boost to competitiveness. “Internal devaluation” via falling wages is incredibly costly — but Greece has been paying incredible costs, and has achieved a sharp fall in relative wages:
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CreditEurostat
Why, then, might exit from the euro happen? The main answer would be the Greek banks, which are dependent on the availability of a lender of last resort — a role that the Greek government can’t play, because it doesn’t own the currency.
But what this says is that if Greece is driven out of the euro, it will be because Brussels and Frankfurt have in effect chosen to hold the Greek banking system hostage, and Greece has declined to pay ransom. Kind of a different perspective, isn’t it?
The new Greece of Alexis Tsipras will run out of money by early March. It will then face a series of escalating crunch points that will end in default and a return to the drachma unless it can reach a deal with EU creditors.
Still, Greece’s great lurch leftward may embolden similar movements in larger, comparably troubled European states. Spain’s Podemos party leader Pablo Iglesias hailed Syriza’s victory. And there may be reason to believe Podemos and other Euro-skeptics could see a plain gains in Spain in a series of local and national elections expected throughout this year. In a recent poll by the country’s El Pais newspaper, Podemos was favored by 28 percent versus the governing PP party’s 19 percent.
With Greece’s government and its creditors in no mood to compromise, investors are growing skeptical on how long the European Central Bank can insulate the rest of the region’s debt markets from the turmoil.
Officials offered several areas for potential compromise with the new Greek administration. Thomas Wieser, the European Union official in charge of preparing meetings of euro-area finance ministers, told Austrian radio ORF that Greece’s official creditors will probably extend the deadline for the country to qualify for its next aid disbursement and Malta’s finance minister, Edward Scicluna, said the troika is also likely to ease its demands for further economic overhauls in Greece.
If Greece were to adhere totally to the previous terms, over the next five years it would make resource transfers of about 20 percent of one year’s GDP. From the point of view of the creditors, that’s a trivial sum. From the point of the Greeks, however, it’s crucial; the difference between a primary surplus of 4.5 percent of GDP and, say, 1.5 percent of GDP for the Greek economy and the welfare of its citizens is huge.
Officials close to Merkel say they still believe Tsipras will ultimately change course, dropping his more radical election pledges and signing up to the economic reforms that Berlin and its European partners have insisted on as a condition for handing over more aid that Athens desperately needs by next month to service its debt. But the past days have sown doubts about this hypothesis.
Although barely in the country for the past three years, he won a record 135,638 votes as a candidate in Athens’s second electoral district – by far the toughest area to contest. No other Syriza MP came close – and unlike any of them Varoufakis had been in politics for only three weeks.
you can think of European policy as involving a bailout, not of Greece, but of creditor-country banks, with the Greek government simply acting as the middleman
The battle lines between Greece and its creditors were drawn in Athens as the Greek finance minister announced that the new government would refuse to engage with representatives of the country’s hated “troika” of lenders. Standing his ground after talks in the capital with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers, Yanis Varoufakis said Greece would not pursue further negotiations with the body of technocrats that has regularly descended on the country to monitor its economy. Nor would it be rowing back on election-winning pledges by asking for an extension to its €240bn (£180bn) bailout programme. “This platform enabled us to win the confidence of the Greek people,” Varoufakis said, insisting that the logic of austerity had been repudiated by voters when the far-left Syriza party stormed to victory in Sunday’s election. Greece has lost more than a quarter of its GDP, the worst slump in modern times, as a result of consecutive waves of budget cuts and tax rises enforced at the behest of creditors. Varoufakis and the new Greek prime minister, Alexis Tsipras, who also met Dijsselbloem on Friday, are adamant that the government will deal only with individual institutions and on a minister-to-minister basis within the EU. They have vowed to shun auditors appointed by the so-called troika of the EU, the European Central Bank and the International Monetary Fund.
This time the odds have changed. Grexit would look more like the Greeks' fault, Europe's economy is stronger and 80% of Greece's debt is in the hands of other governments or official bodies. Above all the politics are different. The Finns and the Dutch, like the Germans, want Greece to stick to promises it made when they twice bailed it out. And in southern Europe centrist governments fear that a successful Greek blackmail would push voters towards their own populist opposition parties, like Spain's Podemos (see Charlemagne).
The situation in Greece will deteriorate significantly over the coming months, but anti-austerity party Syriza has a big incentive to stay in the euro zone, Eurasia Group's senior European analyst told CNBC on Monday.
Syriza faces further pressure because political turmoil and uncertainty has offset economic progress in Greece during the last two months as elections were announced, Rahman said. Before that, growth was picking up, tax revenues were increasing, and Greece had a primary surplus, he added.
02-03-2015, 12:22 PM (This post was last modified: 02-03-2015, 12:31 PM by admin.)
The European Central Bank (ECB) is threatening to withdraw emergency funding from Greek banks if the Greek government doesn't do what it wants. The central bank's actions toward Greece occur less than two months after secret letters revealed that the ECB threatened to pull emergency funding from Irish banks if the state did not apply for a bailout, in what many saw as an overreach into the sovereign affairs of the country. The ECB later pretended that Ireland had applied for its bailout voluntarily. The letters revealed that in fact the ECB had required the Irish government to apply.
What's more, Varoufakis's academic specialty is game theory, the study of strategic decision-making in situations where people with differing interests try to maximize their gains and minimize their losses. Varoufakis knows as much about this subject "as anyone on the planet," Galbraith says. "He will be thinking more than a few steps ahead" in any interactions with the troika. Market analyst Nicholas Spiro, of Spiro Sovereign Strategy in London, says Varoufakis might be stirring things up on purpose. Syriza's leaders are "trying to establish their anti-austerity credentials, to show the Greek electorate that their vote was not in vain," Spiro says. "They will play this game as long as they possibly can. This will give them political cover to climb down" and compromise later.
OK, so as I understand the latest from the new Greek government, Yanis Varoufakis is saying that he and his colleagues don’t care what happens to the headline value of the debt — if you want to claim that there has been no write-off, OK. What they want instead is substantive but not outrageous relief from the burden of running primary surpluses (surpluses ex interest payments), reducing the amount of resources transferred to creditors from 4.5 to 1-1.5 percent of GDP; they also want flexibility to achieve these surpluses with a mix that includes more revenue and less spending austerity.
But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish 10-year bonds TMBMKES-10Y, +0.00% for example, are still trading at interest rates below those of U.S. Treasuries. The question is how long this relative calm will prevail.
Austerity – the policy of saving your way out of a demand shortfall – simply does not work. In a shrinking economy, a country’s debt-to-GDP ratio rises rather than falls, and Europe’s recession-ridden crisis countries have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty and scant hope.
Mr Mody says EMU shock therapy has failed to put monetary union on a viable course. The deficits of the EMU crisis states may have fallen but the mix of perma-slump and “lowflation” - now deflation of minus 0.6pc – have by caused the debt stock to spiral upwards. This is a mathematical effect. The interest costs have been rising faster than nominal GDP.
According to the budget, Greece will achieve a primary budget surplus—before taking into account debt payments—of €3.3 billion ($4.1 billion), equal to 3% of gross domestic product, next year, which is in line with the country’s bailout program. Overall, the government will record only a minor budget deficit of €338 million—equivalent to just 0.2% of gross domestic product—next year, in effect marking the first balanced budget Greece has produced in four decades.
Three of Greece's four major banks have started to tap emergency funding from the Greek central bank as some depositors have withdrawn their money due to political uncertainty, two sources familiar with the situation told Reuters on Tuesday.
There’s a sense of calm in the markets this morning after the new Greek government laid out its plan to renegotiate its some of its debt pile. And it’s a more nuanced stance than some expected; Athens is asking for “menu of debt swaps” to give it time and space to recover. That includes: 1) Growth Bonds, which would be linked to Greece’s nominal economic growth. They would replace some of the debt held by European partners, who would only be paid if the Greek economy was growing. 2) Perpetual Bonds, to replace the debt currently held by the European Central Bank. Finance minister Yanis Varoufakis, who outlined the plan to City investors yesterday, is dubbing the plan “smart debt engineering”. It won’t actually involve a headline cut to Greece’s debt, simply lift some of the burden of repaying it. Bloomberg TV, though, are calling it the Greek Retreat – as it’s not the debt forgiveness that some voters hoped to see. If Athens got a deal, it would still commit to running a primary surplus and also implement some reforms.
Greece’s radical new government revealed proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders.
The Greek-Troika conflict is roiling markets, boardrooms and cabinet offices around the world. Crises are best solved by recognising losses, allocating them and moving on, so the biggest risk, this column argues, is that a compromise kicks the can further down the road. As the can rolls on, the scenery becomes politically and socially less attractive – fuelling the rise of political animosities, nationalism, and fringe parties.
Germany expects talks with Greece to drag on until after the current round of bailout funding runs out at the end of the month and is prepared to play a waiting game until April or May, when the country approaches a cash crunch, a person familiar with the matter said. Greece would not immediately go bankrupt at the end of February because it has resources to last beyond that point and Germany is ready to hold off until there is a more urgent need to strengthen its bargaining position, said the person, who asked not to be identified discussing internal talks.
