Greece Post the Election
“Force has no place, where there is a need for Skill” – Herodotus
by Graham Reid & JR Max Wheel
Of late, we have kept our counsel, whilst watching open-mouthed as one disaster follows another in the great political Euro project. In Greece, a left-wing party, [with minority right-wing support] has now been elected with a mandate to repeal austerity, even repudiate its debts, if no reasonable accommodation can be found amongst the Troika grouping -the EU, ECB and IMF.
This is just the latest evidence of the trail of destruction left behind in the wake of the dysfunctional governance of the Single Currency.
Greece matters for a number of reasons; it has effectively torpedoed the EZ/EU elite’s strategy of demanding reform simultaneously with modest debt relief, it has endured a collapsed economy (-25% GDP), hunger, violence and protest. How they got there through dodgy deals to conceal the real level of deficits, the corruption and appalling governance now hardly matters. Much of this was known (admitted by Romano Prodi) when they joined the Euro or intuited from the behaviour of past Greek Governments.
Greek total debt is estimated at €317bn (€247bn to the troika), following the current bailout packages, but is still 177% of GDP, the IMF and ECB are owed €58bn, which neither side intends to renegotiate unless the Greeks stick to their rules, the private sector still owes approx $82bn.. The IMF does not do restructuring on its loans and the EU has indicated that it will not, which ties the hands of the ECB.
A stand-off of this type was inevitable, firstly because Greece went into the Euro with an annual debt of some 12.7% of GDP rather than the mandated 3% according to Maastricht rules and obviously because yoking an economy like Greece with Germany was clear lunacy. So bizarre are the rules by which the EU and EZ in particular play that even zero-coupon bonds must according to Maastricht criteria be recorded at their face value. This is madness of the first order.
It is also of interest to note that the ruling Germans insist on the rules being kept as a matter of discipline. How then do they explain their own 80% debt to GDP when the Maastricht rules say 60% maximum?
Note also, that of the € 252billion of “rescue” funding, €150billion has been paid straight back as repayment of capital (€96bn) and interest (€54bn) – how clever is that? Great for the French and German Banks who received so much of it but not great for the people of Greece!
Greece has been pushed beyond its effective limits, consistent with some semblance of democracy and those who did the pushing are obligated to redress the balance. Tsipras is perfectly aware of this as are the EZ paymasters. Rather than waiting to see who blinks, it makes sense to accommodate.
We repeat our mantra that no-one wins unless the solution is affordable by the payer. In the case of Greece, and to a lesser extent Italy, Spain, France and Portugal, the only solution is to extend the payback over a much longer and affordable period and at much lower interest. For Greece particularly, this should be deferred interest in the form of roll-up through a Zero Coupon.
Contagion is both very quick and destabilising. Despite that Brussels thinks it is a containable problem, it is not. It will spread quickly to Italy, Spain and possibly France now that minority extremists can be seen to win elections.
Most will agree that Greece does not need endlessly more Government officials, it already has more than the Netherlands and other aspects of the Syriza programme are inconsistent, what it does need is money in the hands of the ordinary people, quite how that gets there is for the present irrelevant. The insistence that relief must be accompanied by austerity and reform will have to wait.
Germany went through a major write-off of its debts in the Andenauer years of the 1950s and also bent the rules in the aftermath of the Faustian pact between Mitterand and Kohl over German reunification. Greece is a bare 3% of EZ output; it is a convenient fiction to forget or worse ignore one’s own economic history. Countries which cannot pay cannot achieve reform, growth or job creation. Far better an accommodation, which dumps the stupid Maastricht rules, to which no one adheres, restructure the debt into LT bonds and then make the changes necessary to ensure proper tax collection, less offshore economy- shipping, property and hotel magnates.
Keynes might now argue that the EU’s disastrous insistence on the Euro standard is “worth it” and the pain “temporary”, but when a general cause operates, those (causes) which are deemed weak (for other reasons) topple over. This was also the deal to which Germany signed up; the piper is waiting to see who, if anyone pays to call the tune. 27.01.15