Friday 19 March 2010

George Papandreou’s Third Act of Political Theatre

Prime Minister George Papandreou, emboldened by the success of his campaign to portray Greece’s debt problems as a result of financial speculation, has launched the third act in his ongoing political theatre. This is his threat to turn to the IMF if the European Union or the Europgroup do not soon decide on a financial support mechanism at the March 25-26 meeting of EU leaders.

His first act came in November-December 2009, when upon taking office, he raised the estimate of public debt from about 6.7% before the October elections to 12.7%. This was done by adding certain costs relating to public healthcare expenditure. The mistake he made was not adding these debts, but:

a. The fact that he added some debts, but not all debts (there are at least another EUR 40-50 mln off the books), and

b. The fact that the primary motivation for this was not necessarily to resolve the debt issue, but to discredit the previous government, and

c. Miscalculating market reaction, as well as that of the European Union.

To put it bluntly, his essentially political tactic back-fired massively. The European Commission and the Eurogroup were more incensed that the National Statistics Service had been partially doctoring its statistics collection and reporting methods (though this was hardly new), and rapidly put Greece under intense financial supervision. Greek lending prices rose; Greece’s credit rating fell.

As a parenthesis, I will add that this is not necessarily a bad thing. Greece should pay more for its sovereign debt, since it has a far higher credit risk given its macroeconomic and fiscal situation, and clearly it is only the threat of external financial events which has finally prompted the government to act.

His second act of political theatre was to denounce the rise in interest rates as “financial speculation”. In doing so, he made it appear as if Greece’s low credit rating and high borrowing costs were somehow the result of “profiteers”, rather than Greece’s own debt mismanagement. Greece’s latest sovereign debt issues have been at rates of 6-7%, about 300 basis points above the German Bund. This is more than fair, given the fact that the government appears to have no idea what its actual public debt level actually is, or how it will repay it.

This act too appears to have succeeded. Papandreou received favourable hearings from Nicholas Sarkozy, Angela Merkel, Barack Obama, and others. He has not, of course, solved his primary goal (to access low-cost credit), or even his secondary goal (to somehow restrict financial derivatives, which are largely irrelevant to the situation). But it’s made for good press.

Now, he’s launched his third act. This involves threatening European political leaders that unless they come up with a financial support mechanism by March 25-26, he will turn to the IMF. This is perhaps a triple irony:

a. Why should the European leaders agree to a financial mechanism, when at every press conference Papandreou states that “we are not looking for financial help or a bail out?”

b. Why is a financial mechanism needed, when all that remains of the major debt refinancing tranche in April – May is EUR 10 bln, and Greece’s most recent issues have been 3-4 times over-subscribed (albeit at a higher interest rate)? There will be no problem at all to raise EUR 10 bln between now and mid-May.

c. Does he really understand what going to the IMF entails? So far, the government has not taken a single structural reform measure. It has undertaken cosmetic measures of partial salary reductions or bonus reductions. It has tinkered with the tax system. It has not fired a single useless public sector employee (of whom there are tens of thousands); it has not closed a single redundant public sector organisation. It has not jailed anyone for tax evasion; has not confiscated any property; has not razed a single illegal villa built on forest land; has not closed a single illegal nightclub or restaurant.

I am personally in favour of an IMF exit. I see this as the only change that a serious external organisation will force serious change upon Greece. Left to its own devices, neither this government, nor one lead by Papandreou’s former college room-mate, Antonis Samaras, will take meaningful structural reforms.

An IMF exit would enable a Greek government to blame yet another nefarious external bank, while hopefully taking serious measures to clear up its own mess.

I can only hope that the IMF will be involved for at least 5-10 years in Greece, and impose the harshest conditions possible. Unfortunately, it’s the only way forward, absent a debt default and expulsion from the Eurozone. It may also be the only way Papandreou can force through reforms in the face of determined opposition from his own party, and the usual craven tactics of the other political parties.

I seriously doubt George Papandreou has fully understood what he is about, but in the case of the IMF, let’s hope he continues on his current track. I will raise the first toast to him if he succeeds in alienating our European partners to the extent that the IMF is the only option left.


  1. Philip, I cannot find anything to disagree with. Frighteningly, I think you state it all in an even more civilised fashion than it deserves. We are not witnessing the quantum leap from a business-as-usual approach to a right-way-of-doing-business approach. We are just seeing an intensification of the business as usual approach, which is to penalise the salaried taxpayers who cannot escape with a euro of evasion, and the small businesses which generate about 90 percent of jobs. I am still waiting for the other shoe to drop.

  2. Thanks John! It's interesting that the government is (so far) taking the path of least resistance: tax/cut what you can.

    The OECD estimates that Greece loses EUR 28 bln every year in tax revenue which should have been collected, but which isn't collected.

    In contrast, the net savings of the various compensation cuts is estimated at a maximum of EUR 2-4 bln by the government (depending on which version one reads).

    Many government employees net less than EUR 1,200 per month, which puts them far below the poverty line, and encourages illegal behaviour. It would be far better to implement structural reforms in the public sector, pay a competitive wage, focus on what is possible, and address the far greater private sector tax avoidance.

    Having said that, I hope Papandreou succeed in his "reforms". It's clear to me that whatever happens, a further, more intense round will be needed in the fall, and then again in 2011, etc. The numbers simple do not add up over the medium term: Greece faces default by 2013-2015 based on the current spending track.