Thursday 31 March 2011

Symptoms of a worsening public finance situation in Greece

All public announcements to the contrary, many signs indicate a worsening short-term public finance situation in Greece. Some of these warning signs are recounted below: there are quite a few more, many of which cannot be precisely quantified.

1.      Construction companies are owed EUR 2.5 bln by the Greek government for completed works;

2.      Pharmacists’ unions are on strike due to unpaid reimbursements by public health insurance funds: media reports indicate that EUR 300 mln are owed;

3.      Public hospital staff are on strike over unpaid wages, particularly for overtime and short-term contract staff;

4.      Police staff held a protest march, claiming that over 2,000 vehicles where not working due to lack of maintenance, and that unjustified cuts in operating expenditure and overtime were taking place;

5.      An article in Kathimerini claimed that a Eurostat audit revealed a deficit of EUR 500 mln in public pension funds, versus a surplus claimed of EUR 900 mln (the Eurostat results have not yet been published).

The Ministry of Finance has made statements to the effect that the severity of the recession is lessening, and that the central government deficit in January-February 2011 was EUR 1,024 bln, or some EUR 55 mln lower than forecast. They also point to the expiration of one-time taxes, such as taxes on heating fuel, as well as “savings” in the Public Investment Budget.

Yet the five warning signs mention indicate that something is wrong with public cash flow and expenditure. The debt to construction firms, for instance, logically should have been paid through the Public Investment Budget (unless the works concerned maintenance): the sector claims EUR 2.5 billion in unpaid bills for primary construction. How is it possible that “savings” have been achieved if bills have apparently not been paid?

Greece and its international creditors have been claiming that Greece’s financial needs have been met through 2012 / early 2013. Yet there is increasing evidence that government obligations have not been paid. In the absence of information from the Ministry as to which specific obligations are still unpaid, and whether these are been included in the monthly budget progress, it is extremely difficult for any external observer or analyst to understand what is going on.

The situation in the private sector is worsening. Unemployment will rise following sectoral lay-offs in retail, although the overall situation may be minimised by higher seasonal tourism employment, partially higher manufacturing and by people exiting the labour force. With corporate income tax filings in April, we should have a clearer picture of 2010 GDP figures. 

There are press reports that the final 2010 deficit figure will be revised upwards to 10% (against an original target of 8.2%). This fact, more than any other, indicates that something is seriously wrong.

The difficulty of what Greece is trying to achieve should not be underestimated: a paradigm shift in state operations and function; the liberalisation of sectors and professions; large-scale privatisation; real structural reforms; fully repaying the public debt of EUR 340 bln. These reforms are taking place not only during a major recession, but against a long-term loss of competitiveness in key sectors such as tourism, industry or shipping.

And while the structural reform agenda is a worthy one, the fundamental dangers remain: 

·         Large segments of the Greek population, and apparently a large share of the public sector, do not accept the need for real structural reforms;

·         The pace of reforms is slow; reforms are sometimes watered-down or not implemented in their entirety; the most serious reforms have not yet taken place;

·         There remain significant questions on whether the economic data provided by the wider Greek public sector is valid;

As I have also reported in earlier posts, the scale of debt instalments and repayment period is severely challenging to manage. Although I believe a debt restructuring is almost inevitable, and to some extent has already begun, the current process must run its course, if for no other reason than to gain even some limited traction in terms of structural reform.  

(c) Philip Ammerman, 2011
Navigator Consulting Group

Monday 14 March 2011

The Greek media and the financial crisis

One of the greatest challenges affecting Greek understanding of the current debt crisis is the apparent difficulty of the mainstream television channels to understand the key issues and ask the right questions.

This reticence may be a structural issue: most probably journalists do not have an in-depth understanding of economics or finance, and may be appointed to their posts for other reasons (including physical attractiveness, personal connections, and personal ratings). It may also have to do with the fact that the government exercises certain forms of control over the media, such as allocation of public advertising budgets or issues such as debt forgiveness (which is a major issue with Alter at the present time).

Yet the fact remains that in the public broadcasting channels (ERT, NET, ERT3), the quality of coverage is extremely poor. A typical example is seen in the coverage of comments today, Monday, 14 March, in which the results of the EUR 110 bln debt rescheduling led each broadcast, together with the Japan earthquake.

Some typical points mentioned in the afternoon (15:00) and evening (21:00) broadcasts were:

·         Coverage of George Papandreou’s press conference outside the Presidential mansion, that Greece had “won a battle, but that the war was still being fought.”

·         Coverage of Press Spokesperson Petalotis’ bombastic and contradictory press conference, in which he stated among others that “we did not ask for anything, no one gave us anything, whatever we have earned we have fought for”, etc.

·         That European leaders apparently commented about the unfair decision made by Moody’s.

·         That the revised agreement would, according to a statement by George Papandreou, “save” Greece EUR 6 billion per year.

·         That spreads had “fallen” while the stock exchange had rebounded.

The tone particularly on NET was triumphalistic: that Greece has one again prevailed in a war against external enemies, that Greece has been “saved.” Additional comments were made or implied that Greece was no longer part of the problem, but part of the solution; that Ireland and Moody’s were the new problems, etc.

As a parenthesis, I must say I was equally amazed at George Papandreou. Upon his return from Brussels, he summoned his Cabinet for an emergency meeting, and read them this speech. Honestly speaking, I can’t think of a graver waste of time than to summon 30 people into a room on a Sunday afternoon to read out a 5-page speech full of empty platitudes and inaccuracies. I am certain that North Korean reports on agricultural output are more interesting than this. 

Yet throughout this television coverage or the Prime Minister’s speech to his Cabinet, I didn’t hear any of the really important questions being raised:

a.       I didn’t see a single chart or table showing what the annual instalments and total interest paid were before the loan rescheduling and after.

b.      Because such data were not presented, no reporter asked how Greece would pay back the EUR 110 bln, which by simple calculation will cost at least EUR 18 billion per year from 2014 onwards, and which implies an 8% GDP surplus being allocated to debt repayment. (Such a surplus has never before been achieved in Greek history in hard currency terms.)

c.       Nor did I hear any reporter question Greece’s future payment capacity given that the budget deficit in the first two months of 2011 is EUR 1.028. Equally, no reference was made to the remaining EUR 230 billion (in present value) which have to be repaid, or what happens when interest rates on this re-set from 2013 onwards.

d.      Although reference was made to a lowering of bond yields, the fact that they remain over 12%, and that the average discount on the open market for a 10-year Greek bond is 35%, was not mentioned. This raises significant doubt as to how successful the European “solution” for Greece actually is.

e.       Although Moody’s was once again cast as the villain, no one bothered to present what was actually written in the downgrade notice, or explain the reasons Moody’s may have indicated for downgrading Greece. This caused the media to miss the basic fact that in a debt restructuring after 2013, the European Stability Mechanism (ESM) will likely lead to a haircut on securities held by private bondholders.

f.        In turn, no mention was made about the possible risk exposure of Greek and Cypriot banks to (a) Greek government bonds, and (b) the dramatic decline in domestic banking indicators and the rise in non-performing loans.

g.      No indication was given of the direction of the EUR 50 billion privatisation package, or whether the Prime Minister’s earlier promise to pass a law making it impossible to sell public land without a Parliamentary vote might act as a deterrent to potential investors.

Although I heard George Papandreou and George Petalotis speaking, I didn’t hear a single question being asked to them. All that was broadcast was their set remarks. It looks as if the reporters have accepted their “achievement” at face value, and are simply, and mindlessly re-transmitting these to the public.

This is literally astounding. Given everything we have learned about corrupt and incompetent politicians in Greece, the fact that today the media give them the benefit of the doubt is unbelievable. I have rarely seen such a misrepresentation of reality, because this is what we are dealing with. If the average Greek citizen gets his news from the mainstream television broadcasts, then he can be forgiven for thinking that everything is all right.

We should not be surprised if, 12 or 24 months from now, Greece’s fiscal situation has worsened, but we hear the same shameless cheerleading emerging from the media and the government. 

(c) Philip Ammerman, 2011
Navigator Consulting Group 

Sunday 13 March 2011

Main risks in the implementation of the Greek Structural Adjustment Programme

The agreement reached on Friday between Greece and its three creditors (the Eurozone member states, the European Central Bank and the International Monetary Fund—otherwise known as the “Troika”) for the EUR 110 billion emergency loan is a positive development in that the lower interest rate and longer loan term mean that the country has an improved chance of managing its debt burden.

Unfortunately, there remain a number of major problems which have not been addressed by this revised loan agreement:

1. Troika repayments by 2014 will be nearly impossible to meet
The revised loan term requires debt repayment to start in 2014 and end in 2021. The annual principal and debt instalments from 2014-2020 are EUR 19.14 billion per year. Assuming moderate GDP growth from 2013 onwards (in line with the forecast in the IMF Stand-by Arrangement), this implies that in 2014-2015, 8% of nominal GDP will be allocated to debt service for the Troika alone. Such a budget surplus has never been achieved in Greek history in hard-currency terms, and it is doubtful whether it has been achieved in other countries.

2. Government debt to private creditors is at least EUR 230 bln; re-finance starts in 2014
Apparently lost or ignored in the debate is the fact that besides the Troika loan, the Greek government owes an additional EUR 230 billion to private creditors at the present time. Repayment or roll-over commences in 2013, with main tranches set to refinance in 2014-2016. The total amounts are difficult to determine based on available public statistics, but according to the original IMF Stand-by Arrangement (which was drafted before the November 2010 Greek debt re-statement), the IMF forecast a 2014-2015 public sector debt rollover and re-finance of EUR 102 billion at an interest rate of 5.5%. Absent a new intervention by the Troika, it is impossible to see how this rollover can take place given current debt markets and spreads.

3. The EUR 50 bln privatisation target cannot easily be achieved; impact is limited
A new conditionality for the EUR 110 bln debt term revision is the achievement of EUR 50 bln in privatisation receipts over the next 3-5 years. As has already been analysed by this author, this target will be extremely difficult to achieve given the state of political tensions within the governing party, low asset values, Greece’s credit rating and international factors such as rising interest rates and commercial debt issues. However, it is also necessary to put this number in perspective: EUR 50 bln will cover the interest on the Troika loan (estimated at EUR 33.58 bln over the loan term) as well as two years interest on the EUR 240 bln private sector debt from 2014 onwards. In other words, even achieving such a major goal, which has never been achieved in Greek history, will not result in a substantial change in total debt levels. It will be more important to generate private sector investment and employment, which is not being effectively addressed by either the Troika or the government.

4. Greece’s economic survival depends on rigorous, strategic government action
So far, the government has not been able to meet the terms of the EUR 110 bln loan. Revenue is far below target, while substantive structural adjustment has not yet taken place. Rather than liquidating non-performing units and terminating staff, the government is transferring staff and maintaining strategic and operating control over public enterprises. There is no prioritisation of government activity: certain Cabinet ministers slow reform progress; energy is wasted in irrelevant and superficial initiatives which do nothing to reassure international markets or creditors. Economic activities such as developing Greece’s mineral or energy resources are blocked by government inactivity or Turkish irredentism.

5. Economic conditions are worsening
Domestic economic conditions are worsening. Unemployment has reached 14.8% in December 2010 and is expected to increase as retailers lay off staff in the spring 2011. Although tourism may provide an increase due to the instability in Egypt and Tunisia, the short- and medium-term prospects for the private sector are grim. A record number of companies closed in 2010, while the flight of bank deposits and companies delocating increased. Consumer spending has fallen; bank credit is difficult or impossible to access for the majority of consumers. Non-performing loans have risen to nearly 10% of total bank consumer lending. Real estate prices have fallen; a large stock of real estate remains unsold and unoccupied. Interest rates are set to rise on the promise of ECB “strong vigilance”, while rising energy prices cut into disposable income and drive higher inflation.

6. There has been no action on corruption or public sector incompetence
The three major corruption scandals—Vatopedi, Siemens and the structured bond scandal—which PASOK promised to investigate remain deadlocked or have ended without any substantial criminal or civil charges being levied. Additional cases of corruption, such as the Skaramanga shipyard sales, remain unaddressed. The fact that Greeks have extensive offshore holdings in Cyprus and Switzerland is well-known, yet despite multiple means of recourse no action is taken. Corruption in the tax authorities and the customs organisations is endemic, yet unprosecuted. The fact that the Hellenic Railways Authority ran up over EUR 10 bln of debt should be investigated: instead, the debt has been transferred to the central government books, and all staff have remained employed in the public sector. Siemens, despite its own admission of bribes of over EUR 90 million, remains a prime contractor in the public sector. It is impossible for Greek civil society to back the sacrifices required by a strong structural adjustment programme when the two main political parties have both been implicated in major corruption scandals without punishment.

Five Actions for a Turn-Around Management Plan
These factors make it imperative that the following five actions are undertaken:  

a.       The financial model which was used to generate the IMF Stand-by Arrangement and the wider EUR 110 loan agreement requires an urgent update. It does not take into account the restatement of Greek debt by Eurostat in November 2010. Its planning is based on a long-term interest rate which is roughly half the current rate. And its assumptions that Greece will be able to return to the markets in 2014 to borrow over EUR 100 bln in 2 years are unwarranted. These conditions are no longer viable.

b.      A restructuring of private debt is needed. Either this will be led by the successor to the European Financial Stability Fund, and will be an orderly process, or it will occur on a unilateral/market basis, and will be disorderly. There are two options for the restructuring are (a) a haircut of at least 30% (and probably 50%) together with a longer repayment term; and/or (b) the assumption of private sector debt by public sector organisations (a second bail-out). In the case of the second option, it should be noted that a simple transfer from private to public creditors is not a solution. Greece will be hard-pressed to allocate 8% of GDP to re-pay the EUR 110 bln: it is difficult to see where it will find the resources to repay the remaining amount.

We suggest that negotiations on restructuring begin with the assistance of major western investment banks. This requires the prior approval of sovereign creditors and the IMF. But such as step is unavoidable, and it would be better to begin the process in the next 2 years given that bond markets are already pricing in a default and haircut. 

c.       The Greek government needs to take urgent measures to raise revenue targets, decrease spending, privatise assets and attract foreign investment. A turn-around management plan is needed that prioritises government activities around the initiatives which bring the greatest return. These should include a more realistic public sector privatisation plan, based on full privatisation and sale, not partial sale/leasing. It also requires a more active private sector investment plan, which is currently non-existent. The targets per sector and segment are seen below, taking into account a 5-year phase-in:

Private Sector Investments
Revenue (€ bln)
Upstream oil and gas exploration and investment
Natural gas co-generation (replacement of lignite-fired plants)
Renewable energy investments
Mineral development
Shipping repatriation / Offshore shipping centre creation
Real estate sales / second residences / retirement homes
Agricultural & food processing sector / modernisation
Automotive sector investments
Education sector liberalisation and investment promotion
Total Private Sector (EUR bln)

Public Sector Sales
Revenue (€bln)
Sales of government land & property
Sales of government shares in state organisations & banks
Re-assertion of eminent domain on public property (sales)
Hellenikon Airport development
Total Public Sector (EUR bln)

Total Investment & Privatisation Income (EUR bln)

d.      The Greek government needs to take further urgent measures to reduce operating expenses and operations. We believe that there are an additional EUR 6 bln in savings and revenue per year possible:

Public Sector Restructuring / Savings
Annual Savings
Leasing airports and ports (annual fee)
Re-organisation of Hellenic broadcasting & others
Consolidation of public leases and rentals
Central Procurement Organisation
Reassertion of eminent domain on public property (rentals)
Total Income or Savings (EUR bln)

e.       All other commitments undertaken for structural adjustment and public sector restructuring must be implemented as soon as possible, exceeding the targets set by the Troika. 

Unfortunately, it should be clear that the main obstacle to achieving these five actions is the lack of political will and management competence at the EU and national levels. At the EU level, the greatest problem is the issue of private sector debt restructuring. At the national level, it is impossible to see how PASOK’s union supporters and regular members will permit a real liberalisation of the market, and a real restructuring of the public sector. We can expect nearly no support from the remaining political parties.

For these reasons, we consider that the outlook for Greece’s debt management is bleak, and that the years 2013-2015 will result in a technical default. Whether this will be orderly or disorderly is up to Greek and European politicians to decide, and this fact more than anything else minimises the hope for a reasonable solution.

(c) Philip Ammerman, 2011
Navigator Consulting Group

Saturday 12 March 2011

The good news from Brussels – and the problems which remain

Against all indications to the contrary, the Eurozone appears to have agreed to a sensible rescheduling of Greek debt, according to the Greek news media, at least. According to these sources, the following commitments have been made in Friday’s meeting in Brussels:

a.       The loan term is extended from 4.5 years to 7.5 years
b.      The interest rate falls from 5.2% to 4.2%
c.       Greece commits to EUR 50 billion in privatisations over the next 3-5 years.

The first two revisions alone are a cause for celebration, since some element of rationality appears to have re-asserted itself. It remains to be seen what the final agreement will be, however, and given the many changes in EU decision-making, it is important to see the text of a final document ratified by the Member States. Should these changes materialise, this author will be the first to congratulate George Papandreou and the Eurozone leaders for taking this modest step.

Unfortunately, the core problems facing Greece and its debt are largely unchanged, and we believe the chances of a successful implementation will be next to impossible, for the reasons already related as regards the privatisation programme as well as the fact that the Greek governmnt owes a further EUR 230 bln to private creditors, which has not been restructured. In other words, the core scenario expressed by Moody’s and this blog still applies.

Let us compare the magnitude of the EUR 110 bln debt repayment, and see what conclusions can be drawn for the repayment of private sector debt (which continues to be difficult to model due to fragmented data available from the Public Debt Management Agency).

Under the current EUR 110 bail-out scenario, the Eurozone interest rate is 5.2% (the IMF portion is slightly lower, but for the purposes of modelling we will use a common rate for IMF and Eurozone debt tranches), while the loan terms include a 3-year disbursement period and a 4.5 year repayment period.

In Figure 1, repayments of EUR 32.10 bln would start in 2014, with the final payment occurring in H1 2018. On the principal of EUR 110 bln, a total of EUR 34.46 bln in interest would be charged. Greece would therefore pay back a total of EUR 144.46 bln.

Figure 1: Original EUR 110 bln Loan Package (click to enlarge)

Under Option 2, which was agreed Friday night / Saturday morning, the interest rate falls to 4.2% while the loan repayments are spread over 7.5 years. As seen in Figure 2, annual repayments of EUR 19.14 bln start in 2014, expiring in 2021. The total interest paid by Greece over this time is EUR 33.58 bln, reflecting a lower interest rate of 4.2%. We do not know if the Eurozone and IMF interest rates will be harmonised to this level or not, but we assume for the purposes of modelling that they are.

Figure 2: Proposed Revision, EUR 110 bln Loan Package (click to enlarge)

So far, so good: the revised terms of the EUR 110 bln “bail-out” are excellent for Greece. But the key problems remain:

·         How will Greece refinance and pay off its private sector debt, which is over twice the level of the Eurozone/IMF debt? If we assume that 8-10% of 2014 GDP will be needed to pay off the Eurozone/IMF debt alone, where will the remaining resources come from?

·         Will it be able to meet the strict terms of the Eurozone/IMF bail-out, which has absolute seniority over payment terms? Can it generate a GDP surplus of 8-10% needed to pay off the EUR 110 bln starting in 2014? 

·         Will it have the political will to implement the EUR 50 bln privatisation programme and the other conditionalities required? In particular, given the dramatic worsening of unemployment (now over 14%), company closures and declining GDP, how will it meet its revenue forecasts? Will it be able to sell EUR 50 bln in the time frame envisaged?

While we remain in hopes of another miraculous solution, our core scenario remains in place:

a.   It will be politically impossible for Greece to gain privatisation revenue of EUR 50 bln, unless drastic securitisation of future revenue is used, which will cause further financial problems in the future.

b.   Greece will not be able to achieve a surplus necessary to repay the Eurozone/IMF debt, let alone the private sector debt. This has never before happened in Greece’s history, and so far the record of the PASOK government’s implementation of existing conditionalities has been hesitant and partially ineffective.

c.   The only solution remains a restructuring of public debt owed to private sector debt, involving a haircut of at least 30% of principal, an interest rate freeze and an extension of principal repayments.

This may well be among the first operations of the EFSF successor from 2013-2014 onwards. Any alternatives to this, including Eurobond issue or EFSF open-market bond restructuring, merely postpones the inevitable and transfers the risk from private to public creditors.

© Philip Ammerman
Navigator Consulting Group

Friday 11 March 2011

Towards a New Greek Negotiating Strategy for March 25th

March 25th, Greece’s Independence Day, is also the date where George Papandreou will take his place among the other leaders of the Eurozone and attempt to negotiate three revisions to the EUR 110 bln Greek bail-out package:

1.     An extension of the loan term from 3 to at least 7 years
2.     A reduction of the interest rate from about 5% to a lower amount
3.     Either the introduction of a Eurobond, or the use of financial guarantees to carry out an open market restructuring of debt.

None of these negotiating aims are likely to succeed:

·        There are still 2 more years to go before the package is fully disbursed and repayment must start. Focussing attention now on renegotiating the bail-out terms is simply not helpful, particularly given the Greek debt restatement which occurred only four months ago.

·        The leading Eurozone powers Germany and France are entangled in massive internal political and economic problems. In France, Marine Le Pen polled first for next year’s Presidential elections. In Germany, Angela Merkel’s CDU has lost its defence minister and most popular politician over a plagiarism scandal; lost regional elections in Hamburg; faces an internal revolt over the Greek bailout; and anticipates further losses in regional elections. The Libyan crisis, the European sovereign debt contagion in Portugal and Spain, and the fears of unrest in Saudi Arabia, have overshadowed international relations this week.

·        Greece signed the bail-out package in May 2010 fully aware of what the conditions were.  Six months later, Greece admitted its debt figures were still not correct, leading to the Eurostat debt restatement. Only ten months after signing the bail-out, Greece is now trying to radically amend the agreement. Critical structural reforms in Greece have either not been implemented, or have been watered down so as to negate most of their positive effects. This is simply not serious.

·        The strategy of choosing vociferous public attacks on the Troika (over the EUR 50 bln privatisation and asset sell-off) or Moody’s (over the downgrade), together with a marked lack of focus on reform by Greece’s Prime Minister and lack of coordination among the cabinet, raises major Greece’s seriousness and credibility.

Finally, there is no indication that even if these conditions are accepted, Greece will be able to service the remaining EUR 230 bln that it owes to private creditors. I therefore believe the Greek negotiating strategy should change, and change drastically.

1.     There is no urgency to re-negotiate the bail-out agreement: Greece has until 2014 before serious debt refinancing needs to take place. In this time, every effort should be made to implement the letter and spirit of the structural reform programme agreed. A prioritised approach should be taken. Coordination of government work in Greece is urgently needed: foreign trips and superficial initiatives should end.

2.     Additional efforts are needed to streamline bureaucracy, promote investment, reform the justice system, and develop sources of national wealth through a mix of privatisation, asset sales and national development, e.g. of mineral and energy resources. Real, substantial structural reforms are needed. 

3.     Greece needs to achieve a primary surplus by early 2013, including a cash reserve equivalent to at least 3-4 months government operations (i.e. about EUR 10-15 billion). Furthermore, Greece will need to further cut public expenditure and raise public sector revenues. This target is achievable, providing the right steps are taken.

4.     This intensive effort should be made for the next 18-20 months, until the economic recession in Greece shows signs of ebbing, and until the international financial and political situation has stabilised.

5.     At the end of 2012 or early 2013, a national election should be called which will be a referendum on whether or not to restructure the national debt. Presumably, the electorate will vote in favour of debt restructuring, since Greece has no real option to repay its debt.

6.     From September 2013 onwards, Greece should unilaterally announce its intent to restructure its private sector debt. By this time, this private sector debt will equal roughly EUR 240 billion in total, assuming Greece meets its reform targets. The restructuring method should include:

  • About EUR 80 billion of private sector debt (33% of the total) should be written off

    • The remaining EUR 160 billion will be repaid, without interest from 2014 onwards, over 20 years (EUR 8 billion per year)

      • The EUR 110 bln owed the Troika should be repaid over a 10-year period, without further interest payments, at EUR 11 bln / year.

      This requires a unilateral approach to debt restructuring. This approach will bring Greece into real conflict with its creditors, so every step should be taken to prepare for this.  This conflict may include taking steps to leave the European Union in 2014, should this be necessary. At this stage, there are few reasons to remain.

      There is, regrettably, no other choice in this matter. It is abundantly clear that European decision-making is unable to cope with the present crisis. Greece has not been sheltered by either the Eurozone or the IMF against its private sector creditors, who have suffered no financial consequences from their reckless lending policies. It is also clear that Greece cannot repay its total debt burden of EUR 340 billion now, let alone in the future rising interest costs are added.

      European partners have not shielded Greece or Cyprus from the ever-present military threat of Turkey or from outright Turkish occupation, and the high defence spending this requires. They have done nothing to help Greece cope with the hundreds of thousands of illegal immigrants entering the country each year—immigrants who do not intend to settle in Greece, but who are in transit to western and northern Europe. A common currency has been implemented lacking a uniform monetary policy, leading to impossible tensions between large and small countries, or countries at different stages of the economic cycle. Policy coordination under the Maastricht Treaty has not worked: it has never been implemented. Countries like Germany have followed a neo-colonial approach to World War II debt reparations and military sales, which Greece has foolishly acquiesced to.

      Clearly, this situation cannot and should not continue, but the lethargy and stagnation of the current system prevent effective decisions from being taken.

      Do any of these issues excuse Greece, and primarily its two main political parties, from the corruption and incompetence that has led to the current financial disaster? Of course not. But the political facts are sufficient to take this “nuclear option” for handling the debt issue. There is no other reasonable choice, given the decisions made so far.

      By 2014, either Greece will have proved that it is a serious partner, having made a wrenching structural reform and fiscal adjustment, and therefore must be negotiated with in a serious and respectful manner. In this case, the creditors will blink and reach an arrangement.

      Alternatively, Greece will have failed in its reform effort, confirming that it is simply not capable of working in the modern economy and upholding its sovereign commitments. In which case it would be better for everyone, especially Greece, if it did leave the European Union and the treaty obligations this entails.

      © Philip Ammerman, 2011
      Navigator Consulting Group