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


      1. Andreas Eriksson15 March 2011 at 10:11

        "There is, regrettably, no other choice in this matter."

        So far, so Philip Ammerman. After this sentence the blog post get's transformed into something a self-pitying leftist greek would like (in other words, like my mother-in-law). I'll have to s=assume that you're either being ironic; or have spotted an opportunity to stand for PASOK in the next election. I mean:

        "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."

        I did not know the EU was a military alliance, I thought that's what NATO is for. Do you seriously want us to pay your defence budget as well? Cyprus is if anything an example of incompetent greek military and political leadership. Please tell this loyal reader that you're not serious...

      2. Andreas, thanks for interjecting a note of reality into the debate. Please rest assured, I'm not running for PASOK (or any other Greek political party)! Nothing could be further from my mind.

        What I was trying to do here is establish the framework by which the Greek Prime Minister can lay the partial grounds for a debt restructuring. The fundamental issue, of course, is the fact that the debt will be nearly impossible to pay off. Yet as with all things, a little bit of theatre will no doubt be required, and the theatre mentioned here has a good deal of truth in it.

        Greece has been spending nearly double the average rate of EU GDP on defence allocations for years now because of very real threats from Turkey. It faces, on a daily basis, very real problems, ranging from armed overflights of Greek islands, to armed dogfights over the Aegean, to Turkish claims on Greek islands.

        You may be aware that Turkey is trying to establish a "grey zone" in the Aegean, whereby it can expand its Exclusive Economic Zone south into the Mediterranean. Turkey's zone south is presently blocked by the Greek island of Kastellorizo, east of Rhodes, which delineates the Greek and Cypriot EEZs.

        This issue has become of major importance lately, because of the Leviathan field found in the Israeli EEZ, which extends into the Cypriot one. Economic exploration in the Greek EEZ has been blocked for years, because of Turkish challenges and military intervention.

        The fact remains that in addition to the Turkish military challenge, Greece is literally drowning under a wave of refugees. This is a tragic issue, and I hope I am not opening myself up to charges of racism or over-simplification here. The Greek government has done an abysmal job of handling this, and the presence of vulnerable refugees has brought out the worse instincts in the Greek private sector, and the average citizen.

        The point I was trying to make in my post is that these two external events have led to real costs for Greece, which have been systematically ignored by the European Union. Frontex started very recently, you will recall, and it's less than a band-aid on what amounts to an arterial wound.

        The fact that the EU has all but ignored the Turkish military occupation of Cyprus, while allowing Turkey to negotiate for accession, is another example of misguided policy. Whatever your background or personal preferences, the legal situation of having a Candidate Country negotiation for accession while in military occupation of an EU Member State is fundamentaly incompatible. Remember that Turkey's illegal occupation of northern Cyprus has been recognised by a UN resolution, not just by me.

        So my point is that neither the EU nor NATO are really helping with two major issues in Greece which are, like it or not, absorbing between 5-6% of GDP, and creating a major opportunity cost in economic development. I am not at all being ironic here: these are the facts.

      3. But, please read as well the final three paras of the post, particularly this one:

        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.

        Looking forward to more of your comments & views!