Monday 17 October 2011

Another Week, Another Vote

This Thursday, the Greek parliament will vote on a proposed “Law on Pension Reforms, Uniform Pay Structure, Labour Reserve and Other Implementation Measures of the Mid-Term Fiscal Adjustment Programme 2012-2015.”

This law includes, among others, the temporary cessation of sectoral collective bargaining agreements, which until now have enabled social partners to negotiate minimum wages and compensation. The Troika apparently believes that it is necessary to end collective bargaining in order to force a wage fall, making Greek exports and domestic services “more competitive”. It is difficult to think of a less realistic policy recommendation for solving the Greek debt crisis.

Additional measures include a drastic reduction in pensions, the institution of the labour reserve covering at least 30,000 employees in the first phase, and a further reduction in wages for certain semi-governmental organisations.

It is nearly one month since the last crucial vote of this kind (see Will PASOK Survive Next Week), and in retrospect, it is remarkable how little has changed:

a.   Once again, the Greek Socialist Party is called upon to pass extremely regressive measures which will exacerbate the economic depression, without a solid international framework for resolving the Greek debt crisis.

b.  Once again, PASOK deputies are threatening to resign, or to vote against the law. One, Theodoros Rovopoulos, has resigned, but his place will be filled by PASOK. Dr. Louca Katseli, former Minister of Labour, has announced she will vote against the article on the collective bargaining agreement.

c.   Once again, European leaders are expected to meet this week to find a lasting solution to the Greek debt crisis. This will have to involve a resolution of private sector involvement (PSI), which has been re-opened at German insistence.

d.   Once again, both Europe’s governments as well as its institutions, including the ECB and the EFSF, are at loggerheads, with different parties proposing different solutions.

e.    Once again, the threat of contagion is rising, with a major political crisis unfolding in Italy, and a worsening economic situation in Spain and France for private sector debt.

A flurry of activity occurred today, with Prime Minister George Papandreou meeting President Karolos Papoulias, and this evening chairing a Cabinet Meeting. What has raised interest has been the Prime Minister’s proposed contact with the leader of the ND opposition party, Antonis Samaras.

It is very likely that this week marks the end of the line, as it were. This applies to the domestic political situation, where it is difficult to see how much longer PASOK deputies will be strong-armed into paying the costs of austerity. The vote will occur amidst a general strike on Wednesday, and a series of rolling strikes by a range of other public workers, as well as a general slow-down in public sector operations. The chances of either a turn to the polls (an early election) or another attempt at a national unity government, are rising, as PASOK cannot govern with a majority of 153 votes in a 300 vote parliament.

It is ironic to recall that the 1993 Mitsotakis government and the second Karamanlis government (2007-2009) fell in precisely the same circumstances, and with precisely the same politicians in charge. In this case, however, the fall of the PASOK government would probably trigger a European financial crisis, or at the very least, exacerbate an already very difficult situation. There is a significant chance that this will occur. 

But the "end of the line" also applies to the international situation, where uncertainty over PSI and a rapidly worsening global economic situation puts the entire Greek rescue in doubt. A PSI of 50% will destroy the capital structure of most Greek banks and pension funds. Although a recapitalisation is theoretically possible, it will have to be done in an exceptionally competent fashion for it to work, and it is difficult to see how this will occur without a significant impact on banking operations in Greece.

A greater PSI will also probably herald increasing European contagion, as well as worsening sovereign debt. A PSI of 50% on Greek bonds implies at capital write-down of at least EUR 100 billion. This will either have to be met through EFSF guarantees, or through equivalent sovereign debt commitments. This means that not only will banking operations be jeopardised, but that sovereign balance sheets will be affected. Both the ECB and the IIF are against a non-voluntary “haircut”: the outcome of negotiations remains to be seen.

A PSI write-down of 50% also carries important repercussions for Greek bonds held by sovereign lenders, including the IMF, the ECB and the Eurozone governments. There is almost no way a private sector haircut will not affect the value of these bonds, which will lead to either a credit rating downgrade, or to a haircut by sovereign lenders at a later date (or both).

The greatest casualty in all this is trust. Leave aside the lack of trust within Greece, or between Greece and its European partners. The problem is that the European financial and sovereign debt system has lost its credibility, as has the system of European decision-making. It is this loss of credibility and trust that leads to financial panic and market failure, both within the financial sector, but also among ordinary citizens.

It is for this reason that the German insistence that the EFSF should only be accessed as a last resort, an “ultima ratio”, is the wrong approach. Angela Merkel is said to have told Nicholas Sarkozy that if a bank needs recapitalisation, it should first turn to the market, then to its national government, and only as a last resort to the EFSF. Although logical as a textbook approach, it means that by the time the bank gets to the EFSF, it will have created a self-fulfilling financial panic. It is similar to suggesting that the only time one should call the fire department is not only when one smells the smoke and sees the flames of the fire, but when the fire has burned down half the house.

Numerous posts on this blog have outlined my fears of a deeper financial crisis, both within Greece and Europe. This crisis has begun. We may or may not see a “Lehman moment”, an instance of illiquidity or insolvency that touches off a financial panic. But the crisis is here nonetheless.

Unless Europe’s leaders come up with a viable plan for Greek and European sovereign debt; and a parallel solution to the European banking crisis which emerges from this (as well as from derivatives, commercial loans, residential mortgages and a range of other issues) it is only a matter of time before that Lehman moment arrives.

© Philip Ammerman, 2011

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