The Financial Times leaked a German policy proposal on Friday which includes two incendiary conditions attached to a second bail out package:
a. A constitutional amendment that enshrines “absolute priority to future debt service”. In other words, “State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure.”
b. Transfer of national budgetary sovereignty, in other words: “Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.”
Both conditions are unacceptable and unworkable, and have been rejected by Greek political leaders. They are unacceptable because they infringe on basic national sovereignty to the extent of making any future bailout impossible in political terms. They are unworkable for the same reason that governance of the current Greek budgeting system is unworkable:
a. The Troika has already reviewed and in theory approved each Greek budget defined since 2010, including both general expenditure and revenue measures. A “veto [of] decisions not in line with the budgetary targets” is clearly impossible, given that any expenditure made would be recorded after the fact, and not beforehand.
b. The actual Greek shortfall on the deficit side is small, and is due more to the fact that there is an unprecedented economic depression in the country as well as due to an extremely adverse international financial situation which makes certain decisions such as privatisation unworkable. Nonetheless, the Greek government and the political parties are certainly guilty of making promises which they have not implemented or reneged upon, and this is unaccepted.
c. The fact that much of the Troika’s plan is unworkable in conditions of an economic depression, with real unemployment of over 20%, and that the first and second bail-out plans continue to have grave errors in terms of economic policy.
To assume that a Eurocrat financial commissioner sitting in Brussels can govern the Greek budget by fiat is the worse sort of theoretical utopia. I honestly wonder which German theorists were responsible for drawing up this plan, and whether the cold light of reality has every intruded upon their gravid musings.
There are, in fact, several more workable solutions for ensuring that future Greek revenue is used for debt service rather than other means:
a. The first and most logical method is to disburse the second bail-out package in tranches rather than in a single package. This implies that rather than a single bond exchange in 2012, the bail-out can be phased in according to the expiration dates of the current debt maturities. There is practically no difference in the annual interest rate: the pre-2010 average interest rate of all Greek government bonds was about 3.8%; the current rate currently being negotiated is between 3.5-4.0%.
b. The second option is to place all future Greek income from European Union funding as a guarantee against a potential future Greek default. Given that Greece receives roughly EUR 2 billion in Common Agricultural Policy subsidies each year alone, it is clear that the potential withholding of these funds would provide a significant cash flow in the case of a future default. Moreover, their with-holding would create such asphyxiating political pressure among key political interest groups in Greece as to assure that any future government would think long and hard before contemplating a future default.
c. The third option would be to indicate in no uncertain terms that any future Greek bail-out would be the sole purview of the private financial sector, and not the European taxpayer. This would automatically raise the quality of due diligence and risk analysis made by private financial institutions, and force the Greek state to budget accordingly. It would also set a practical limit on this bail-out exercise, after which there should be no further public support to Greece.
It remains to be seen whether a rational resolution to this issue will be reached. With the Troika advocating ever more unworkable plans, and with a consistent record of Eurozone cacophony (remember the Finnish guarantee?), the most logical solution may in fact be a unilateral Greek default. This may be the only way to guaranteeing Greek sovereignty while at the same time requiring an immediate conversion to a current account surplus and primary public sector budget balance.
© Philip Ammerman, 2012
Navigator Consulting Group