This morning I woke up to see the FT running this main headline (on FT.com): “Greece not lost say Merkel and Holland.”
Yet judging by the policies forced through by France and Germany these past 2.5 years, I honestly wonder if this is not the case: if Greece is not lost.
These policies have been so far removed from what passes as rational debt restructuring and economic recovery that one can only conclude that either the Eurozone has made a series of monumental errors, or is actually in investing in Greece’s destruction.
A summary of main errors:
· The “structural reforms” in the first bailout (May 2010) do not convincingly account for the interest costs of Greece’s debt. The expenditure cuts and revenue generated do not equal interest costs. They do not make a provision for either higher interest rates, which were already very visible in January 2010, or for a cut-off of lending due to lower credit ratings.
· The Eurozone component replaced cheaper debt with more expensive debt, and a longer debt maturity with a shorter debt maturity. Greece’s average interest rate of all debt prior to the bailout was below 3.5%; the Eurozone priced its loans at 5%. The weighted average maturity was 7.8 years; the Eurozone replaced it with 5 years.
· The first bailout allowed Greece to run deficits to 2015, but assumed a return to the markets in 2012.
· The first bailout replaced debt discounted by the private sector by at least 25% with full face value, plus interest. An opportunity to reduce the debt by at least EUR 60 billion was lost. This was also a tremendous give-away to the banks. Coincidentally, French and German banks had the highest debt exposure to Greece at the time.
· The first bailout occurred in May, when the Troika knew full well that the official debt number did not include all the hidden debt in the system, which was in the process of being consolidated.
· There is no prioritisation of “liberalisation” or “reform” issues in the first bailout. Many of these are unworkable or have no economic benefit – for instance taxi liberalisation – and have never been done in Germany, France, or the United States, where a system very similar to the Greek one remains in place. Much of this useless regulatory experimentation has little to do with the real business world.
· Greece rapidly became the enfant terrible of the German and wider European political system, with politicians outdoing themselves to insult Greece, using “facts” which in most cases were untrue. As long as Greece was the black sheep, European politicians thought they could stop the contagion from spreading. Contagion has now reached their doors, yet they seem unable to open their eyes to the facts.
· The second bailout was kicked off with a disastrous German insistence that the private sector take a 50% “haircut” on its Greek government bond holdings. This was disastrous for two reasons:
· The first was that the private sector was already offering a 25% discount voluntarily. Having a 50% haircut rammed through, while keeping official debt senior and without a haircut, has challenged the most basic assumption in the international financial sector in terms of sovereign lending. One of the main reasons private investors now shun most European sovereign debt is precisely because of this.
· The second problem was that only in Europe can you have a EUR 100 billion “haircut” which actually doesn’t add up to EUR 100 billion. This amount does not include the EUR 20 billion cash “sweetener” given to the banks, and a further EUR 40 billion given to the Greek banks for recapitalisation. This additional EUR 60 billion was of course added to Greece’s sovereign debt. So the net benefit of the second bailout was a EUR 40 billion bailout, which is equivalent to less than 3 years of interest on Greece’s “new” debt of EUR 320 billion.
· The second bail-out was accompanied by a requirement to privatise EUR 50 billion in assets, comprising EUR 15 billion in state companies and EUR 35 billion in property between October 2011 and December 2015. This Eurozone demand ignores the fact that there has not been another privatisation programme in history which met its targets given this time frame, asset value and economic environment. And since every week another German politician is trashing Greece or speculating about a Greek exit, it becomes obvious that privatisation will be much more difficult than originally planned. This was clear even to journalists on the eve of the Eurozone decision.
· The problems at the institutional level remain, as recently seen with the EUR 3.2 billion ECB bond redemption implemented last week. Greece did not have EUR 3.2 billion, so it sold treasury bills at a 4-month interest rate of 4.43% to repay the ECB at full face value. The ECB, however, purchased these in the secondary market, with at roughly 25% discount. So Greece winds up paying 4.43% interest for 4 months to retire this debt, while the ECB (which lent EUR 1 trillion to private banks at 1%), makes windfall profits.
Honestly speaking, you probably couldn’t design a system this bad if you tried.
This litany of errors is not to say that Europe does not (or did not) actually want to help Greece. I genuinely believe this was the case, although now I’m sure they regret this decision.
But the core problems remains:
· Europe is trying to solve this crisis replacing debt with debt, rather than accepting a real debt restructuring (which in 2010 would have created major problems for French and German banks, but would have been far more manageable that what has occurred since then).
· In order to avoid banking problems, they have saddled European taxpayers with refinancing Greece’s debt, but in parallel are doing just about everything possible to denigrate Greece, poisoning the climate in Europe while assuring that key elements in the Greek programme—privatisation—fail.
· Rather than taking rapid decisions, the “reform” programme takes too long, and is packed with irrelevant “structural reforms” such as taxi liberalisation which will not work in an economic depression or even in a healthy economy.
· Interest costs have been totally miscalculated.
To be fair, many aspects of the reform programme has met with resistance from Greece every step of the way, as illustrated by flip-flops on the labour reserve and other issues. And Greece under George Papandreou appeared to have even less understanding of economic realities than the Troika did (and does).
Greek society has also not been in favour of real reforms, placing their faith in statist demagogues who do more to deceive than to offer real solutions. And tax evasion remains rampant, a sure recipe for failure.
The next four years will be extremely painful for Greece, as yet further expenditure cuts and tax increases are implemented. The good news is that a primary surplus is in sight, and will focus attention more than ever on the fact that interest costs will probably double in 2013, rendering the Troika’s budget unworkable. A reluctance to accept this now may be replaced with a willingness to see common sense next year.
In the meantime, we can expect a further Greek GDP decline of 6.5% in 2012, unemployment at 25% by the end of the year, and continued business closures. By 2013, fully 10% of Greek GDP and 20% of government spending will be interest costs.
This is the result of Troika policy, and I look forward to seeing what creative excuses Francois Holland and Angela Merkel will come up with next year to justify this and blame Greece in the process.
But remember: “Greece is not lost”.
© Philip Ammerman, 2012