Saturday 27 June 2015

Alexis Tsipras Calls a Referendum

Greek Prime Minister Alexis Tsipras has just called for a referendum in Greece, to be held on Sunday, 5 July. The topic of the referendum will be a “yes or no to the austerity measures proposed by the creditors”.
Essentially, the real question here is “in or out of the Euro”, or even “in or out of Europe”.
This is a canny political move on his part. It is the only way his political party can be absolved of the blame for misleading voters with the “Thessaloniki programme” and for the disastrous record of governance since SYRIZA’s election on January 27th.
But at the same time, it is probably the right move to make. Greece’s creditors have been insisting on exceptionally foolish policy measures. Despite their denials and counterproposals, they have at various points in the negotiation wanted value added tax on electricity, processed foods and tourism to rise to 23%. This is an extremely regressive move, particularly given the fact that Greece has been in recession since 2009, i.e. in economic depression.
I was amused (for lack of a better word) to see Christine Lagarde, head of the IMF, state in an interview that the Greek reform proposals cannot be based “only on tax increases”. That was her rationale for rejecting higher taxes on companies. Instead, the IMF recommended higher consumption taxes, on a population that has seen a 25% reduction in real GDP, a 27% unemployment rate, and skyrocketing poverty rates. Obviously, there is more than one deep contradiction to such a policy.
But this is also probably the right decision because there is still no political consensus in Greece on what the root causes of the problem/s are, and what measures should be taken in response. Greek voters believed SYRIZA’s promises to redistribute wealth through higher government spending, despite all evidence to the contrary. In the months since SYRIZA has been elected, the population has become even more polarised, while government ministers and supporters have been making increasingly outlandish and often very offensive statements.
This is the time for every voter to make up their minds what they want, and what they believe in. Hopefully, they will be accurately informed as to the loan conditionality on the table, and will be able to understand its consequences.
It will also be important to understand what a “no” vote means:
  1. Immediate capital controls to prevent a bank run: these are now probably from Monday, 29 June;
  2. A cut-off of any new bilateral or multilateral funding for Greece, both in terms of loan refinancing as well as from EU structural funds;
  3. A massive smear campaign in European and international press: what has been seen until now will be child’s play compared to what is coming. Part of this will be deliberate misinformation, but most of it will be genuine frustration and misunderstanding by other European citizens;
  4. A likely political embargo. Greece and its elected representatives will be treated as pariahs by other the European Union Member States;
  5. Tourism cancellations: a bank run and credit controls at the height of the tourism season can only be considered a massive policy failure by the Greek government;
  6. A cessation or cancellation of export and import contracts involving Greek companies;
  7. The public sector budget will fall still further, as individuals and companies are unable to pay their already-high taxes;
  8. Payments of mortgages and loans will cease;
  9. A consolidation of power by SYRIZA and ANEL, given their control over the public purse. How long this can last is unknown.
I have covered the likely impacts of a Grexit here. I assume that we are still in the first scenario: Grexit but remaining within the Eurozone.
Less than one hour after the referendum announcement, lines were forming outside bank ATMs and gas stations across Athens. I was in one of them.

© Philip Ammerman, 2015

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23 June 2015
23 March 2015
15 March 2015
21 January 2015

A Tale of Two Images

On Thursday 18 June and then again on Monday, 22 June, thousands of demonstrators gathered at Constitution Square in Athens to protest in favour of remaining in Europe. The demonstrations were identified by the slogan Μένουμε Ευρώπη, or “We Stay in Europe”.

I attended the second demonstration. Not due to any allegiance to any political party, but in order to express my deep dissatisfaction with the way the current government has openly gambled with the Greece’s European membership. At this demonstration, I met people who are educated and hardworking professionals or business owners, who have paid a lot more in Greek taxes that most. No one there was demanding anything specific: certainly no one was demanding higher state salaries or other benefits. It was not that kind of demonstration.

I was therefore horrified to see the following image posted by none other that Dimitris Kammenos, a Member of Parliament for ANEL (Independent Greeks). This image shows the gates of the Auschwitz concentration camp, with the words “Arbeit Macht Frei” replaced by the words “Μένουμε Ευρώπη.“

To me, this image symbolizes two things:

1.   Ostensibly, Mr. Kammenos has posted this to compare the austerity measures imposed by the Troika on Greece as being equivalent to Auschwitz. This is obviously totally inaccurate and deeply insulting, not only to the 1.1 million that died at Auschwitz, but to the millions of Europeans who have been refinancing Greece’s debt (and Greece’s mistakes) from their own tax income.

2.   More ominously, when I first saw this, I understood the message to be that all the people who demonstrated at the “We Stay in Europe” event were bound for Auschwitz. The threats made by SYRIZA members and associated groups both during and after the event did little to dispel this image.

Although Mr. Kammenos apologised for the insult done to Holocaust survivors, and although Independent Greeks issued a statement claiming that this image does not represent it, I and many others will not soon be forgetting this.

The second image is that of Arkas, a popular Greek satirist. A sample of his work is seen below: 

“A leader is he who can avert disaster which would not have occurred
had he not been in power”

This and other cartoons led to his Facebook page being inundated with hateful comments and threats, apparently by SYRIZA followers or other supporters of the present SYRIZA – ANEL government. The Facebook page was deactivated out of fears for his own safety, but later reactivated.

These two images are only part of a long list of events that indicate the threat to free speech posed by political supporters in Greece today. From SYRIZA MP Kostas Lapavitsas singing the EAM song in January, to the group of “anarchists” suggesting that the massacre at Meligala during the civil war was “only half finished”, the prevailing tactics used by certain political groups is all too clear. These tactics have recently been extended in the educational sector through the abolition of university councils and of electronic voting for university rectors.

A recent article indicated that many SYRIZA supporters seemed intent on re-fighting the Greek Civil War. I can only attest that events these past few days bears this out.

With the Charlie Hebdo attacks still fresh in our minds, and with a strong culture of left wing / "anarchist" violence in Athens, I wonder how much longer the relative peace in this country will hold out.   

(c) Philip Ammerman, 2015

What do I think of the new Greek austerity plan?

This article was originally published by Philip Ammerman on 23 June 2015 on the Navigator Consulting website

Yesterday the Greek government sent its new proposals for austerity to Brussels. Several people have asked me what I think of the package. I’ll respond with a little bit of perspective.

The First Bail-out

In May 2010, Greece accepted a first bail-out promising € 107 billion, primarily in loan refinancing. There were four major mistakes with this bailout:
  1. It fully compensated private sector holders of Greek government bonds (mainly French and German banks) at a time when these bonds were discounted by 20-30%. There was no debt haircut on private bondholders at the outset, which is standard in most cases. This was basically a financial rescue package for the European banking system.
  2. The weighted average interest rate was about 4.5%, meaning that over the five years of the programme, the cost of interest would equal the cost of austerity and privatisation. The cost of interest wasn’t properly calculated. In 2011, for instance, total interest paid was € 16.34 billion, versus € 6.6 billon as calculated in the bail-out. This is an elementary error that any first year finance student would have presumably corrected: Calculate 4.5% of € 300 billion.
  3. The programme envisioned that by 2014, Greece would have a deficit of 2.55% and a public debt of € 359 billion, yet return to the markets for financing. This is difficult to believe, given at the outset of the crisis Greek public debt was at least € 290 billion and Greece was already cut off from the markets.
  4. There was no overall list of priorities for structure reform.
Please view Table 7 of the European Commission’s Staff Working Paper for details: I reproduce the relevant table below:
Notice that I don’t even touch the IMF multiplier debate: there are so many errors in the first four points above that I really don’t need to.

The Second Greek Bail-out

The first Bail-out was followed by a second Bail-out, in which the keynote feature was a Private Sector Involvement (PSI). PSI saw private bondholders with a nominal value of € 100 billion have their bonds written down by about 75%. But this too was wrongly calculated:
  • A € 20 billion “sweetener” was added to induce bondholders to participate;
  • The Greek banking system had to be recapitalised with € 50 billion via the Hellenic Financial Stability Fund;
  • The Greek social security system, which held at least € 20 billion of Greek government bonds, was not recapitalised, leading to massive financial losses.
So the actual net benefit of PSI was, at best, € 30 billion (out of a nominal € 100 billion), and if one counts the losses to the social security system, it is actually lower. These social security system losses had to be reimbursed by the Greek government in subsequent years.
One positive aspect of the second bail-out was that the effective interest rate paid by Greece fell thanks to refinancing by the European Financial Stability Fund and a low interest rate policy by the European Central Bank.

The Last Instalment of the Second Bailout

This brings us to the present package, which in fact is simply revised conditionality for the last instalment of the second bail out. My comments are the following:
  1. The first two bail-out packages have been monumentally botched. These have been exclusively errors made by the Troika of lenders, who have set the terms for each of these.
  2. Successive Greek governments have not helped matters, in that they have been more intent on safeguarding public sector sinecures and related oligarchs rather than implementing true structural reform or a pro-growth agenda that respects European law (or even common sense). Although a significant fiscal adjustment has been achieved and public sector employment has fallen by 30% (mainly through early retirement and non-renewal of temporary contracts), structural reforms have been few and of limited impact.
  3. Greece has been financially self-sufficient since August 2014, and in this time has successfully repaid or rolled over its debt load. The argument over new conditionality for the last instalment is therefore entirely misplaced, particularly since 100% of this instalment is going to repay the IMF and ECB. None of it goes to sustain the Greek public sector. I believe this is sufficient good faith in the process—particularly given the Troika’s monumental mistakes in the past—to warrant an immediate release of the final tranche, directly to creditors if need be. All this fuss is about creditors paying € 7.2 billion to repay creditors, and is simply not serious.
  4. SYRIZA has done itself no favours given its chaotic negotiating style, its statist demagoguery and its blatant disregard of economic and financial reality. However, in some aspects it is correct: a debt restructuring is needed, and its proposals in this direction bear some serious consideration, which was unfortunately never afforded to it by the Troika.
  5. Misperceptions among national and international press and deliberate politicking are creating problems where no problems should exist. Greece’s debt is manageable, providing the short-term distortions of the previous two bail-outs can be managed, and proving Greece finally implements a pro-growth agenda. The large majority of bail-out funds disbursed to date have been to refinance existing debt. The distortions in the bail-out packages have been exclusively the fault of Greece’s official creditors.

Specific Measures

Which brings me to the specific measures proposed by SYRIZA. I can affirm the following:
  1. With these proposals, SYRIZA has attempted a 180-degree turn or somersault on its Thessaloniki programme that got it elected. It is attempting to shift the burden of higher tax revenue onto companies and individuals, protecting a public sector pension system and the wider public sector.
  2. In their sum, the incremental changes in taxes are minor. For instance, corporate taxes are set to rise from 26% to 29% (a 3% difference). The real problem in Greece is that existing taxes are not being collected. Total tax arrears from the beginning of the year are now € 5.5 billion; total uncollected taxes (stock) are € 77 billion.
  3. Increasing value added tax bands in a financial depression can only be described as stupidity on a colossal scale. Greece has seen a real GDP decline of 25% since the crisis began and unemployment is currently 26%. Hitting consumers and households with higher VAT is simply an exercise in stupidity. The high VAT rate is 23% and already captures too many products and nearly all services. If you want GDP growth, and if you accept that consumption is a core component of GDP, then you don't increase consumption taxes on an impoverished population with an already-high VAT rate.
  4. Apart from a nebulous related commitment to privatisation, there is not a single pro-growth structural reform in the entire proposal. There is not a single structural reform in terms of the real operations of the Greek public sector. It’s all about raising taxes during an economic depression.
  5. Finally, even if these measures are implemented, they will not be enough to handle Greece’s refinancing needs in the next 18 months.
Sadly, I see no indication from the Troika that they understand the deleterious impact these measures will have. What I see are ivory tower theorists and career politicians who apparently have little understanding of economic reality or facts on the ground, and who have apparently never worked in any serious capacity in the private sector. As such, they simply don't understand the reality behind the numbers on their Excel charts.
For SYRIZA, I can see how these “reforms” will be interpreted as being positive. They comply with a statist mentality that the private sector should pay for everything. They increase poverty and unemployment, thus favouring the political party that controls the public purse strings. And when they fail, as they inevitably will, they will embolden SYRIZA to say yet again to the Troika: “We tried it your way, and your way failed.”
Although I believe a negotiated solution will be reached, this will therefore merely extend the problem and introduce yet further distortions, which will then require yet more “reforms” to mend.

© Philip Ammerman, 2015

European Commission, Directorate General for Economic Affairs. The Economic Adjustment Programme for Greece. May 2010.
Financial Times. Leaked: Greece’s new debt restructuring plan. 5 June 2015 (access the link to the Greek proposal on PDF:
International Monetary Fund Working Paper. Growth Forecast Errors and Fiscal Multipliers. January 2013
Navigator Consulting Group. Employment Trends in the Greek Public Sector. 29 March 2015
Navigator Consulting Group. The SYRIZA Somersault. 23 March 2015

Related Posts:
For a detailed assessment of a pro-growth agenda for Greece and our detailed assessment of the first Memorandum, please view our presentation here (image gallery).