Greece entered its first sovereign debt crisis in December 2008 when the spread over bunds started diverging significantly. The end of this first sovereign debt crisis was in the spring of 2012, with the PSI; after causing a major depression after two years of austerity for its people and no equivalent austerity for its sovereign near defaulted borrower and despite MOU # 1 of 2010. On determining the non sustainability of the debt, the Greek state, in agreement with its official lenders, defaulted officially towards remaining foreign private lending institutions, its own banks, hospitals, universities, insurance companies and pension funds. It was then said that the level of debt forgiveness was adequate for restoring macroeconomic balance and that growth was just around the corner otherwise. This restarted the clock on the greek sovereign debt crisis, with MOU #2.
The big differences of MOU #1 and MOU #2 were the author and the emphasis. MOU #1 was written by the IMF even prior to 2010, when it was signed, in its various reports and analyses. It had four axes: increased taxation, decreased government spending, market liberalization, state reform. MOU #2 was written effectively by the largest bailout partner, Germany, with debt repayment only in mind to please its own constituency: many more taxes, less social welfare, english law, save the banks, privatize indiscriminately, high primary surpluses forever, and a formal repetition of some of the previous stuff on which nothing had been done; and never subsequently really pressed to do. It is a surprise it even recognized that the actual debt had gone up despite the partial forgiveness, which is the first admittance of amajor failure of the program. The IMF, despite words to the opposite, was coerced to follow and used unrealistic growth projections in the middle of a unique historically non war related depression, to justify the impossibility of debt sustainability.
2013 and 2014 were a demonstration of further economic collapse, despite non educated political hooliganism, mistaking as underlying long term growth what was essentially a one off tourist boom and some further defaults of the Greek state to its own citizens. Yet it was clear to anyone willing to think, that the underlying problems and country management that had brought the greek state to collapse had not only not improved, but instead remained either the same or even deteriorated. Thus, despite a lot of words to the opposite for some time, especially by the Greek sovereign's management team, the enforcers of MOU #1 and #2, based on reality, told the management to clean up their act. But cleaning their act required either accepting their failure and renegotiating, or defaulting, or continuing squeezing the people and not the continuously spendthrift and unproviding Greek state. Or abandoning ship, which is what they did, and handed over the hot potato.
It is clear that no debt forgiveness or other substantial change was agreed in the latest Eurogroup, despite the noise. It is rather clear that until a new program is agreed the MOU #2 still holds and shall sort of be concluded. Unless there is some hidden agenda for Athena delenda est through e.g. Malta's parliament not accepting the agreed extension of the loan, it seems that agreement was reached on discussing a sort of new program. Such new program or MOU #3, if concluded, will effectively restart the clock on the debt crisis for the 3rd time.
As argued in the past and as 100% of american economists insist upon, debt forgiveness of a massive scale needs to be accepted if Greece is not to eventually default, sooner or later, with plenty of collateral damage. No one of those insisting on it thinks of this as a sufficient condition for eventual debt sustainability or growth, yet it is clear that it is a necessary precondition for debt sustainability and growth. So the risk remains that once again European politics of federalist compromising will fail to do what is really required to at least give Greece a chance and MOU #3 will not be a solution but rather another 10-15% drop in GDP and disposable income; and a poor, destabilized, and haunted by vulture funds Greece shall be the only thing left.
This is where the current government has only one option: to eventually insist on debt forgiveness after showing that it can do good things for Greece's economy with the risk of a meltdown everpresent. Does it have the strength,guts, popular support and clear thinking to do so? Will it ultimatelybe able to explain to Greeks the need to default if the debt forgiveness does not take place? Does it have the guts to then ridicule the eurozone by refusing to leave while defaulted (after all, Detroit did not leave the dollar when it defaulted...)? Does a blind to economic reality opposition (ex-government) have the guts to stop arguing in favor of its failure of achieving a primary balance through pauperization? Does (Germany's) Europe have the willingness to go on with the European Project and show true solidarity and lack of stubborness? Does Germany's government have the guts to accept reversing the european catastrophic policy of austerity and explain it to its people? After all, the lenders' governments can never recover the money used for saving their own banks, only pretend to do so till they have also handed over their own hot potatoes to others.
Sunday, February 22, 2015
Friday, February 20, 2015
First corrections of troika imposed economic policy and the magic number 7: Partly absurd and demagogic
We have seen a lot of the new Greek government and its negotiation with the rest of the Eurozone. However, ultimately, it is what it does in the country that will determine its success or not. And I am amazed at how dividing and demagogic these are. And prior to awaiting a deal with the eurogroup, in a silly - to say the least - attempt to create a fait accompli. If I were any Eurogroup Finance Minister, I would request smacking Greece on these as a precondition for any deal. Using the protestant ethic on Varoufakis is at least not productive and builds nationalistic support for him; pointing out and correcting demagogic attempts within the country can be much more effective and correct; but, ironically, this is also against the troika's previous advice...
In detail:
1. Proposal for protecting the main residence from bank seizures and auctions
Anyone with an economics education seeking to provide a social protection for cases where people have been unable to pay their debt service for their house knows that the first criterion is to connect income, cash at hand and potential cash at hand (sources of repayment) to debt service. Is this what they are doing?
They have actually identified the abovementioned sources of repayment. But are they linked to debt service??? NO: Instead of being used to check the ability to pay, these, with the use of the magic number 7 (70,000 income, 700,000 real estate, 70,000 deposits) are only used to safeguard actual and potential voters of Syriza. And coupled with a total "objective value"of 400.000 for the value of the primary residence - one more 700,000 would include some who will never vote for them -, all those who are clearly anti-Syriza are excluded from benefiting from this.
So a non typical household where both husband and wife still have a job, can decide to not pay the bank even if it is able to pay debt service of say 10,000 a year; they can simply wait and see without doing anything! How is this healthy for the banking sector or the economy or for debtor behavior? Moral hazard at its maximum!!!
2.Tax settlement and forgiveness
Here details remain a bit unclear as it seems to still be cooking, but the aim is clear: make the burden much much lighter, even forgive principal, for 3.5 million voters.
It is clear that it was impossible to go on as before: new taxes were imposed with a troika approved stupidity of estimating the ability to pay of these taxes at levels of 70%! i.e. a tax was imposed where it was already known that 30% of the people could not pay it. It is clear that this was going to, sooner or later, require correction, and to a large extent is what is happening. Yet the way this is being done is not through a link with the ability to pay, but on absolute terms, just like the primary residence protection above. It is also "marketed" as a present to existing and potential voters, rather than a correction. With all the moral hazard effects once again. And, of course, excludes the tax of the right wing supporters who had large real estate holdings...
3. Domestic Debt Prisons: When democracy collapses...
And of course the first near complete turnaround on debtor prisons comes along, at the same time the country is negotiating a release from its own debt prison! Greece is one of the few countries where to owe to the state is legally worse than tax evading! Today if you owe 5.000 euros you can be arrested at any random police check and taken to prison! If you tax evade, you wait for a court decision ad infinitum though your assets may be seized in the meanwhile... And of course you may owe without prior notification or a chance to appeal legally - you can only appeal once you pay 50% of the tax, even if you do not have to pay it or it can destroy your business!!! Many people have been driving happily with their families and have suddenly been dragged out of their cars to prison without knowing the reason, a complete and total offense to any sense of decency! And of course such collapse of reason and due process only leads to people wanting to avoid investing in Greece while Greeks want to keep their money outside the country, outside the reach of the Greek authorities against whom there is no protection of law.
Instead of fixing, as a priority, this complete breakdown of the basics of democratic principles (troika imposed also) which they have promised to eventually do (let's see, when money is missing, things change), they are simply raising the limit to go to debt prison to 50,000. Maybe... still unclear. Yet they had promised to stop this thing altogether, properly acknowledging prior to elections that if you put somebody in prison while he cannot pay you or when he has been unable to appeal to justice, society sort of does not work well. Just like Greece and its bailout funds...
FYI: Darkleaks
I came across this on new technologies, it is interesting but sounds scary...
http://www.coindesk.com/meet-darkleaks-bitcoin-powered-black-market-secrets/
http://www.coindesk.com/meet-darkleaks-bitcoin-powered-black-market-secrets/
Wednesday, February 18, 2015
Why did the latest Eurogroup result in confrontation? An alternative view based on just published documents
The latest Eurogroup ended with a confrontation between the new greek minister of finance and all the rest. Varoufakis was actually accused of lying, not being prepared, not proposing anything, not committing to anything etc. Given my personal experience with negotiations, I was wondering if this was true or if it was the first rule of negotiations 101: If your opponent has a good negotiator, take him out by discrediting him to the people who mandated him.
The MoF disclosed the documents of the Eurogroup, including the non papers given by Varoufakis and the alternative texts for the Eurogroup communique, all in good english, showing that there was plenty of preparation and that Varoufakis did not lie on the two alternative communique drafts: http://www.naftemporiki.gr/cmsutils/downloadpdf.aspx?id=917523
This has actually proven to me, at least, that the reason for the failure and the subsequent discrediting tactics was the fact that they did not like what he said as it hurt the interests of eurozone companies and mostly German ones for that. Let me pick, inter alia, some things the Greek government committed to do differently that are likely to hurt the interests, existing or hoped for, of companies based in certain Eurogroup countries, including greek interests:
1. They will examine future privatizations on their own merits and not dogmatically
2. They will make procurement transparent
3. They will attack tax evasion/avoidance through transfer pricing for multinationals present in Greece and fuel contraband
4. They will "undermine rent-seeking, in particular in the oil sector, procurement, the construction sector, the financial sector, and the media"
Rent seeking, in economics, means those who exploit market imperfections, usually market positioning, to extract higher profits than in a fairly competitive case, e.g. banks charging 800 basis points to healthy companies for loans.
The pauperization of Greek households in numbers other than GDP, and the remedy's problem demonstrated
**Warning** this is a bit technical and number heavy and boring for most
It is almost unthinkable that after 4 years of a debt program and of "reforms" things have not yet stabilized for the greeks. The level of the adjustment, which now is well beyond the initial need for a c. 15% drop in the government spending part of GDP, exceeds the great depression and is most pronounced at the household level where disposable income has dropped quicker than GDP. GDP is a measure of production, not a disposable income or standard of living index, and understates the effect on people. GDP may have been an adequate measure of the drop in income in the 30s, where government budgets started from a healthy point. In the case of Greece, the effect is more evident in the disposable income figures rather than GDP.
The Greek Statistical Authority today relased a report on household income and consumption for 2013: http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A07061/PressReleases/A0706_SEM91_DT_AN_00_2013_02_P_EN.pdf
Here are the points to take away:
Household disposable income fell a total of 30% between 2010 and 2013, while consumption by 22% while GDP at 24%. The biggest drop in disposable income of 10.2% was in 2013!
Households dipped into their savings to fund the difference in 2013, with the gross savings rate dropping to -6% from positive before.
At some point this negative savings rate will also show in consumption with a time lag and reduce GDP which in 2013 was saved by the negative savings rate.
During the same period, government spending fell a total of 22%. So the main responsible of the crisis, the spendthrift Greek state, adjusted much less than households, which explains why GDP had to fall much more than was required if the adjustment had been done at the source of the problem. This is further empirical evidence in relation to the post of 26/2, point 3, on lessons from the greek debt crisis, where the argument is that the adjustment could have been done with much less pain if it had been done at the source of the problem.
It is almost unthinkable that after 4 years of a debt program and of "reforms" things have not yet stabilized for the greeks. The level of the adjustment, which now is well beyond the initial need for a c. 15% drop in the government spending part of GDP, exceeds the great depression and is most pronounced at the household level where disposable income has dropped quicker than GDP. GDP is a measure of production, not a disposable income or standard of living index, and understates the effect on people. GDP may have been an adequate measure of the drop in income in the 30s, where government budgets started from a healthy point. In the case of Greece, the effect is more evident in the disposable income figures rather than GDP.
The Greek Statistical Authority today relased a report on household income and consumption for 2013: http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A07061/PressReleases/A0706_SEM91_DT_AN_00_2013_02_P_EN.pdf
Here are the points to take away:
Household disposable income fell a total of 30% between 2010 and 2013, while consumption by 22% while GDP at 24%. The biggest drop in disposable income of 10.2% was in 2013!
Households dipped into their savings to fund the difference in 2013, with the gross savings rate dropping to -6% from positive before.
At some point this negative savings rate will also show in consumption with a time lag and reduce GDP which in 2013 was saved by the negative savings rate.
During the same period, government spending fell a total of 22%. So the main responsible of the crisis, the spendthrift Greek state, adjusted much less than households, which explains why GDP had to fall much more than was required if the adjustment had been done at the source of the problem. This is further empirical evidence in relation to the post of 26/2, point 3, on lessons from the greek debt crisis, where the argument is that the adjustment could have been done with much less pain if it had been done at the source of the problem.
Tuesday, February 17, 2015
ECB voting rules: the absence of logic and of representative democracy
The following link is an article on ECB voting rules. I have read it a few times, and find the whole thing simply absurd, as demonstrated e.g. by the fact that the Netherlands has equal voting posts as Spain or Italy.
http://www.euractiv.com/sections/euro-finance/ecb-voting-rights-rotation-raises-fears-germany-302884
What is even more worrisome, is how certain people view the rules: when not convenient anymore, change them!
http://www.euractiv.com/sections/euro-finance/ecb-voting-rights-rotation-raises-fears-germany-302884
What is even more worrisome, is how certain people view the rules: when not convenient anymore, change them!
Eurozone-Greece, 2 to 0: Why does it appear as a win win for eurozone governments to throw Greece out, no matter what
Background
Last night the majority of European Finance Ministers, told Greece to beg for an extension of the current program without even offering some window-dressing for the newly elected government. As there was a lot of publicity, it looks like the first time that this has happened. This is however the outcome of a gradual buildup.
The previous government,genuinely believing that a magic wand had been applied to Greece to bring back growth and despite standard micro and macroeconomics, promised in the summer of 2014 to the Greek people an end to the troika program, remembering once again Samaras' promises of 2010-11. Not a single party in Greece proposed extending the MOU or imposing further austerity in 2015.
However, in the fall of 2014, the reality of the economy was back on the table again: the growth of 2014 was a one off injection from a huge increase in tourist arrivals and a smaller increase in tourist receipts, and the rest of the economy continued contracting as internal demand wavered and businesses and people kept on fleeing the unfriendly tax, business and lack of financing or employment environment. The troika was well aware not only that the primary surplus was overstated as a number of expenses was hidden under the table, but that 2015 posed challenges to the optimistic counting of the Greek ministry of finance.
So despite some signals towards ending the program in 2014, the troika in December rejected all proposals of the last government even though these included additional taxes and wide-ranging further reductions in social security and pensions, without proposing something instead. They also rejected certain measures of the Samaras government which were taken unilaterally, such as the 100 installment settlement of overdue tax obligations. The Samaras government left the negotiations inconclusive and went for slightly early elections which both the troika and he knew he would lose.
So effectively in late 2014, the previous government was already given an ultimatum it could not comply with. Therefore yesterday's rejection is only a continuation of previously made decisions, although there is one big difference: the troika rejection did not have the political implications of yesterday's ultimatum as it was on a technocratic level.
So what is really going on? A hypothesis for testing
I shall formulate a hypothesis which seems plausible: The eurozone leaders, knowing in 2012 that the Greek economy had already passed the point of no return, made a decision to "help" Greece for the last time and ensure that the eurozone was able to cope with a failure of Greece to comply with the program and be forced/allowed to exit the eurozone. And as Greece moved towards the inevitable while its people kept facing economic disaster, it would serve all best if the "accident" happened in the hands of a euroskeptic party.
Substantiation
- Passing the point of no return: IMF officials had to struggle with assumptions to substantiate - but hardly convince the trained economist - that the greek program would keep the external debt manageable. Even in 2013-4, there were voices in the IMF suggesting doing debt forgiveness. So there seems to be no actual further cost from a Grexit, as the money already lent is already lost.
- Eurozone banks are now totally insulated from a Greek default, after having been bailed out from 2010 to 2013, despite a cut, with the bailout being funded mostly through new greek state loans.
- Apart from official lending, vulture hedge funds have taken their place as English law has replaced Greek law, so the Greeks will continue to be penalized for their failure if they do not submit to the ultimatum and prefer to default.
- Most EU governments face serious challenges from euroskeptic parties, with the most apparent threats in France, Spain and the UK. Crushing the first euroskeptic party to take control of a country is in their best political survival interests. The inability to think that such non-union mentality standoffs may actually fuel euroskepticism does not seem to be on their minds.
- Old cold war sentiments still arise psychological reactions to anything that is called left, especially if it is called radical left with a communist twist.
- Prejudices about Greece and Germany, both of which remain unsubstantiated (separate notes on this are in the works), are being continuously invoked.
- Greece stands out as a confirmation of the prejudices, when compared to Portugal.
- Greece will be a problem again and again unless the debt is written off, and governments will have to apologize to their people for it, so why bother when there is a scapegoat? Or else, the I-am-fed-up-with-you factor.
- Handling of public opinion: every time the issue of Greece comes up, public support for the euro drops in most countries. So finishing the Greek issue once and for all may stabilize euroskepticism.
A Further Hypothesis which I wish fails testing
It seems that the lessons from the divides that brought about WW 2 have now been forgotten in Europe as the generation of politicians who had lived that disaster has passed away. Politicians are generally not people who have worked in the challenging private sector but rather civil servants or professional politicians. The political morality of Europe over the last few years has resulted in electing those who do the fewer mistakes, not those who try to do things and unavoidably, make mistakes and enemies. Politicians have therefore built a mentality for doing the least damaging politically, and not the correct for their people.
And European Unification has suffered. While we should be strengthening the common market, currency, laws, free circulation of people, goods and services, instead barriers of various sorts are being erected under the pressure of narrow political interests and budget pressures. And not a single market unifying act has been implemented for more than 10 years, with the exception of the self serving european bureaucracy's single divorce jurisdiction directive. As one German journalist wrote "I never thought I would miss Helmut Kohl"!
Last night the majority of European Finance Ministers, told Greece to beg for an extension of the current program without even offering some window-dressing for the newly elected government. As there was a lot of publicity, it looks like the first time that this has happened. This is however the outcome of a gradual buildup.
The previous government,genuinely believing that a magic wand had been applied to Greece to bring back growth and despite standard micro and macroeconomics, promised in the summer of 2014 to the Greek people an end to the troika program, remembering once again Samaras' promises of 2010-11. Not a single party in Greece proposed extending the MOU or imposing further austerity in 2015.
However, in the fall of 2014, the reality of the economy was back on the table again: the growth of 2014 was a one off injection from a huge increase in tourist arrivals and a smaller increase in tourist receipts, and the rest of the economy continued contracting as internal demand wavered and businesses and people kept on fleeing the unfriendly tax, business and lack of financing or employment environment. The troika was well aware not only that the primary surplus was overstated as a number of expenses was hidden under the table, but that 2015 posed challenges to the optimistic counting of the Greek ministry of finance.
So despite some signals towards ending the program in 2014, the troika in December rejected all proposals of the last government even though these included additional taxes and wide-ranging further reductions in social security and pensions, without proposing something instead. They also rejected certain measures of the Samaras government which were taken unilaterally, such as the 100 installment settlement of overdue tax obligations. The Samaras government left the negotiations inconclusive and went for slightly early elections which both the troika and he knew he would lose.
So effectively in late 2014, the previous government was already given an ultimatum it could not comply with. Therefore yesterday's rejection is only a continuation of previously made decisions, although there is one big difference: the troika rejection did not have the political implications of yesterday's ultimatum as it was on a technocratic level.
So what is really going on? A hypothesis for testing
I shall formulate a hypothesis which seems plausible: The eurozone leaders, knowing in 2012 that the Greek economy had already passed the point of no return, made a decision to "help" Greece for the last time and ensure that the eurozone was able to cope with a failure of Greece to comply with the program and be forced/allowed to exit the eurozone. And as Greece moved towards the inevitable while its people kept facing economic disaster, it would serve all best if the "accident" happened in the hands of a euroskeptic party.
Substantiation
- Passing the point of no return: IMF officials had to struggle with assumptions to substantiate - but hardly convince the trained economist - that the greek program would keep the external debt manageable. Even in 2013-4, there were voices in the IMF suggesting doing debt forgiveness. So there seems to be no actual further cost from a Grexit, as the money already lent is already lost.
- Eurozone banks are now totally insulated from a Greek default, after having been bailed out from 2010 to 2013, despite a cut, with the bailout being funded mostly through new greek state loans.
- Apart from official lending, vulture hedge funds have taken their place as English law has replaced Greek law, so the Greeks will continue to be penalized for their failure if they do not submit to the ultimatum and prefer to default.
- Most EU governments face serious challenges from euroskeptic parties, with the most apparent threats in France, Spain and the UK. Crushing the first euroskeptic party to take control of a country is in their best political survival interests. The inability to think that such non-union mentality standoffs may actually fuel euroskepticism does not seem to be on their minds.
- Old cold war sentiments still arise psychological reactions to anything that is called left, especially if it is called radical left with a communist twist.
- Prejudices about Greece and Germany, both of which remain unsubstantiated (separate notes on this are in the works), are being continuously invoked.
- Greece stands out as a confirmation of the prejudices, when compared to Portugal.
- Greece will be a problem again and again unless the debt is written off, and governments will have to apologize to their people for it, so why bother when there is a scapegoat? Or else, the I-am-fed-up-with-you factor.
- Handling of public opinion: every time the issue of Greece comes up, public support for the euro drops in most countries. So finishing the Greek issue once and for all may stabilize euroskepticism.
A Further Hypothesis which I wish fails testing
It seems that the lessons from the divides that brought about WW 2 have now been forgotten in Europe as the generation of politicians who had lived that disaster has passed away. Politicians are generally not people who have worked in the challenging private sector but rather civil servants or professional politicians. The political morality of Europe over the last few years has resulted in electing those who do the fewer mistakes, not those who try to do things and unavoidably, make mistakes and enemies. Politicians have therefore built a mentality for doing the least damaging politically, and not the correct for their people.
And European Unification has suffered. While we should be strengthening the common market, currency, laws, free circulation of people, goods and services, instead barriers of various sorts are being erected under the pressure of narrow political interests and budget pressures. And not a single market unifying act has been implemented for more than 10 years, with the exception of the self serving european bureaucracy's single divorce jurisdiction directive. As one German journalist wrote "I never thought I would miss Helmut Kohl"!
Monday, February 16, 2015
Economic History as a tool at its best: The Weimar republic and Carthagena
On the just announced ultimatum of the Eurogroup to Greece:
http://krugman.blogs.nytimes.com/2015/02/16/athenae-delenda-est/
On the similarities of the bailout program for Greece to the Weimar Republic and the Treaty of Versailles:
http://www.nytimes.com/2015/02/16/opinion/paul-krugman-weimar-on-the-aegean.html?action=click&pgtype=Homepage&module=c-column-top-span-region®ion=c-column-top-span-region&WT.nav=c-column-top-span-region
http://krugman.blogs.nytimes.com/2015/02/16/athenae-delenda-est/
On the similarities of the bailout program for Greece to the Weimar Republic and the Treaty of Versailles:
http://www.nytimes.com/2015/02/16/opinion/paul-krugman-weimar-on-the-aegean.html?action=click&pgtype=Homepage&module=c-column-top-span-region®ion=c-column-top-span-region&WT.nav=c-column-top-span-region
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