Greece: So what next?

It is a week now that the main issue of reopening the greek program appears to have been resolved. Nothing has been really been agreed, except for a likely slight relaxation of this year's primary surplus target and that no policies shall be enacted with a fiscal impact. The rest is to be agreed, and effectively discussions for program 3 are now open and have a deadline of June 30, 2015.

The entire effort of the two protagonists, Varoufakis and Tsipras, has been on this issue, and this is logical. However, now comes the need to pull together the government and make it function in line with what has been explicitly or implicitly or tacitly agreed. Because the one clear message is "DO NOT GO ON A SPENDING SPREE" during these 4 months. This is the testing period for the government, and showing that it controls things and can deliver is of primary importance. 

This is true on two fronts: the external, where many governments hope that Syriza will demonstrate total incompetence, hence they can then finish with Greece once and for all for fault. Other governments just hope that an obedient government will come to power, replacing Syriza. Nobody really wants a success for Syriza.

Then there is the internal front, where the real issue is. This is where success or failure shall be determined, because even if Greece is eventually forced to exit the euro or otherwise defaults without debt relief, the economy's performance shall determine the outcome for the country. Although there are some political and economic interests that oppose Syriza, that is not the main problem. The first is internal opposition within the party of Syriza. And the second is the total lack of managerial experience of yet another prime minister and minister of finance. The combination of these two seems catastrophic.

So what are we seeing on this front? The Syriza government is not functioning and its ministers seem to think that they can do whatever they want for 4 months. A clear policy for these four months needs to be established and followed strictly. There is only one thing to do: prepare and agree the new program. No resources should be wasted on other things. I will outline certain basic management concepts, including key confidence building actions, which I think would be useful particularly during this period:

1. Establish a clear management structure for the government's functioning with rules for and coordination of all actions and announcements regarding government policy. The present image is one of complete lack of coordination and management with a lot of confusion being generated on a daily basis. The issue of the prototype schools comes to mind.

2. Expectations' management: the government should refrain from doing or announcing things it cannot do or things that are contrary to its pre-election promises with respect to the majority of the electorate. Even minor such things can destabilize popular support and bring collapse. It is better to lose the support of 2-3 special interest groups such as e.g. the ERT personnel, than ridicule yourself as a government in front of the entire electorate by e.g. increasing the television tax - which used to be sufficient - to pay for them.

3. Putting together the details and the numbers of the new program, MOU #3 or, in politically correct words, the Agreement. No time or effort should be wasted on other things, four months is very little.

4. Put all effort in revealing and cutting wasteful expenditure. This should not be that difficult and has limited political cost, but requires a change of heart for most Syriza people.

5. Identify certain cases of real major tax fraud and corruption covered up by the previous governments with the purpose of maintaining a sense of fairness and political support while difficult real reforms are planned. This should be only too easy to do. Syriza should also demonstrate leadership and modernity by avoiding Mccarthyist tactics used in the past.

6. Restore basic faith in the tax/judicial system in line with pre-election promises. This will also help stop capital flight and restore small business confidence.

7. Stop the tax uncertainty, primarily for indirect taxes. This should also have a direct effect on consumption, which was affected in the last few months by the obvious impasse with the troika and the expectation of new taxes.

8. Take simple cheap measures for the humanitarian crisis. This is probably the only one being implemented but its costs and financing seem unclear.

Failure to achieve what needs to be achieved, without ideological fanaticism, is a must if the country is going to come out of the mess of the last decade.

A Foreign Policy magazine view on "Merkelism". Sad times for the European Project

https://foreignpolicy.com/2015/02/19/greece-should-not-give-in-to-germanys-bullying-euro-syriza-merkel-varoufakis/

and, as a sign of the German Government's failure to explain what has happened to its people, german tabloid ideas about European Union, reminding other, sadder, times:

http://www.bild.de/politik/startseite/politik/home-16804552.bild.html

As also confirmed by the Union of German Journalists:

http://www.djv.de/startseite/profil/der-djv/pressebereich-download/pressemitteilungen/detail/article/sofortiger-stopp-gefordert.html

Twisted Economics

Greece's letter to the Eurogroup: At last Greece takes ownership of its program!

This morning Greece's new government sent a letter to the Eurogroup describing the reforms it intends to implement. The text can be found on the internet, a sample reference is provided at the end. I will make only two key points:

A. Dramatic qualitative change: This is the first and only time that a Greek Government has taken ownership of a program. This is no longer something being dictated from foreigners which the greek government will do everything it can to circumvent implementation, as happened for 5 years now. Hopefully...

B. Content: This looks like unfortunate program #1 of the spring of 2010 which was only 1/4 implemented. That program had four axes: tax more/transfer* less, spend less, reform public sector, liberalize markets. It has differences, but the direction is the same. Yet program #1, due to being imposed and not owned by the Greek government, resulted in only one thing being done: increased taxes and cut transfers (where public sector wages should be viewed as mostly transfers...).


* Transfers in this case means all government revenues and payments which are related to non funded policy schemes with accumulated liabilities such as pensions, mandatory health insurance, and employment obligations. So transfer less means either increase social security contributions or decrease payments for health, pensions and non-market/non-productive salaries.


Sample reference: http://clamo.ftdata.co.uk/files/2015-02/24/GREEK%20GVT%20REFORM%20AGENDA.pdf

Germany's Pyrrhic Victories and Signs of Hubris: Ukraine and Greece

Germany is unquestionably the leading economy within the eurozone. Yet it seems that it has also decided to lead, whether by default or on purpose, the European Union and particularly the Eurozone. There is already a plethora of voices discussing the issue, as the link provided below and the recent critique of philosopher Habermas, so I will avoid repeating the arguments. The point I would like to argue is that Germany is doing a very bad job of leading Europe despite appearing to get its positions imposed, inflicting long term losses not only on others which they call friends and partners, but ultimately to itself. And I shall use the Ukraine peace effort and the Greek sovereign debt crisis -episode 3 - as examples.

Ukraine: If I were writing a novel, I would start with "Europe's boss, taking hand in hand her alibi Francois, went for a romantic walk along the shores of the river Donets". However this is not a novel, it is real war with real dead and high emotions on all sides. So what did Germany do wrong here? (A brief background is provided in a PS at the end).

1. Merkel was self appointed as informal EU leader on the issue despite the specific provisions of the Lisbon Treaty providing for a High Representative of the Union for Foreign Affairs and Security Policy to represent the EU in foreign affairs, ignoring basic recent concepts of the Union's rulebook. Dragging along Francois Hollande, who needs to increase his visibility at home, as an alibi that this is two major players in Europe doing things, not the EU.
2. Merkel displayed incredible hubris in doing so: The Ukraine has been a target of German foreign policy or practice: the holding of part of it by the Austrohungarian Empire, the immigration of the Ukraine by Germans in the 19th century, the subsequent treaty of Brest Litovsk of 1918 that handed it to Germany, and most recently the invasion of the Ukraine by Nazi Germany in 1941 which required a lot of Russian blood to be spilt in liberating the Ukraine. When Germany tries to mediate between the Ukraine and Russia for a cease fire which can only work against the Russian nationals in the Ukraine, it is an insult to Russia. It is the equivalent of Israel mediating between Saudi Arabia and Iraq after the invasion of Kuwait, of Taiwan mediating between the PRChina and Japan, of the USSR mediating the reunification of PDRGermany by West Germany.

So Merkel went away, as a modern Chamberlain leaving Munich, thinking she had achieved peace and a diplomatic victory on Germany's vision of the Ukraine. And quite similarly to the subsequent 1938 invasion of the Sudetenland, Putin is increasing his military support for the separatists...

Greece: It is clear by now that Germany has coerced the new Greek government into submission over the last 2-3 weeks, only waiting the list of additional taxes baptized reforms to complete this. It is one more victory for Germany over the "spendthrift and lazy Greeks". What did Germany do wrong here:

1. It has shown once again that it considers itself as the undisputed rightful boss of the eurozone, taking over the negotiation with Greece as if it was only Germany who provided loans.
2. It has won once again brownie points by telling Greece to repay all its debts. Yet this is an impossibility, once again postponing the inevitable and continuing failed austerity with a new name.
3. The inevitable default will only lead to the complete destabilization of Greece, adding to the world's problems, without getting any loans repaid anyway. Greece was economically and socially destabilized already, the basis of Syriza's victory, it can now go on collapsing. Capital flight will only continue and no sensible investor will put his money into increased uncertainty.
4. It has shown to all euroskeptics that their nationalistic arguments against the euro and the EU are 100% valid. As Podemos leader said, if Germany does not relax austerity for Greece, they should expect to be talking to Marine Lepen's Front National in the near future. It also proves to the UK that not joining the euro was the wisest thing ever done, thus retaining sovereignty.
5. It has worked up on nationalist lines its own population, undermining even more the European Project. Tabloid titles remind of other sadder times.
6. It has proven to Poland that being in the EU/NATO protects from Russia, not being in the euro protects from Germany.

This sounds pretty pyrrhic .. no debt repayment, no or less euro, no european integration, more nationalistic Germans.

PS 1: A recent example of the discussion on Germany's self assumed Euro-boss role.

http://www.bloombergview.com/articles/2015-02-22/germany-thinks-it-s-europe-s-boss-on-greek-debt

PS 2: Brief background on Ukraine crisis: The West and Germany in particular, has tried to get the Ukraine to become part of the EU and had spent years pushing for entry negotiations/other preentry status . The change of the elected president's stance on the EU resulted in a "popular" revolution to topple him, with the full blown support of the west. This is fundamentally a sort of a coup d'etat, as it was focused on the nationalistic Ukrainian Kiev area and ignored the majority russian rest of the country. As Russia views the Ukraine as part of Russia and not merely a satellite state under the Yalta Treaty, it is inconceivable to them to let go of the Ukraine, and even more the majority russian areas. So they immediately reacted with annexing Crimea, an area where very few ethnic ukrainians had ever existed and was only a historical administrative transfer from SSRussia to SSUkraine; and since then, they have been supporting the separatist Russians in the east part of today's Ukraine.

Some fun but with two way interpretation possible...

Reportedly from the Irish times, but taken from social media.

Greece is restarting, for the third time, its sovereign debt crisis: will it end up in further misery due to compromise?

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.

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

http://www.kathimerini.gr/804345/article/oikonomia/ellhnikh-oikonomia/ka8olikh-prostasia-apo-pleisthriasmoys

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 The primary surplus and the non sustainability of greek debt 101

http://www.bloomberg.com/news/articles/2015-02-19/why-greece-won-t-ever-be-able-to-pay-off-its-debts-with-austerity

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/