Sarkar on Greece

There has been a great deal written about Greece recently. I therefore, somewhat timidly, add my penny’s worth.

The Syriza Party, through their PM and their finance minister, has rejected the idea of cooperating with the Troika, the EU, ECB and the IMF. They are seeking debt forgiveness to meet their election pledges to the Greeks population.

Right from the start, it must be said that the EuroZone will not entertain debt forgiveness. Two simple but crucial reasons as to why.

—- Debt forgiveness for Greece will encourage other countries, who have far larger and unsustainable debt (including Italy and even France), to seek a similar deal, which at this stage is impossible to accommodate; and

—- Equally importantly, debt forgiveness will encourage and embolden popular support for right wing fanatics in Northern Europe and left wing loonies in Southern Europe.

As a result, debt forgiveness will not happen. 

 The EZ will, however, agree to

—- Lower interest rates on the IMF/ECB/EZ loans to Greece;

—- Agree to an extension of maturities on the outstanding loans;

—- Allow the Greek government to reduce the primary surplus requirements, in order to provide fiscal stimulus; and

—- in due course, allow debt forgiveness. 

In any event, the net present value of debt, which attracts virtually zero interest rates over say 50 years (both of which, the EZ will agree to) is considerably lower than the current value of the outstanding debt.

Who has the upper hand. It is clear that the EZ does. No debate. The risk of a Greek default/exit is considerably lower than it was 5 years ago. The outstanding debt is mainly to EZ governments, ECB and the IMF and not to EZ banks. Furthermore, the introduction of QE in March dispels fears, other than short term panic by ill informed investors.

At the peak, the Greek Central Bank provided some E124bn of emergency lending assistance (ELA) to Greek banks, with Target 2 as far as the rest of the system was concerned, of around E102bn.  In December 2014, there was E56bn in normal financing and just E1bn of ELA. 

The IMF cannot take a write off in its loans – it is a preferential creditor. As a result, the EU and the ECB will have to accept haircuts on outstanding loans if they agree to debt forgiveness. The ECB wont. That leaves the EZ countries, who have guaranteed the vast majority of the outstanding debt to Greece. Politically, the EZ, for the reasons mentioned above, cannot agree to a debt “haircut” either, certainly not at this moment. 

Whilst recovering, the Greek economy in January has started to flag. Last year, the Bank of Greece reported that the country produced a primary surplus of +2.0% of GDP – clearly that is going to contract. Furthermore, a number of Greeks have reverted to their bad old habits and are not paying taxes in anticipation of relief by Syriza. Greek bank are losing deposits by the truckload in anticipation of a Grexit. The ECB will not agree to ELA if the country does not comply with its commitments – that’s the bottom line and the real killer for Greece. Neither will the ECB include Greek debt in its QE programme. 

OK, what if there is no deal. Well Greek banks will collapse and the country will be forced to stop those depositors who still have funds in Greek banks from withdrawing their cash. The Greeks will then revert to the Drachma, which will be less valuable that soiled toilet paper. Inflation will skyrocket. Greece will be cut off from international capital markets. The conclusion will be that Greeks will have to start living in caves. Political tensions will erupt and the threat of civil disorder/violence will be real, given the neo-Nazi elements in the country.

What happens next and when. Greek banks and the country need funding in the next week or so. As a result, this crisis has to be resolved one way or another imminently. No matter what Syriza states in public, they have to concede that there will not be any debt forgiveness. That’s the problem of over-promisng – under-delivery inevitably follows. They could, I suppose agree to a deal, get ECB ELA and then renege. However, that still busts Greece, as the ECB will not play ball on QE.

Insulting the Germans, which the Syriza party is doing,  will not help – indeed, it will make the German public (whose opinions Mrs Merkel follows religiously) to force their government to agree to Grexit. It can happen, even though, in theory, there is no mechanism to kick anyone out of the Euro. 

I am clear as to the German/EZ view. What I certainly do not know is how the Syriza party will react. They comprise academics and theoretical economists – an explosive mixture. Their problem is their electoral promise to demand and get a debt haircut. To concede withing a couple of weeks of being elected will bring down the government, most likely this year. Well, you reap what you sow.

All of this is hugely Euro negative. The Euro, last week, appreciated, though there was some weakness on Friday. I suspect the Swiss National Bank (SNB)  was intervening, as the Euro appreciated noticeably against the Swiss Franc. However, not even the SNB can withstand the selling pressure following problems with Greece. 

My own view (hope) is that Greece exits the Euro – I for one am sick and tired of them. Regrettably, the odds are that the Greeks will back off at the last second. Not much time to wait anyway. 

SELL THE EURO, against the US$ though, though it will recover if there are signs of a deal late next week or the following week. Please note that I am short the Euro against the US$, up to my maximum limit. 

I’m not sure whether this is a Greek comedy or tragedy, but it’s certainly amateur dramatics time.


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  1. cobaltbluedolphins commented on Feb 1

    “My own view (hope) is that Greece exits the Euro – I for one am sick and tired of them.”

    Well, I wish that too. Then, I hope they’re followed by Spain, Italy, Portugal and Ireland. And finally, I’d like to see the whole European project fall apart.

  2. Blissex commented on Feb 1

    «Well Greek banks will collapse and the country will be forced to stop those depositors who still have funds in Greek banks from withdrawing their cash. The Greeks will then revert to the Drachma, which will be less valuable that soiled toilet paper. Inflation will skyrocket. Greece will be cut off from international capital markets.

    That I think is the real Syriza plan: to pretend to negotiate a huge debt cut, and when that fails, to declare national bankruptcy and revert to “monetary sovereignty”.

    «The conclusion will be that Greeks will have to start living in caves.»

    Well, no: a large minority of Greeks have lots of money in Euros in Swiss banks, largely pilfered from the loans that the Greek government borrowed from Eurozone banks, and they seem to be hoping that Greece defaults on its debts, and switches back to the dracma, so that they can buy both greek government and greek private assets at really low firesale prices.

    A significant minority of relatively rich greek insiders in other words hope that Greece becomes bankrupt to make a lot of money out of that bankruptcy and become a lot richer.

    As to the greeks who are poor and haven’t looted their country and swindled foreign lenders, the question is whether after bankruptcy greek exports can cover the cost of greek imports. Of course mathematically they must, but I suspect that the greek imports that can be covered with the value of greek exports don’t include the quantity of oil and medicines that Greece needs to maintain minimal standards. Greece has enough difficulty importing enough oil and medicines now…

    If the germans were less incredibly stupid they would still be very harsh as they are now on the big issue of the debt, but also be generous and provide some kind of welfare via for example ration cards to the poor greeks who did not loot their country and swindle foreign banks, to prevent fellow Europeans from falling into desperate circumstances, and it would cost them very little money, and gain them a lot of respect.

    They would have to do this directly, or more likely through ad-hoc charities (if ration cards were used, they ought to bear the german flag), rather than through the EU, or through the thoroughly corrupt greek government.

    But that’s unlikely to happen.

  3. RW commented on Feb 1

    Pretty fair analysis and, agreed, the most likely (but not inevitable) outcome is something along the lines proposed with a reduction in primary surplus requirements being the critical piece: it is flows that matter here, not the overall debt, because Greece is currently running an account surplus (>4%) but its all getting sucked up in required interest payments so the economy cannot grow.

    I am betting that wisdom prevails and a solution reducing required flows (and structural reform of the tax system it is to be hoped) is negotiated but I am fully aware that EU elites could be distracted by morality plays leading to the breakdown of negotiations and serious dislocation. As Blissex points out, there are probably wealthy Greeks who could profit from a catastrophe but the consequences for the quality of life of the Greek people would be terrible and the EU project would not escape injury.

    It needs to be recalled that economic unification in Europe is primarily a tactic, the core issue of the EU project is democracy and peace. We’re not dealing with instructing children here or enforcing discipline either, we’re dealing with sovereign states and millennia of blood on the ground and the forced economic destruction of an EU member would not, shall we say, be a constructive lesson.

    Never mind what one thinks of Greece, it was probably a mistake to grant them entry into the EU in the first place, but those who wish to focus on moral hazard might want to keep the greater hazard in mind.

    NB: Axel, Count Oxenstierna, advised his son during negotiations in Westphalia (1648) — “Do you not know, my son, with how little wisdom the world is governed?” — yet the Thirty Years War and the Eighty Years War were ended and a kind of peace established, at least for a time. We’ll just have to see how well the Europeans do this time around.

  4. Lord commented on Feb 1

    I expect the rate to be reduced to zero and repayment open ended as much the only solution. Debt forgiveness becoming irrelevant then. Even that would be a good return with deflation ever present. I don’t know how to interpret no debt forgiveness though. Literally it means keeping them in the euro since leaving would mean 100% forgiveness involuntarily, so they are speaking out of both sides of their mouth.

  5. Blissex commented on Feb 1

    «it is flows that matter here, not the overall debt, because Greece is currently running an account surplus (>4%) but its all getting sucked up in required interest payments so the economy cannot grow.»

    That is likely irrelevant: greek statistics are “inaccurate” (euphemism alert), then tax receipts have fallen hard after the Syriza victory (who may not want to pass to history as the party who made greeks pay taxes.

    But even more importantly as I wrote what matters is the balance of trade, not government, cash-flow aspect: whether Greece can cover the hard-currency cost of “sufficient” imports with the income from exports. That’s the critical matter in the well-established recipe book of sovereign defaults or quasi-defaults.

    Greece is already having huge difficulties importing medicines, as foreign pharmaceuticals companies complain that greek hospitals stopped paying them years ago and oil, as Greece does dubious deals to import “black market” oil from Iran and other sources in the Middle East.

    The recent fall in the oil price to half is probably the best thing that could have happened to Greece, and probably it makes Syriza’s likely choice of bankruptcy and “monetary sovereignty” far more feasible.

    «there are probably wealthy Greeks who could profit from a catastrophe»

    I would expect that 1/3 to 1/2 of Greeks have foreign bank accounts; after all there are reports that swiss bank accounts by greek citizen amount to more than the foreign debt of Greece.

    Many of these bank accounts won’t have much money in them, but probably there are enough middle-upper and upper class people with large Euro deposits abroad that a greek catastrophe would be a huge buying opportunity in a firesale for quite a number of them.

  6. Blissex commented on Feb 1

    «economic unification in Europe is primarily a tactic, the core issue of the EU project is democracy and peace»

    And that’s why I suggested that while the germans have every right to be hard on the monetary and debt front, wisdom should advise them to provide emergency support to the poorest greeks out of a simple spirit of charity towards fellow europeans. The greek elites in large part looted the greek state and the foreign lenders, but a majority of greeks just lived ordinary lives without being favoured insiders.

    By some suitable mechanism, but I think that something like ration cards like USA food and medicine “stamps” (bearing the Bundesrepublik flag, plus that of any other contributor) might go a very long way to show to the greek population how much they have been screwed by their elites and that they can trust at least some foreigners to help them. Imagine a poor greek family in the mountains or an island being able to afford the medicines to cure the illness of one of their children thanks to a german ration card redeemable at a german run warehouse maybe run by german volunteers (I would expect greek pharmacists to have a large minority of cheaters and profiteers who would subvert the scheme).

    Greece is in large part a semi-failed state and a banana republic because countries that have been occupied for centuries by foreigners like the Turkish Empire did to Greece tend to maintain the habit of thinking that government is an extractive oppressor even when they become independent. If some foreigners, and especially the germans, showed how they instead are ready to help,and with characteristic german effectiveness, they could earn the trust and respect of Greece for many generations. Which is what nation building is about. Germany has the right to be leaders in Europe, and part of a leader’s job is to show that they take care of their followers, without having to be taken advantage of.

  7. rd commented on Feb 1

    Be cautious about assuming everything will be resolved rationally. Yugoslavia, just north of Greece, was not resolved rationally after Tito died. The big question is whether or not an alternative to a negotiated agreement is becoming more attractive to the Greeks. Perception may play a larger role in decision-making than ledger sheets.

  8. Robert M commented on Feb 2

    I would remind Germany that in the 1950’s germany could not repay its debt to the US. Most of it was haircutted into nothingness in order to keep Germany from economic collapse. Germany should remember that the politics were far worse. That said it means Germany needs to reallize that much of the resulting growth of Germany since the intro of the Euro has come because it can export to Europe as a whole. Simply because they believe that they do not need Europe because of the rise of the PRC and the rest of Asia does not make it so. the low value imports from both Europe and Asia are gradually becoming more and more upscale and in any trade war w/ Asia Germany will be the big loser. Not only will they lose they will receive no help from Europe as Germany is a notorious non buyer from any other country, promotes Austerianism as though they were napeleon after Austerlitz and deaf when it comes to the concerns of others especially the dfense of Europe where they contribute less than zero.
    They need to be reminded of this by the US. So they should prepare for the haircut now. if they in turn need a scalp I suggest they look to ban the Vampire Squid from Europe. After all the Squid helped fraudently hide the situation of Greece.

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