25 February 2012

Second Greek Deal: an Exercise in ComPact StuPIGidty

Ministry of Truth:  Strength is Ignorance; Slavery is Freedom; Austerity is Growth

The Second "Greek 130 billion "euro bailout" is not about saving Greece. The numbers and projections were incredible, designed as counters in a "let's make a deal" PSI game.

The Eurzone is an unbalanced monetary union whose economies are in persistent divergence.  The crisis exposes the structural problems of individual economies.  If Greece was the only one facing the threat of insolvency, it would have been bailed out by now. In a monetary union of contradictions, the stress of Eurozone economies moving in different directions, comes apart at the weakest link.  If it Greece wasn't in the eurozone, it would be some other member of the periphery that would be this position.

Greece may have a bloated State sector and a clientelism system ruled by political dynasties, but it is not the cause of the Euro crisis. The world is littered with incompetent, corrupt regimes ruling inefficient economies. In the Eurozone, there is no exchanges rate (or alternative) mechanism to adjust competitiveness and compensate for economies that share very little in common with each other. The "too big to fail" dream is not bringing Europe together, but destroying it. Like other failed monetary unions, this one threatens dictatorships, wars and revolutions.

The Second Greek Bailout Deal

Greece has now been in recession for five years. Greece's GDP fell by 7% last year (17% since 2009) and unemployment now stands at 20%. Youth unemployment (under 25 years) is dangerously close to 50%. Economic growth must be a priority, but it isn't . It only appears in EC communiques.

Reforms without growth are deforming. Austerity, the reaction to 2008 like that in 1929 is creating a monster. Everything, from democracy, freedom, and even humanity itself is being threatened. For what?

A 1930s comedy?
""Well, here's another nice mess you've gotten me into!"

A 1948 nightmare?
with the great powers of global finance in a state of waging permanent war; national cheer leaders (and she who must not be named Tart | KTG) demanding greater competitiveness for their national export effort against each other; populations tuning into national TV 'Hate Weeks' blaming each other; officialdom churning out EuroSoc contradictions; and, new historical agreements each day that erase the previous ones.

Compact StuPIGidty?
The new "Stability and Growth Pact.  At best it is Stupidity Pact 2.0 riddled with holes, rendered useless as each member breaks the fiscal and deficits rules.

But, made effective, it a suicide pact that condemns the periphery economies that sign up for it. It   renders democratic constitutions and civil rights null and void - a 'Find and Replace' button to zap out  the word 'citizens' to replace it with 'creditors' in each nation's constitution.

It means that in a global downturn (imagine a supply-side shock such as a jump in crude oil prices e.g Iranian crisis), a governments will either have to cheat, or cut and deepened its own economy's recession. Trying to cut the budget deficit will lead to lower tax revenues, increased expenditures (more unemployment payments) and yet more missed targets. The country is then placed in a debtors' jail with their finances placed under stringent watch to enforced deeper more bloodier cuts. And once off-track, if you are a small country, there is no way back.

Here's a view from Punk Economics

And a lighter take (from @GTCost on twitter)
The whole Pact can be replaced by the Hitchhikers Guide with no loss of functionality and like the EU, the Deep Thought never computed the actual question it attempted to answer. 
A Carthaginian deal on Greece? ( H/T Fabius MaximusAmbrose Evans-Pritchard 

The Greek deal is a template for the new "Stability and Growth Pact. - a template for an accounting book dictatorship where rules and agreements are made behind closed doors, by unfamiliar officials and  technocrats guaranteeing the rights of creditors above those of citizens. It is served as a austere lesson to discipline all other 'sinners'.  Hardy any of  the "Greek 130 billion "euro bailout" is going to the Greek people. It locks them up in a debtors prison, and then throws away the key.
  1. Exchanging of existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law will both diminishes their sovereignty and makes the eventual default far more difficult.
  2. Exchanging bonds issued to private investors for loans from quasi-governmental agencies will make the eventual default far more difficult.
  3. The pledging of gold reserves will eliminates a vital resource needed to buy imports during a default and devaluation process.
These will make any future defaulting or exiting of the euro more expensive and more painful.

Here is the second lesson from Punk Economics

The reward for the hardships imposed by the "Second Greek bail-out", is that Greece's sovereign debt will become sustainable at debt/GDP ratio of 120% by the year 2020.

The deal forecasts Greek GDP to fall until some point in 2013 but somehow magically pops up at 2% in 2014 and continues at growth rate that achieves a 120% debt to GDP in the year 2020.  Greece is  a weak economy that has just suffered five years of hard recession with still more austerity cuts to come. How can it return to growth by 2013?  What makes 120% the magical number of debt sustainability? 20/20 EuroVision.

Within hours a IMF leaked Debt Sustainability Report (find here) stated a worse (more likely) case scenario of the debt being 160% of GDP in 2020.  Here is the Greek Debt sustainability analysis  as annotated (by G Jenkins, Swordfish Research Ltd via FT's Alphaville)

“Strictly Confidential” (It has already appeared on Wikileaks so give away as you like)
“Baseline assumptions…the 2011 outturn was worse than expected…the macroeconomic outlook has deteriorated significantly…Medium term potential growth assumptions have been maintained” (Yes, I know it doesn’t make any sense not to alter the growth assumptions when all the inputs have deteriorated but unless we keep the figures the same then even we can’t fudge this one)
“Fiscal path has been adjusted…still bring Greece to a primary general surplus of 4.5% of GDP by 2014, although additional measures will need to be identified to secure this outcome” (I can’t get it to add up)
“… uncertain whether market access can be restored in the immediate post-programme years…” (I mean, would you lend your own money to this lot?)
“For the purpose of constructing the DSA baseline Greece is assumed to maintain good policies post-programme” (Yeah, knew that one would make you chuckle!)
“…if the primary balance gets stuck below 2.5% of GDP” (which it probably will), “then debt would be on an ever-increasing trajectory” (I am working on the Bail-out III paper this weekend...)
“Debt dynamics under an alternative unchanged policies scenario” (Think of it like alternative comedy…it all becomes mainstream in the end, so this is the more likely outcome. It’s not the wrost case scenario — jeez, you definitely don’t want to see that…)
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned…” (Hey, can you blame them? They have to live there…)
“Greater wage flexibility may in practice be resisted by economic agents” (Turkeys don’t vote for Christmas…)
“Service market liberalisation may continue to be plagued by strong opposition from vested interests” (Expect more riots…)
This was quickly followed by the EC admitting its own prediction from last Nov for 2012 is now "markedly" wrong, with economic activity being much weaker than anticipated. The new EC forecasts (23/02/2012 click here ) exploded the numbers in the Greek bailout deal that had projected the new measure realizing a 120% Debt/GDP ratio for 2020.  Just the headings alone in the report reveal how messed up the Eurozone is. The new forecasts now also show negative GDP growth rates for Belgium, Spain, Italy, Cyprus, the Netherlands, Slovenia and Hungary.

So, after years of suffering, having loss of its independence and being taken over by unelected Trioka officials, the best the Greek economy can hope for is to be in the same unsustainable place as where it is now.

The agreements to cut minimum wages, health care, pensions and "whatever it takes" will reduce domestic demand and deepen the recession.  Cartels and power interest groups, buffered by funds aboard will survive.  Small competitive  businesses won't.  423,000 businesses have shut down while People live of the garbage and sleep on pavements. Ignore the semantics of default, citizens will default everyday on their mortgages, loans and bills. The Troika does not offer a bailout for ordinary citizens or save small businesses from bankruptcy. Greeks are asked (in fact they are being ordered) to do it for their children....

Internal devaluation (replacing the role of exchange rates in adjusting international competitiveness) is proving to be a disaster of epic proportions for the Greek economy. Competitiveness in the Greek economy is not simply measured by a macroeconomic 'real wage level' to be adjusted in neoclassical or simplistic Keynesian versions of the world. Wages cannot be cut off from productivity, productivity cannot be cut off from the structural inefficiencies of the Greek economy, and this in turn cannot be cut off from the political regime in Greece. The much needed restructuring of the Greek economy has to go hand-in-hand with a much needed restructuring of the political and legal system.

Competitiveness in the Greek economy is about cartels, monopolistic market structures and a system of clientelism that kills off development and innovation. Foreign and domestic Cartels, collude, carve up markets, fix prices while regulators look the other way. Innovation retreats to the black and grey economy. Lower incomes groups, struggle to escape a system that tries to make them pay more in an increasingly regressive tax system. The wealthy have off-shore accounts, lawyers and accountants that cut through a complex legal system. Austerity and reforms are applied to the weakest first. A turkey does not vote for Christmas.

To inflict this monstrous deal, the Greek Constitution has to be changed to give creditors first priority to take any revenues that "Greek" government can squeeze from its own population. The money to pay these creditors must be placed in a so-called "escrow account" so that it can't be diverted to other purposes. Any leftover spare cash raise from government revenues will be used to run whatever remains of the country. Unless Greece manages to achieve primary surplus (tax revenues exceeding expenditures excluding interest payments on debt), which is proving to be practically impossible, it will either have to borrow yet more money or break even more obligations to its citizens. More exasperated taxing and expenditure cuts, will slash against those designed for economic reform as the economy spins further into its death spiral.

Think of Greece as a 19th Century UK rotten borough in desperate need for more not less democracy. Think of Europe as not even pretending to be one, enforcing rules that make governments accountable to the creditors, not their citizens.

Here is yet another take on the Greek scam

Debt servitude not investment is the priority in an up-side-down economic development model that reduces the economy to Third World conditions. Eurocrats land in Athens to ensure the serfs don't cheat in making their tributes. The increasing numbers of people exiting the euro to  arrive at soup kitchens, shows how far the third world colonialism has entered into Europe.

Who is the deal really bailing out? The private holders of Greek sovereign might be hit with a loss (in Net Private Value) of up to about 75%. - but these were junk bonds of an insolvent economy a long time ago. The Institute of International Finance representing 50% of private sector bondholders has agreed to this debt swap, but, as  hedge funds and potential vulture funds have resisted participate, the Greek government is trying to enforce participation (Collective Action Clauses, CACs). In effect, it ought to trigger a credit event, so that insurances can be collected on the bonds. The ECB and members Central Banks tries avoid losses by not being in the debt swap. The private sector is rests this and in the end blackmail or coercion will be used. 

This new Greek "bail out " and the Stability and Growth Pact is really an attempt to bailout of the Euro dream.  All means possible are used to prevent its break-up. Democracy and freedom do not count.
.... the sacrifices demanded of ordinary people to preserve the single currency are a huge threat to European union. As externally-imposed austerity bites, not only in Greece but in other countries too, there is a real risk that Europe will fracture along historic lines and people will seek to settle old scores. The single currency is the biggest threat to European peace since the Second World War................ And then there is Spain.....at which point the wheels come off. Spain is much too big to bail out. (Frances Coppola: False Dawn)
In the same light Yanis Varoufakis describes the deal as Crisis Appeasement, using the words (apart from one in red) of Winston Churchill's response to the Munich "Peace in Our time" deal: 
"I do not grudge our loyal, brave people, who were ready to do their duty no matter what the cost, who never flinched under the strain of last week – I do not grudge them the natural, spontaneous outburst of joy and relief when they learned that the hard default [ordeal] would no longer be required of them at the moment; but they should know the truth. They should know that there has been gross neglect and deficiency in our defences; they should know that we have sustained a defeat without a war, the consequences of which will travel far with us along our road; they should know that we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies:" Winston Churchill on the Munich-Agreement Oct 5, 1938. House of Commons
Internal devaluation does not work. Greece is not a neoclassical macroeconomic model. Legal, political, and not just economic restructuring are necessary -  but ones that move towards democracy to motivate ordinary citizens to participate and share in the reforms. This no longer possible without a regime change. Europe is edging towards war, dictatorship or revolution. The choice is yours. 

Thought I had something more to say


  1. Cheshire Cat, as you yourself admit, widespread reforms are necessary. Without them, no investment makes sense and more generous bailout credits would only create a new bubble, not a sustainable recovery. The Greek governments have delayed those urgent reforms for decades, and the political culture still hasn't changed that much. Those politicians will only react to pressure, without it, they will shy away from any controversy and instead try to sedate voters with more clientelism and election gifts.

    Under these circumstances, there are really only two reasonable ways out of the mess:
    - A step by step allocation of bailout moneys in exchange for reform efforts (that's the troika approach) or
    - Default, exit from the Eurozone and introduction of a new Drachme in order to balance the state budget with freshly printed money. This results in high inflation and less pressure for reforms.

    If you're against the first option (and I agree, it sure looks as if the progress is much too slow and the suffering prolonged) then you have to support the second one. Do you?

  2. I disagree that there are really only two "reasonable" ways out of the mess, for example see my "The Blindness and Deafness to Modest Proposals" post. And there are others

    I agree widespread reforms are needed. The Euro crisis exposes the need, but the structural problems are not the cause of the euro crisis. If the crisis didn't happen in Greece it would be happening somewhere else. Even if Greece was not in the Euro, there will still be an euro crisis.

    As for Greece, reforms are not sufficient. People will fight for their jobs in a corrupt state if living on the streets is the only alternative. The private sector in Greece is being demolished by the Trioka measures. The reforms are distorted, perverted and applied to the weakest first. They cannot be done effectively as the clock is ticking.

    The Troika is like 'Morecambe and Wise'(UK comedians) playing piece of music on the piano: "I'm playing all the right notes—but not necessarily in the right order."

    Greece needs a growth program - more carrots, less stick. Unfortunately, the present regime will just eat the carrots. Clientelism entangles the private and 'public' sector with political dynasties dominating politics and mass media - a 'centralised party' imitation of democracy. Hence many people feel they were freed by the fall of the junta and, sadly, even the opposing parties reflect what they are opposing. I can understand why German politicians don't trust the Greek ones. Most Greeks don't too.

    So the first option won't work.

    The second one suffers for the same reasons. But, exiting the euro will result in other periphery countries also following. So there is also a question of what happens if the Eurozone splits - not just Greece by itself. Are funds are better served by helping to stabilise the new countries?

    I also disagree with your accounting version of macroeconomics (& Wiemar Republic ghosts), but I would worry over who controls the printing press button.

    The second option needs to be qualified by reforms, but this need a regime change. Wouldn't the funds that are being thrown into a black hole, be better served by trying to help to stabilise the new currencies?