by Jean Pisani-Ferry
Project Syndicate
February 28, 2015
Earlier this week, following days of tense discussions, the new government in Athens reached an agreement with its eurozone creditors that includes a package of immediate reforms and a four-month extension of the financial assistance program. But, despite Europe's collective sigh of relief, the compromise does not preclude the need for further tough negotiations on a new financial-assistance program that should be introduced by the end of June.
In any negotiation, a key variable influencing the protagonists' behavior, hence the outcome, is what failure to reach an agreement would cost each of them. In this case, the issue is the cost of Greece's exit (“Grexit") from the eurozone – a prospect that was widely discussed in the media throughout the recent negotiation, with considerable speculation about the stance of the various players, especially the Greek and German governments.
From Greece's perspective, leaving the euro would be highly disruptive, which explains why there is very little support for it in the country. But what about Grexit costs for the rest of the eurozone? Ever since the question was first raised in 2011-2012, there have been two opposing views.
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Saturday, February 28, 2015
The Perilous Politics of the Euro
by Andrés Velasco
Project Syndicate
February 28, 2015
The jury is still out on whether Greece will manage to avoid default, remain in the eurozone, and reverse the brutal contraction of its economy. But any fair panel already would have issued a verdict on the political consequences of the common currency: utter failure.
Of course, the case for the euro was always political and came in two varieties: earthy and lofty.
The earthy case, seldom made clearly in polite company, was that the countries in southern Europe spent too much, taxed too little, and thus borrowed in excess. So long as they could finance deficits by printing a local currency and devaluing it from time to time, they would stick to their free-spending ways. Only the straightjacket of the euro and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. With the risk of devaluation gone, interest-rate spreads dropped precipitously, and so did borrowing costs. Cheap money from abroad flooded into Europe's lower-income countries. In some places – Greece, Italy, and Portugal – the money financed an unsustainable public-spending binge. In others – Spain and Ireland – it financed the delusions of private real-estate developers. Debts ballooned everywhere.
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Project Syndicate
February 28, 2015
The jury is still out on whether Greece will manage to avoid default, remain in the eurozone, and reverse the brutal contraction of its economy. But any fair panel already would have issued a verdict on the political consequences of the common currency: utter failure.
Of course, the case for the euro was always political and came in two varieties: earthy and lofty.
The earthy case, seldom made clearly in polite company, was that the countries in southern Europe spent too much, taxed too little, and thus borrowed in excess. So long as they could finance deficits by printing a local currency and devaluing it from time to time, they would stick to their free-spending ways. Only the straightjacket of the euro and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. With the risk of devaluation gone, interest-rate spreads dropped precipitously, and so did borrowing costs. Cheap money from abroad flooded into Europe's lower-income countries. In some places – Greece, Italy, and Portugal – the money financed an unsustainable public-spending binge. In others – Spain and Ireland – it financed the delusions of private real-estate developers. Debts ballooned everywhere.
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Paul Mason’s diary: My Greek TV drama
Spectator
February 28, 2015
It’ll be a Skype interview, says the producer from Greek television, and not live. In TV-speak that usually means not urgent and not important, but I’ve become vaguely interesting to Greeks because of the ‘Moscovici draft’ — a doomed attempt to resolve the crisis, leaked to me amid denials of its existence. The interview goes on a bit and the tone is deferential. At the appointed time, I fire up Greek television to see how many clips they’ve used. Instead of me, a panel of five bearded men in an expansive studio are conducting an earnest preview of my interview. When it starts, my face is on a studio screen twice the size of a human being and it turns out that Greek Skype is good enough to reveal what flavour of dog food you have smeared on your glasses and whether you have combed your hair. Afterwards, as the panel reconvenes, the words Πολ Μέισον (Paul Mason) begin to trend on Twitter. Some suggest a square in Athens be renamed after him. Others that he is a wanker.
Wednesday. I come off air and go straight to a fundraiser for a documentary my Greek colleagues are making about Syriza. For a news reporter, documentaries are the opposite of our daily reality. In the world of news coverage, doors open. In the world of documentary-making, they are slammed in your face. The audience is a mix of Syriza activists and bourgeois philhellenes, many of whom have never been to this part of London, an alley in Soho that runs beneath what used to be the Raymond Revuebar. The owner of the space is a Greek entrepreneur who has turned a former sex shop into an art gallery. ‘You should have seen what we had to clear out of here,’ he whispers. ‘I mean, I just don’t understand the British. The canes and stuff, OK, because of public school. But what would you want with a three-inch dildo?’
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Lawmakers (Just Not Greece’s) Approve a Bailout Extension
New York Times
February 27, 2015
The debate lasted more than two hours, with one conservative lawmaker sharply accusing the Greek government of acting in bad faith. A liberal railed against Greek tycoons exploiting the tax system. And the powerful finance minister argued that lawmakers must put aside their differences and accept the controversial four-month extension of Greece’s bailout program.
Ultimately, lawmakers approved the Greek program on Friday — just not those in Greece. The vote was held in the Bundestag in Berlin, not inside the Greek Parliament building looming over Syntagma Square in Athens. Parliaments in Finland, Estonia and the Netherlands also granted approvals this week, as non-Greek politicians voted for Greece’s future even as Greek politicians did not.
The odd spectacle did have a rationale — the Greek deal required parliamentary approval in creditor countries — yet it also underscored how the economic crisis has accentuated the irregular shape of federalist democracy in the European Union, where the political structure remains under construction and the lack of democratic accountability of officials in Brussels is a sore point.
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Friday, February 27, 2015
Greece’s Pension System Isn’t That Generous After All
Wall Street Journal
February 27, 2015
Greece’s pension system has become a flash point in the new government’s talks with its international creditors. Prime Minister Alexis Tsipras has vowed to fight more cuts to the system, while Greece’s creditors say more cuts are probably necessary to ensure the government can pay its bills.
Before dealing with that question, they’ll need some facts about Greece’s baroque pension system. At first glance, it might seem too generous. But dig a little deeper, and the picture becomes more complicated.
First, how much does Greece spend as percentage of GDP on pensions? The data from Eurostat looks like this as of 2012, with Greece expenditure easily highest in the eurozone as a percentage of GDP:
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Greece runs out of funding options despite euro zone reprieve
February 27, 2015
Greece is running out of options to fund itself despite a four-month bailout extension, raising pressure on Athens to quickly implement reforms it has vocally opposed or default on debt repayments in a matter of weeks.
Eurozone and IMF creditors gave Greece extra time until the end of June to complete the bailout program and receive the remaining 7.2 billion euros but it will not be allowed any funds until it passes a review that could take weeks to negotiate.
Shut out of debt markets and faced with a steep fall in tax revenues, Athens is expected to run out of cash by the middle or end of March. Its finance minister has warned that Greece will struggle to repay creditors starting with a 1.5 billion euro IMF loan repayment due in March.
Athens has been looking for quick fixes to tide it through the coming weeks but has not found one yet.
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Germany backs Greek extension but bailout fatigue grows
Bloomberg
February 27, 2015
Germany's parliament approved an extension of Greece's bailout on Friday but a record number of dissenters from Angela Merkel's conservatives underscored growing scepticism in Berlin about whether a new Greek government can be trusted to deliver on its reform pledges.
With Finance Minister Wolfgang Schaeuble promising not to let Greece "blackmail" its euro zone partners, 542 members of the Bundestag voted "yes" to the extension, while 32 opposed it and 13 abstained.
It was the biggest majority for a euro zone bailout since the crisis erupted five years ago, in part because Merkel's year-old "grand coalition" enjoys a dominant position in the Bundestag lower house.
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ECB to Face Scrutiny Over Greece at March Meeting
Wall Street Journal
February 27, 2015
The European Central Bank is expected to be hit with questions at its rate-setting meeting in Cyprus next week about how it tackled the Greek debt negotiations. The central bank also kicks off its €60-billion-a-month stimulus program.
February 27, 2015
The European Central Bank is expected to be hit with questions at its rate-setting meeting in Cyprus next week about how it tackled the Greek debt negotiations. The central bank also kicks off its €60-billion-a-month stimulus program.
Greece’s Challenge: Appeasing Its Creditors and Its Population
Wall Street Journal
February 27, 2015
Greece and the rest of the eurozone spent February fighting about the procedure for keeping the country afloat. They will spend the spring haggling over a tougher issue: Which economic policies can appease both Greece’s creditors and its population?
This week’s agreement to carry on talking was hard enough to achieve. The next deal will be far harder because the airy communiqués that preserved a consensus so far must be turned into meaty policy decisions.
Part of the mistrust between Greece and its German-led creditors stems from an ideological rift over what has gone wrong in the small, distressed country over the past five years.
Berlin blames the economic collapse that followed Greece’s 2010 bailout on the fiscal and other sins that predated it. Greece’s new government blames the bailout for turning a financial crisis into a full-blown depression. Opposite policy prescriptions follow from these clashing interpretations.
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Greece’s Syriza and Europe must be patient and pragmatic
Editorial
February 27, 2015
For a cash-strapped government, pleasing both one’s creditors and one’s voters is always tricky. The letter sent this week from Greece’s Syriza government to the eurogroup of finance ministers was a list of pragmatic concessions wrapped in the language of ideological defiance.
The proposals are intended to win Greece an extension of the current bailout programme for four months, whereupon a comprehensive revision of the terms and conditions of the rescue can take place.
Overall, its tone seems reasonable and represents a welcome retreat from unrealistic promises Syriza has made to its voters. Yet the cool response to the letter from the other two creditor institutions in what Greece no longer wants to call the “troika” — the International Monetary Fund and the European Central Bank — highlights how much trust has been damaged in the course of fractious negotiations.
Having sensibly left most of the business of negotiating the programme to the eurogroup, the ECB nonetheless felt the need to raise the alarm about the weakness of Greece’s promises. In particular it issued a cryptic warning about the need to “stabilise the payment culture”, assumed to be concern about plans for a freeze on banks foreclosing on mortgages. The IMF said it was worried about the failure to make firm commitments in a number of areas, including reforms to Greece’s chaotic VAT regime and sclerotic labour market.
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Can the Greek economy grow?
Hill
February 27, 2015
Albert Einstein famously observed that a sure sign of insanity was to keep repeating exactly the same experiment and yet to expect a different result. One has to wonder whether the same might not be said of Greece and its European partners as they have agreed to extend Greece's borrowing arrangement for another four months. They have done so in order to negotiate a new economic program with very much the same macroeconomic policy recipe as before. This has to beg the question: Why, if such policies failed so miserably before, should a different result now be expected?
At the heart of Greece's dismal economic performance since 2010 has been the Troika's (the European Commission, European Central Bank and International Monetary Fund) insistence that Greece engage in massive budget belt-tightening within a euro straitjacket. Lacking an independent monetary or exchange rate policy to offset the contractionary impact of fiscal tightening, which belonging to the euro necessarily involves, it should have come as no surprise that the Greek economy would have plunged.
Sadly, that is precisely what happened to the Greek economy. Today, the Greek economy is around 22 percent below its 2008 level, while unemployment exceeds 25 percent or the highest in the eurozone. Also troubling is the fact that Greece is now experiencing outright price deflation at an annual rate of 2.5 percent. Such deflation could constitute a major headwind to any future economic recovery and it could make reducing Greece's public debt to gross domestic product (GDP) ratio well-nigh impossible.
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What Greece Has to Do Now: Fix Its Economy
Harvard Business Review
February 27, 2015
After weeks of media frenzy around the Greek election and the new government’s once-ambitious plans to renegotiate with the Eurozone over its debt crisis, the searchlights of publicity are shifting. For all of its bravado, Greece was pushed into a corner in an eleventh-hour deal that will extend a bailout agreement for four more months. And although it has been given a temporary lifeline, little has been resolved.
Greece’s creditors have by and large insisted that prior agreements be honored, and told the government that its radical plans for state largesse (let alone debt forgiveness) are off the table. A few verbal tweaks (such as renaming the “Troika” — which consists of the EU, the IMF, and the ECB — the “Institutions”) were given as a political concession to the newly elected government, which had created high expectations with its electorate.
The tentative agreement with creditors reached this week is much less favorable to Greece than what was on the table last fall. To be sure, the proposal set forth by the Greek finance minister is less detailed than that of his predecessor, and leaves some room for maneuvering, but this is a mixed blessing, as the EU, the IMF, and the ECB will need to sign off on specifics. Greece appears also to lose control of the €11 billion reserves of the Greek banking stability fund.
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What Greece Won
New York Times
February 27, 2015
Last week, after much drama, the new Greek government reached a deal with its creditors. Earlier this week, the Greeks filled in some details on how they intend to meet the terms. So how did it go?
Well, if you were to believe many of the news reports and opinion pieces of the past few days, you’d think that it was a disaster — that it was a “surrender” on the part of Syriza, the new ruling coalition in Athens. Some factions within Syriza apparently think so, too. But it wasn’t. On the contrary, Greece came out of the negotiations pretty well, although the big fights are still to come. And by doing O.K., Greece has done the rest of Europe a favor.
To make sense of what happened, you need to understand that the main issue of contention involves just one number: the size of the Greek primary surplus, the difference between government revenues and government expenditures not counting interest on the debt. The primary surplus measures the resources that Greece is actually transferring to its creditors. Everything else, including the notional size of the debt — which is a more or less arbitrary number at this point, with little bearing on the amount anyone expects Greece to pay — matters only to the extent that it affects the primary surplus Greece is forced to run.
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In Greece, Bailout May Hinge on Pursuing Tycoons
New York Times
February 26, 2015
As he sifted recently through a sheaf of Greek bank accounts held by executives, politicians and other members of the Greek elite, Panagiotis Nikoloudis, the nation’s new anti-corruption czar, was struck by some troubling numbers.
A man who was claiming unemployment benefits and declared zero income on his taxes had more than 300,000 euros, or $336,000, stashed away at his bank. Another, who told the tax authorities that his annual income was just €15,000, turned out to have €1.5 million in various bank accounts.
Mr. Nikoloudis estimated that the men had bilked Greece’s Treasury of thousands of euros in tax revenue, even as other Greeks struggled under the government’s austerity budgets and embattled economy.
“I have nothing against rich people,” said Mr. Nikoloudis, a financial crimes specialist, leaning into a table one recent afternoon in his office in western Athens. “I’m against dishonest rich people. And I’m here to get them.”
For years, Greece has been trying to attack corruption and tax evasion, from the smallest taverna owner to the nation’s most powerful oligarchs. Now, Prime Minister Alexis Tsipras is vowing to take far more action than previous administrations in cracking down. He says his government, led by his leftist party, Syriza, will succeed because having never held power, it is not beholden to the entrenched interests that have long fought to maintain the status quo.
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Family Feud: The Tortured Relationship between Schäuble and Varoufakis
February 27, 2015
The end began in the National Theater of Greece in Athens. It was the evening of Wednesday, Feb. 18, and the work on stage was "Happy Days," a two-character play by Samuel Beckett. On stage, a not-particularly-young woman slowly sank into a pile of dirt, talking all the while. Finally, she was stuck up to her neck, but continued talking and making plans even though she could move little more than her eyes and her mouth.
Greek Finance Minister Yanis Varoufakis was in the audience. "Splendid performance(s)," he tweeted two days after the show. The evening, he wrote, was "such a relief from you know what ..."
In hindsight, the scene seems like an omen -- like a screenplay for the days to come. Theater, after all, is a reflection of humanity's existence as a whole -- and sometimes it reflects the specific existence of a Greek finance minister.
At the same time as Varoufakis was enjoying his visit to the theater, his German counterpart Wolfgang Schäuble was attending a very different show, one in which the main character was Portuguese Finance Minister Maria Luís Albuquerque. She was a guest speaker at the Bertelsmann Stiftung and used her talk to review the significant progress her country has made since almost going broke four years ago. The country's finances are now under control and economic growth has returned.
"My dear friend," Schäuble addressed her pleasantly. The warmth in his voice made him sound like a teacher who had just barely managed to prevent a student from failing out of school. Why, he seemed to be thinking, can't all finance ministers in Europe be like Maria Luís Albuquerque?
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Setbacks for Tsipras Stir Discord in Greek Ruling Party
by Maria Petrakis
Bloomberg
February 27, 2015
“A Day with Yanis Varoufakis,” a satirical post doing the rounds on social media, shows the Greek finance minister spending his waking hours feted by adoring fans. He goes to sleep and is jolted awake by a nightmare of German Finance Minister Wolfgang Schaeuble cackling.
In what’s turning that nightmare into reality, Greece’s month-old anti-austerity government led by Prime Minister Alexis Tsipras had a rude awakening last Friday when German-led pressure forced it to pedal back on most election pledges in the face of national insolvency. On the streets of Athens, Greeks used to political flip-flops in the five years of their odyssey to financial health are taking what has been a capitulation in their stride.
“When you have your hand outstretched and they say there’s no money, that’s when you put your hands up in the air,” said Alexandra Dimopulos, 60, a retired civil servant. “You may have all the good intentions in the world but that means nothing when you have no money for them.”
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Bloomberg
February 27, 2015
“A Day with Yanis Varoufakis,” a satirical post doing the rounds on social media, shows the Greek finance minister spending his waking hours feted by adoring fans. He goes to sleep and is jolted awake by a nightmare of German Finance Minister Wolfgang Schaeuble cackling.
In what’s turning that nightmare into reality, Greece’s month-old anti-austerity government led by Prime Minister Alexis Tsipras had a rude awakening last Friday when German-led pressure forced it to pedal back on most election pledges in the face of national insolvency. On the streets of Athens, Greeks used to political flip-flops in the five years of their odyssey to financial health are taking what has been a capitulation in their stride.
“When you have your hand outstretched and they say there’s no money, that’s when you put your hands up in the air,” said Alexandra Dimopulos, 60, a retired civil servant. “You may have all the good intentions in the world but that means nothing when you have no money for them.”
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Thursday, February 26, 2015
IMF’s Christine Lagarde shows tough love to Greece over bailout
February 26, 2015
When Christine Lagarde offered a sceptical view this week on the new Greek government’s reform plan, the International Monetary Fund chief highlighted just how uncomfortable her institution has become about one of the biggest bailouts in its history.
The IMF’s experience in Greece has been painful, exposing fault lines between its traditional US and European paymasters and emerging powers keen for greater influence over global finance.
“Greece so far has not been a brilliant chapter in the IMF’s history,” says Paulo Nogueira Batista, who represents Brazil and 10 other countries on the fund’s board. “Rules were bent and broken to suit the needs of the euro area.”
The result, he argues, has been damage to the institution’s credibility.
The IMF joined the EU’s financial rescue of Greece in 2010 and its board since then has approved two separate programmes, each worth approximately €30bn and greatly exceeding the fund’s normal lending limits.
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'Foreign' Money and 'Austerity' Haven't Caused Greek Stagnation
by Jerry Jordan
Real Clear Markets
February 26, 2015
The on-going "Greek Financial Crisis" is chock full of lessons about the nature of the entity that serves the functions of money in an economy. Historically, people have chosen to use as money everything from notched wooden sticks to metal coins to pieces of paper printed by governments. When alternatives have been available, people have chosen to hold on to "high-quality-money" and rid themselves of the lower quality forms of money. Sometimes that has meant the illegal holding of foreign forms of money-like US dollars or German marks-instead of the official currency of their own country.
Today, the vast majority of Greek citizens answer pollsters that they want to continue using the ‘euro'-a currency provided by the European Central Bank-rather than return to the ‘drachma'-the fiat currency previously issued by the Greek central bank. At the same time, Greek voters elect politicians who promise to reject economic policies that would be essential to remaining within the "euro zone." As The Wall Street Journal recently commented on Greek preference for euros over drachmas "... they also keep electing candidates who campaign against reform ... (who) promised voters he opposed the bailout before he supported it in office." This inconsistency reveals the inherent tensions arising from forms of money and the associated economic policies of a country.
It comes down to this: a specie currency-gold and silver-imposes sound economic policies on a country. A fiat currency-issued by central banks-requires sound economic policies. What is happening in the euro zone-and clearly in the case of Greece-the imposition of sound economic policies is being demanded by politicians of foreign governments, not advocated by domestic politicians. As the Journal put it, "The conceit remains that external forces can mandate reform. But creditors lack the means to enforce reform, while successive Greek governments on left and right lacked the desire or political skill to implement them."
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Real Clear Markets
February 26, 2015
The on-going "Greek Financial Crisis" is chock full of lessons about the nature of the entity that serves the functions of money in an economy. Historically, people have chosen to use as money everything from notched wooden sticks to metal coins to pieces of paper printed by governments. When alternatives have been available, people have chosen to hold on to "high-quality-money" and rid themselves of the lower quality forms of money. Sometimes that has meant the illegal holding of foreign forms of money-like US dollars or German marks-instead of the official currency of their own country.
Today, the vast majority of Greek citizens answer pollsters that they want to continue using the ‘euro'-a currency provided by the European Central Bank-rather than return to the ‘drachma'-the fiat currency previously issued by the Greek central bank. At the same time, Greek voters elect politicians who promise to reject economic policies that would be essential to remaining within the "euro zone." As The Wall Street Journal recently commented on Greek preference for euros over drachmas "... they also keep electing candidates who campaign against reform ... (who) promised voters he opposed the bailout before he supported it in office." This inconsistency reveals the inherent tensions arising from forms of money and the associated economic policies of a country.
It comes down to this: a specie currency-gold and silver-imposes sound economic policies on a country. A fiat currency-issued by central banks-requires sound economic policies. What is happening in the euro zone-and clearly in the case of Greece-the imposition of sound economic policies is being demanded by politicians of foreign governments, not advocated by domestic politicians. As the Journal put it, "The conceit remains that external forces can mandate reform. But creditors lack the means to enforce reform, while successive Greek governments on left and right lacked the desire or political skill to implement them."
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Greek Bailout Deal Boosts Deposits to Banks
Wall Street Journal
February 26, 2015
Greece’s interim deal with its eurozone partners last week has helped calm nervous depositors, senior banking and government officials say, reversing a weekslong savings outflow from the country’s cash-strapped banks.
According to one senior banking official, more than €800 million ($905 million) in deposits have been put back into the Greek banking system since Monday when Greece’s banks were closed for a public holiday.
“We saw €700 million return on the first day and another €150 million yesterday,” the banking official, speaking on the sidelines of central bank conference, told journalists. “Things are going well.”
But, in fact, the money that has dribbled back since last Friday’s deal, pales in comparison with the amount withdrawn in the past three months, say analysts, and it will take several months of inflows to confirm that the trend is here to stay. And, if past experience serves as precedent, many of the deposits that have left, may never come back.
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Greece Must Reform, Says Greek Central Bank Governor
Wall Street Journal
February 26, 2015
Bank of Greece Governor Yannis Stournaras urged the government on Thursday to fulfill reforms commitments promised to European partners in exchange for future funding as soon as possible to help the country’s economic recovery to take place.
Presenting his annual report, Mr. Stournaras said Greece needs a comprehensive growth plan based on reforms including the opening up of professions, preserving fiscal achievements, reviewing tax exemptions and adopting policies that promote employment.
“In the past few years, we have covered some very rough ground at high cost to the whole of Greek society. If we can address the relatively few issues still pending and complete the first phase of the effort launched in 2010, we will then be able to move on to the next phase, in which the growth potential of the economy will be considerably enhanced,” said the governor.
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The Reason Austerity In Greece Didn't Work
Forbes
February 26, 2015
One of the little puzzles of the past few years has been why was the reaction of the Greek economy to austerity so much worse than that of other countries? For it is true that other countries (I think particularly of Spain and Portugal) had the same sort of shrinkage of the government budget, had the same (entirely wrong and inappropriate) monetary and currency policies but they did much better. Or at least not as badly. So what was the secret to that Greek economy that made the out turn so awful? And awful it is, Greece has had a fall in GDP akin to what the US had in the Great Depression of the 1930s. The answer, it appears, is that the underlying structure of the Greek economy is such that it just couldn’t take advantage of the meagre benefits that austerity did provide.
The point is made in this NYT piece:
Greece has fared much worse than other eurozone countries that faced a sudden drop in foreign financing, and then enacted similar austerity programs. It lost 26 percent of its G.D.P. from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7 percent each. Much of this difference is due to foreign trade.Yes, of course, there’s more to it than only foreign trade. But this is also a large part of the difference:
Finally, the size of companies in Greece is a fundamental structural issue. Industrial capitalism was never strong in Greece, which is a society of small owners and of microbusinesses. Land and homes belong mostly to their occupants, free of mortgage, more so than in any Western country. Self-employment and companies of fewer than 10 employees are much more prevalent than in any other European nation. Only 5 percent of employment in the whole economy occurs in companies with more than 250 employees. Even the main export industry, tourism, consists mostly of medium and small businesses.More
Unlikely Winners of Greece's Surrender
Bloomberg
February 26, 2015
The Greek government's apparent capitulation in debt negotiations with its euro partners makes it less likely that Athens will be forced out of the common currency. The real winners, though, are the European governments who have stuck with spending cuts in the face of mounting domestic opposition. They don't have to worry about a successful austerity renegade giving ammunition to their opponents.
Rightly or wrongly, Greece's interlocutors displayed a united front on refusing to cede to Greece's demands throughout the talks, with 18 euro members allied against one. Rightly or wrongly, Germany was indifferent to whether Greece stayed in the euro or not, willing to countenance a Grexit rather than surrender to the new Syriza-led administration, the person said. And, rightly or wrongly, any changes Greece makes to its existing commitments will probably have to be fiscally neutral, with the government having to show exactly how it plans to meet its pledges; unquantifiable measures, such as promising to collect outstanding taxes, won't make the grade.
Instead, Greece has diluted at least five of its key electoral promises in the face of implacable German-led opposition to its stance. There's been no extension of the country's debt repayment timetable; Greece is still a ward of the troika, even if its guardians now go by a different name (they're now referred to as the "institutions"); there's no rollback of the previous government's economic reforms; cash allocated to the domestic banking system won't be diverted to alleviating economic hardship; and the need to achieve a sensible budget surplus has been acknowledged.
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Wednesday, February 25, 2015
Greece sees problems repaying IMF, ECB; Germans air mistrust
February 25, 2015
Greece said on Wednesday it will struggle to make debt repayments to the IMF and the European Central Bank this year as Germany's finance minister voiced open doubts about Athens' trustworthiness.
A day after euro zone finance ministers agreed to a four-month extension of a financial rescue for the currency bloc's most heavily indebted member, Finance Minister Yanis Varoufakis gave a frank assessment of Greece's financial position.
"We will not have liquidity problems for the public sector. But we will definitely have problems in making debt payments to the IMF now and to the ECB in July," he told Alpha Radio.
He put no figure on the funding gap. After interest payments this month of about 2 billion euros, Athens must repay an IMF loan of around 1.6 billion that matures in March and about 7.5 billion in maturing bonds held by the ECB in July and August.
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What Greece Needs
New York Times
February 25, 2015
The depression ravaging Greece is always framed as an issue of macroeconomics: fiscal policy was tightened too quickly; government debt is too high; the tools of currency devaluation and monetary expansion are not available inside the eurozone. But this is overly simplistic; local politics and microeconomic factors are just as important in explaining the depth of the crisis.
Greece has fared much worse than other eurozone countries that faced a sudden drop in foreign financing, and then enacted similar austerity programs. It lost 26 percent of its G.D.P. from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7 percent each. Much of this difference is due to foreign trade.
Continue reading the main story
In all four countries, when capital from abroad stopped flowing in, increasing exports became an urgent goal. The other three countries achieved this quickly. Greece did not. If it had boosted exports, its recession would have been much shallower; by one estimate, a 25 percent increase in exports could have limited the drop of gross domestic product to just 3 percent.
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Greece Struggles to Get Citizens to Pay Their Taxes
Wall Street Journal
February 25, 2015
Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.
At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades; the government says only €9 billion of that can be recovered, with most of the rest lost to insolvency.
Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.
The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.
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A Greek Deal and What It Means
by Jacob Funk Kirkegaard
Peterson Institute for International Economics
February 25th, 2015
Greece and the Eurogroup have struck a deal designed to avoid another economic meltdown and even return Greece to economic growth. An additional four months have been added to an earlier two-month extension of the review of Greece’s economic reform program, giving Athens and its partners until the end of June to reach a more comprehensive arrangement. As previously discussed, the threat of an acute fiscal revenue crunch and an accelerating deposit flight from the banking system gave the new Greek government no choice but to reverse course and seek such an extension while remaining committed to the goal of reform.
Indeed the new list of Greek reform commitments includes most of the agenda in the existing program imposed by the Troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). Both the IMF and the ECB [pdf] will not accept vague “policy commitments” from Athens but instead will demand concrete reform implementation before releasing further funds to the new government.
Despite the predictable spin, this outcome represents a Greek government capitulation—and a likely worse outcome for the Syriza coalition in Athens than what might have resulted from a more levelheaded and credible negotiating strategy.
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Peterson Institute for International Economics
February 25th, 2015
Greece and the Eurogroup have struck a deal designed to avoid another economic meltdown and even return Greece to economic growth. An additional four months have been added to an earlier two-month extension of the review of Greece’s economic reform program, giving Athens and its partners until the end of June to reach a more comprehensive arrangement. As previously discussed, the threat of an acute fiscal revenue crunch and an accelerating deposit flight from the banking system gave the new Greek government no choice but to reverse course and seek such an extension while remaining committed to the goal of reform.
Indeed the new list of Greek reform commitments includes most of the agenda in the existing program imposed by the Troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). Both the IMF and the ECB [pdf] will not accept vague “policy commitments” from Athens but instead will demand concrete reform implementation before releasing further funds to the new government.
Despite the predictable spin, this outcome represents a Greek government capitulation—and a likely worse outcome for the Syriza coalition in Athens than what might have resulted from a more levelheaded and credible negotiating strategy.
More
Greece’s Alexis Tsipras Seeks Backing of Lawmakers Over New Deal With Creditors
Wall Street Journal
February 25, 2015
Greek Prime Minister Alexis Tsipras sought the backing of his restive lawmakers for a new financing deal with creditors Wednesday, as his government signaled its continued defiance to the sale of state assets-one of the key demands of its creditors.
The deal reached with eurozone partners and the International Monetary Fund late last week has forced Greece’s government—in power just over a month—to make deep concessions to its populist platform, rolling back many of the promises made to voters. Promises such as writing off the country’s debt, raising the minimum wage, and rehiring laid off public servants, have all gone by the wayside or else been dramatically pushed back.
And that has fueled discontent within the radical-left Syriza party that had vowed to abolish Greece’s €240 billion ($272.3 billion) bailout, the austerity measures that came with it, and bring sweeping change to a political system many see as riddled with corruption and cronyism.
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After approval of bailout plan, Greece under pressure to deliver
by Christine Pirovolakis
German Press Agency (DPA)
February 25, 2015
A green light by the eurozone to a list of proposed reforms by Greece needed in return for continued loans means its new leftist government has its work cut out in the coming weeks trying to deliver on its promises.
The reforms, approved by eurozone finance ministers, to extend the European share of Greece's bailout by four months, has gained the country a "few weeks of breathing space," according to a finance ministry official.
But the government, led by the leftist SYRIZA party, faces months of difficult negotiations with its creditors over how to ease its unsustainable debt after securing a temporary lifeline on Tuesday that wins Prime Minister Alexis Tsipras time until the end of June.
"The main objective of SYRIZA now has to win the international confidence battle. If it does so, creditors will trust it and will possibly consider to provide further financial assistance after June," said George Tzogopoulos, a political analyst at the Hellenic Foundation for European and Foreign Policy (ELIAMEP).
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German Press Agency (DPA)
February 25, 2015
A green light by the eurozone to a list of proposed reforms by Greece needed in return for continued loans means its new leftist government has its work cut out in the coming weeks trying to deliver on its promises.
The reforms, approved by eurozone finance ministers, to extend the European share of Greece's bailout by four months, has gained the country a "few weeks of breathing space," according to a finance ministry official.
But the government, led by the leftist SYRIZA party, faces months of difficult negotiations with its creditors over how to ease its unsustainable debt after securing a temporary lifeline on Tuesday that wins Prime Minister Alexis Tsipras time until the end of June.
"The main objective of SYRIZA now has to win the international confidence battle. If it does so, creditors will trust it and will possibly consider to provide further financial assistance after June," said George Tzogopoulos, a political analyst at the Hellenic Foundation for European and Foreign Policy (ELIAMEP).
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German MPs urged to take tough line on Greece
February 25, 2015
An influential German business group is urging MPs to take a tough line on Greece ahead of a Friday vote in the Bundestag to approve an extension to the country’s bailout.
The lower house of Germany’s parliament is broadly expected to pass the four-month extension that eurozone finance ministers agreed with Athens on Tuesday.
Nonetheless, Chancellor Angela Merkel could face a sizeable rebellion within her Christian Democratic Union and its Bavarian sister party, the Christian Social Union. If nothing else, the warnings from the CDU’s business caucus and other conservatives reflect widespread unease about providing additional support to a Greek government amid doubts about its reform pledges.
In a letter to lawmakers, Kurt Lauk, president of the CDU’s Economic Council, wrote: “A simple extension of the aid programme without effective terms would mean that we are knowingly throwing further good money after bad.”
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Ex-Greek minister on trial over HSBC accounts
February 25, 2015
Former Greek finance minister George Papaconstantinou went on trial on Wednesday charged with removing relatives from a list of Greeks allegedly holding accounts at HSBC’s Swiss private bank.
Mr Papaconstantinou denies that in 2010, while finance minister, he tampered with a USB memory stick containing a list of 2,000 HSBC accounts held by alleged tax evaders.
The document is known as the Lagarde List after Christine Lagarde, then French finance minister and now head of the International Monetary Fund. Paris sent it to Mr Papaconstantinou who allegedly removed the names of two lawyers and an engineer from the memory stick, which he later said was mislaid.
Greece’s new Syriza government has pledged to speed up the investigation after authorities have been criticised for not pursuing the people on the list more aggressively.
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Is Greek honeymoon over for Tsipras after EU bailout deal?
by Mark LowenBBC News
February 25, 2015
The cold January wind swept through Omonia Square in Athens for Alexis Tsipras's penultimate pre-election rally, eased only by the sense of excitement in the crowd.
Half of Greek debt would be written off, he told supporters, promising to "finish with the orders from abroad".
To rapturous applause, he insisted: "We will not govern with anybody who follows the policies of Mrs Merkel."
His fans were ecstatic.
Fast forward a month and the rhetoric is a distant memory. After three crisis meetings in Brussels, Greece was backed into a corner.
Its banks faced the prospect of emergency liquidity being turned off and capital controls implemented unless a deal was reached.
As much as €1bn (£732m, $1.5bn) a day was flowing out of Greek banks as the stand-off reached its climax.
Athens was forced to dance to the eurozone's tune.
So is it a capitulation or a pragmatic compromise? Well, a bit of both.
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Four Months to Get It Right on Greece
Editorial
February 25, 2015
European leaders have avoided a potential catastrophe by extending for four months a bailout program to rescue the Greek economy. They did not, however, resolve any of the big problems that have grounded the economies of Greece and other eurozone countries.
The extension will keep the money flowing from a loan program of 240 billion euros, or about $272 billion, that has provided much-needed cash to the Greek government, which is unable to borrow money in the private market. As a condition of the loans, Greece’s lenders — the 18 other countries that use the euro, the European Central Bank and the International Monetary Fund — have forced it to raise taxes and cut spending, depressing its economy.
The good news is that there is now more time to work out an agreement to stimulate Greece’s economy and reduce the unnecessary suffering of its people. Such a deal would still need concessions on both sides, something that is far from guaranteed. Lenders must be willing to ease the loan terms, and Greek leaders must do more to reform the economy as promised.
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Tuesday, February 24, 2015
Greece’s Reprieve: In Praise of Kicking the Can Down the Road
by Paolo Mauro
Peterson Institute for International Economics
February 24th, 2015
The melodrama in Greece has produced demands that Athens and its European partners take decisive action to fix a complicated situation once and for all. In fact, kicking the can down the road—as the players did recently to avert a financial crisis—is an underrated and long-standing feature of debtor-creditor relations. The rattling metallic noise produced by the joyous act of kicking that can is fondly remembered from childhood days. Today it marks the sound of Greece and its official sector partners bound together in a long-run relationship by virtue of their large exposures as debtors and creditors.
No doubt a more orderly and speedy negotiation with less last-minute drama and posturing in public would be welcome. But unconditional fiscal transfers are not envisaged. Complete and unconditional debt relief would run the risk of profligate spending in Greece and elsewhere. At the opposite end of the spectrum, expecting a new government to abide willingly by a detailed list of tough austerity measures in the absence of outside monitoring also does not seem plausible. Anything in-between is messy and requires repeated interaction.
Creditors will continue seeking to influence the economic policies of a debtor country in an effort to get repaid. Greece will be asked for some degree of “austerity” for many years to come. Negotiations on debt relief and the size of the primary surplus are two sides of the same coin. Creditors will ease the pressure only if it becomes apparent that excessive austerity will undermine economic growth to the point that it reduces the debtor’s ability to repay.
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Peterson Institute for International Economics
February 24th, 2015
The melodrama in Greece has produced demands that Athens and its European partners take decisive action to fix a complicated situation once and for all. In fact, kicking the can down the road—as the players did recently to avert a financial crisis—is an underrated and long-standing feature of debtor-creditor relations. The rattling metallic noise produced by the joyous act of kicking that can is fondly remembered from childhood days. Today it marks the sound of Greece and its official sector partners bound together in a long-run relationship by virtue of their large exposures as debtors and creditors.
No doubt a more orderly and speedy negotiation with less last-minute drama and posturing in public would be welcome. But unconditional fiscal transfers are not envisaged. Complete and unconditional debt relief would run the risk of profligate spending in Greece and elsewhere. At the opposite end of the spectrum, expecting a new government to abide willingly by a detailed list of tough austerity measures in the absence of outside monitoring also does not seem plausible. Anything in-between is messy and requires repeated interaction.
Creditors will continue seeking to influence the economic policies of a debtor country in an effort to get repaid. Greece will be asked for some degree of “austerity” for many years to come. Negotiations on debt relief and the size of the primary surplus are two sides of the same coin. Creditors will ease the pressure only if it becomes apparent that excessive austerity will undermine economic growth to the point that it reduces the debtor’s ability to repay.
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Crisis in Europe Averted (For Now)
Editorial
February 24, 2015
Europe is taking a break from the crisis over Greece it's engineered over the past few weeks. It's a welcome breather -- but that's all it is. The euro system's governments haven't solved the problem, and unless they try a new approach, they will keep making it worse.
The recent standoff didn't achieve much. Greece needs short-term financial help while it negotiates a new economic program, and has been arguing with its euro-zone partners over the terms of this relief. It delivered a new list of policy proposals on Monday, and on Tuesday this was deemed "sufficiently comprehensive to be a valid starting-point for a successful conclusion of the review."
What does that mean? Almost nothing. The Greek proposals are sensible -- but also vague, as the International Monetary Fund points out. They concentrate on reforming the tax system and streamlining the public sector. Excellent goals, but they've defeated previous Greek administrations. Despite all the back and forth, there's still no detailed plan.
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Greek Bailout Extension Amid Doubts
February 24, 2015
Eurozone finance ministers approved a four-month extension to Greece’s bailout on Tuesday, despite signaling concerns over the willingness of the new left-wing government in Athens to implement the budget cuts and legislative overhauls they demanded.
The extension removes the immediate threat of a Greek exit from Europe’s currency union and a run by depositors on the country’s banks. “Greece has won a few weeks,” said a senior Finance Ministry official in Athens.
But numerous hurdles remain until the government can get its hands on the cash remaining in its €240 billion ($273 billion) bailout from the eurozone and the International Monetary Fund and negotiate a longer-term rescue deal with its creditors.
A first set of obstacles was raised Tuesday by Christine Lagarde , the IMF’s managing director. In a letter to Dutch Finance Minister Jeroen Dijsselbloem made public just minutes after he presided over the finance ministers’ approval, Ms. Lagarde complained that new measures outlined by the government of Prime Minister Alexis Tsipras were “generally not that specific.” Similar concerns were voiced in a separate letter by European Central Bank President Mario Draghi and by the ministers themselves.
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A closer look at Greece’s proposed reforms
Financial Times
February 24, 2015
Greece’s new leftwing Syriza government has talked of killing the country’s current bailout deal. Yet many of the reform pledges it spelt out in a letter to the eurogroup on Tuesday bear a striking resemblance to those made but not implemented by previous Greek finance ministers.
Others seem calibrated to give space for Yanis Varoufakis, Greece’s new finance minister, to claim he has kept faith with Syriza’s so-called “Thessaloniki programme”. This is a collection of anti-austerity policies endorsed by multiple factions in the hardline “Left Platform”, which is said to represent about one-third of party activists.
Greece has submitted the reforms to persuade its 18 eurozone partners to extend its bailout by four months, putting it on a path to collect about €7.2bn in loan payments by June.
Its gaps and omissions will presumably be filled in during negotiations with the group of institutions that have overseen the bailout and were until recently known as the “troika” — the European Commission, the International Monetary Fund and the European Central Bank.
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The Economic Consequences of Greece
by Alberto Bagnai, Brigitte Granville, Peter Oppenheimer & Antoni Soy
Project Syndicate
February 24, 2015
The first sentence of the 1957 Treaty of Rome – the founding document of what would eventually become the European Union – calls for “an ever-closer union among the peoples of Europe." Recently, however, that ideal has come under threat, undermined by its own political elite, which adopted a common currency while entirely neglecting the underlying fault lines.
Today, those cracks have been exposed – and widened – by the seemingly never-ending Greek crisis. And nowhere are they more evident than in Greece's relationship with the International Monetary Fund.
When the euro crisis erupted in 2010, European officials realized that they lacked the necessary expertise to manage the threat of sovereign defaults and the potential breakup of the monetary union. For EU officials, avoiding the eurozone's collapse became the top political imperative, so they turned to the IMF for help. The irregularities in the Fund's resulting intervention attest to how serious the eurozone's problems were – and continue to be.
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Project Syndicate
February 24, 2015
The first sentence of the 1957 Treaty of Rome – the founding document of what would eventually become the European Union – calls for “an ever-closer union among the peoples of Europe." Recently, however, that ideal has come under threat, undermined by its own political elite, which adopted a common currency while entirely neglecting the underlying fault lines.
Today, those cracks have been exposed – and widened – by the seemingly never-ending Greek crisis. And nowhere are they more evident than in Greece's relationship with the International Monetary Fund.
When the euro crisis erupted in 2010, European officials realized that they lacked the necessary expertise to manage the threat of sovereign defaults and the potential breakup of the monetary union. For EU officials, avoiding the eurozone's collapse became the top political imperative, so they turned to the IMF for help. The irregularities in the Fund's resulting intervention attest to how serious the eurozone's problems were – and continue to be.
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Germany Gives Greece a Short Leash
by Leonid Bershidsky
Bloomberg
February 24, 2015
Contrary to all that's been said about Germany's uncompromising stand on helping Greece, Berlin showed today that it's willing to give the far-left government of Alexis Tsipras a chance. All he needed to do was clearly state that he wouldn't make any economic moves before consulting his country's creditors. Even if the rest of Tsipras's plans remain rather vague, Germany seems prepared to offer an endorsement -- while continuing to watch over his shoulder.
In accordance with a provisional deal between Greece and the Eurogroup last Friday, Athens was supposed to detail its policy proposals to secure a four-month extension of the country's current bailout. Finance Minister Yanis Varoufakis put them in an e-mail that landed in the mailbox of Eurogroup President Jeroen Dijsselbloem at 11:15 pm last night, 45 minutes before the deadline.
Here's a word cloud representing the words most frequently used in the document:
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Bloomberg
February 24, 2015
Contrary to all that's been said about Germany's uncompromising stand on helping Greece, Berlin showed today that it's willing to give the far-left government of Alexis Tsipras a chance. All he needed to do was clearly state that he wouldn't make any economic moves before consulting his country's creditors. Even if the rest of Tsipras's plans remain rather vague, Germany seems prepared to offer an endorsement -- while continuing to watch over his shoulder.
In accordance with a provisional deal between Greece and the Eurogroup last Friday, Athens was supposed to detail its policy proposals to secure a four-month extension of the country's current bailout. Finance Minister Yanis Varoufakis put them in an e-mail that landed in the mailbox of Eurogroup President Jeroen Dijsselbloem at 11:15 pm last night, 45 minutes before the deadline.
Here's a word cloud representing the words most frequently used in the document:
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Greece Must Stop Grandstanding and Start Governing
by Angel Ubide
Peterson Institute for International Economics
February 24th, 2015
Greece’s last-minute agreement with the Eurogroup on Febuary 20 averted a potential major financial disaster. The Greek government was days from running out of money to pay the bills. But despite the claims of victory by both Prime Minister Alexis Tsipras and his European creditors, little has changed in the relationship among Europe, the International Monetary Fund (IMF), and Greece, as I expected. Paraphrasing the Sicilian novelist Giuseppe Tomasi di Lampedusa, change has occurred in Greece, so that nothing (or little) changes.
The deal was similar to what Greece would have obtained with the previous government. Any potential change will come in how Tsipras’s government implements it. Given the agreed fiscal targets, will the composition of expenditures and revenues, or the type of reforms, be adjusted? Given the left-wing political leanings of Tsipras’s Syriza coalition, one would expect some different priorities. There is always flexibility within a fiscal policy path and a reform objective, and that flexibility is dictated by domestic choices.
Greece has no market access, is facing a sharp liquidity crunch, and needs external funding. It remains under the monitoring of the IMF, the European Commission, and the European Central Bank (ECB)—a group formerly known as the “Troika,” now to be called the “institutions” as a gesture to Greece’s sensibilities. The agreement of late February calls for a four-month extension of the current program, which may be granted based on proposals that Athens is to submit by the end of the month. No new funding has been agreed, leaving Greece’s acute liquidity crunch unresolved. A possible solution (including the ECB’s reinstatement of the waiver to accept Greek government bonds as collateral) could be adopted if the Greek proposals are submitted and accepted by the Eurogroup.
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Peterson Institute for International Economics
February 24th, 2015
Greece’s last-minute agreement with the Eurogroup on Febuary 20 averted a potential major financial disaster. The Greek government was days from running out of money to pay the bills. But despite the claims of victory by both Prime Minister Alexis Tsipras and his European creditors, little has changed in the relationship among Europe, the International Monetary Fund (IMF), and Greece, as I expected. Paraphrasing the Sicilian novelist Giuseppe Tomasi di Lampedusa, change has occurred in Greece, so that nothing (or little) changes.
The deal was similar to what Greece would have obtained with the previous government. Any potential change will come in how Tsipras’s government implements it. Given the agreed fiscal targets, will the composition of expenditures and revenues, or the type of reforms, be adjusted? Given the left-wing political leanings of Tsipras’s Syriza coalition, one would expect some different priorities. There is always flexibility within a fiscal policy path and a reform objective, and that flexibility is dictated by domestic choices.
Greece has no market access, is facing a sharp liquidity crunch, and needs external funding. It remains under the monitoring of the IMF, the European Commission, and the European Central Bank (ECB)—a group formerly known as the “Troika,” now to be called the “institutions” as a gesture to Greece’s sensibilities. The agreement of late February calls for a four-month extension of the current program, which may be granted based on proposals that Athens is to submit by the end of the month. No new funding has been agreed, leaving Greece’s acute liquidity crunch unresolved. A possible solution (including the ECB’s reinstatement of the waiver to accept Greek government bonds as collateral) could be adopted if the Greek proposals are submitted and accepted by the Eurogroup.
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How Greece’s Creditors Can Encourage Its Return to Stability
by Avinash Persaud
Peterson Institute for International Economics
February 24th, 2015
Now that over 75 percent of Greece’s debt has been transferred from private banks to the official sector backed by European taxpayers—there is a novel solution to the Greek tragedy that would satisfy the interests of borrowers as well as creditors. This solution could also temper unhelpful nationalism on both sides and doesn’t promote future fiscal irresponsibility.
Under this proposal, official creditors and borrowers would enshrine debt stability by setting interest rates equal to nominal growth. Greeks would rejoice. But it would also be necessary and possible to embed strong incentives to discourage Greece from abandoning fiscal responsibility and reform as soon as growth returns. Interest rates would be further adjusted above nominal growth by the amount of a primary deficit and fall below it by the size of the surplus. Creditors would approve.
Any solution to the current impasse must satisfy at least three tests. First, the primary budget surplus required of Greece must not be so large as to inhibit sustainable economic growth. By primary budget surplus we mean revenues less expenditures, excluding interest or debt repayments. This is a better measure of a budget’s impact on economic activity than the overall deficit. When the animal spirits are low like now, the multiplier of fiscal conditions on to GDP growth is high. And without GDP growth, there can be no stabilization of the debt-to-GDP ratio.
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Peterson Institute for International Economics
February 24th, 2015
Now that over 75 percent of Greece’s debt has been transferred from private banks to the official sector backed by European taxpayers—there is a novel solution to the Greek tragedy that would satisfy the interests of borrowers as well as creditors. This solution could also temper unhelpful nationalism on both sides and doesn’t promote future fiscal irresponsibility.
Under this proposal, official creditors and borrowers would enshrine debt stability by setting interest rates equal to nominal growth. Greeks would rejoice. But it would also be necessary and possible to embed strong incentives to discourage Greece from abandoning fiscal responsibility and reform as soon as growth returns. Interest rates would be further adjusted above nominal growth by the amount of a primary deficit and fall below it by the size of the surplus. Creditors would approve.
Any solution to the current impasse must satisfy at least three tests. First, the primary budget surplus required of Greece must not be so large as to inhibit sustainable economic growth. By primary budget surplus we mean revenues less expenditures, excluding interest or debt repayments. This is a better measure of a budget’s impact on economic activity than the overall deficit. When the animal spirits are low like now, the multiplier of fiscal conditions on to GDP growth is high. And without GDP growth, there can be no stabilization of the debt-to-GDP ratio.
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5 Things to Know About Greece’s Proposed Reforms
Wall Street Journal
February 24, 2015
Greece’s new government has submitted a list of overhauls it will make in exchange for four more months of financing from its international creditors while it negotiates a new bailout program. The European Commission has backed the proposals, but has asked for more details. Here are five things to know:
1. The List of Reforms Doesn’t Include Any Numbers
The seven page letter, sent by Greek Finance Minister Yanis Varoufakis, describes general principles of the reform program and details some specifics on tax overhauls and government spending policies. But it doesn’t include any estimates about the costs, benefits and economic impact of those commitments. The financial details of the reform program will be hammered out during further consultations with creditors by the end of April.
2. Greece Wants To Shake Up The Public Sector And Crack Down On Corruption...
From tightening political party financing rules to publicly tendering out media broadcast licenses to making public procurement more transparent, the government wants to sever the deep links between business oligarchs and government. Many Greeks blame the country’s monied elite for leading the country to ruin, but rooting out corruption is never easy and Greece’s oligarchs have proven to be very resilient.
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European Commission Backs Greek Reform Proposals
February 24, 2015
The European Commission on Tuesday backed proposals made by the Greek government for reworking its bailout program, putting Athens one step closer to securing a four-month extension to its expiring bailout.
But the bloc’s governments will require more detail on the proposals before giving Greece more money and possibly before approving its extension request. Eurozone finance ministers will discuss the list of proposals, sent by Greece to its creditors on Monday night, on a conference call Tuesday afternoon.
“In the commission’s view, this list is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review, as called for by [eurozone finance ministers],” said commission spokesman Margaritis Schinas. “We are notably encouraged by the strong commitment to combat tax evasion and corruption.”
However, Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of the eurozone ministers, said the proposals represented “just a first step.”
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Münchau v Dixon - what next for Greece?
Financial Times
February 24, 2015
Syriza, Greece’s ruling leftist party, has radical options to avoid both Grexit and eurozone demands, but would they work? FT columnist and associate editor Wolfgang Münchau debates with Reuters News editor-at-large Hugo Dixon. Lex’s Robert Armstrong chairs.
February 24, 2015
Syriza, Greece’s ruling leftist party, has radical options to avoid both Grexit and eurozone demands, but would they work? FT columnist and associate editor Wolfgang Münchau debates with Reuters News editor-at-large Hugo Dixon. Lex’s Robert Armstrong chairs.
Greece delays delivery of spending-cuts plan to creditors
Los Angeles Times
February 23, 2015
Caught between their election promises and the reality of bills to pay, Greece’s new leftist leaders Monday delayed delivery of a detailed plan to creditors for boosting employment at the same time they make deep spending cuts.
Prime Minister Alexis Tsipras and his populist Syriza party sailed to victory last month on vows to end the indignity of austerity measures imposed by European lenders in exchange for $280 billion in bailout funds over the last five years.
But Tsipras’ campaign-trail message, that Greeks can demand easier terms on repayment without giving up their membership in the common currency alliance, has come back to haunt him as his freshman government tries to persuade the troika of financial institutions that oversees the bailout agreement to extend it before its Saturday expiration.
European Union leaders want to preserve the 19-nation Eurozone, as a Greek departure would represent a failure of the euro experiment that is a fundamental part of the European Union vision of the continent as a collective economic powerhouse. Syriza politicians felt confident that the Eurozone needed Greece at least as much as Greece needed the euro when they ran on a platform vowing to recover sovereignty over the country’s finances.
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Monday, February 23, 2015
Eurogroup conference call raises hopes for Greek bailout extension
Financial Times
February 23, 2015
Eurozone finance ministers are expected to hold a conference call on Tuesday to weigh Greece’s new economic reform plans, raising expectations that they are inclined to sign off on a tentative deal to extend Athens’ €172bn bailout until June.
The Greek list of economic reforms, due to be submitted to bailout monitors early on Tuesday, represents the last hold-up for the 18 eurozone counterparts deciding whether to extend Greece’s EU programme beyond Saturday, when it otherwise expires.
Eurozone officials said that, if the list proved unacceptable, ministers would probably be summoned to Brussels for another in-person meeting to try to resolve differences.
But Greek and EU officials said that, after an initial outline of reforms submitted at the weekend proved too vague, talks on Monday were more constructive, leading to the decision to hold a conference call instead.
“I’d put my money on [approval] tomorrow,” said one senior official involved in the talks.
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A Greek deal cannot fix the flaws in the euro
Financial Times
February 23, 2015
Watching the Greek crisis unfold, I found myself torn between two equal and opposite thoughts. First, the euro cannot survive. Second, everything must be done to save the euro.
The agreement reached between Greece and its eurozone creditors is therefore a good thing because it has put off the immediate threat of a political and economic crisis. But experience suggests that a debt deal with Greece may be only marginally more durable than a ceasefire in Ukraine. In both cases, there are underlying tensions and problems that cannot be solved by a cleverly drafted document.
Ever since a single European currency was first mooted, I have believed that it would eventually collapse. That belief is based on three simple propositions. First, a currency union cannot ultimately survive unless it is backed by a political union. Second, there will be no political union in Europe because there is no common political identity to underpin it. And so, third — the euro will collapse.
Plenty of people have attempted to convince me, over the years, that each of these three propositions is simple-minded and wrong. But events keep driving me back to the idea that the euro lacks the political and economic underpinning that it needs to survive.
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Four misperceptions about Greece
Financial Times
February 23, 2015
At best, it's the end of the beginning
On Friday, Free Lunch called the eurogroup meeting on Greece "the next of many high noons", and so it will prove this week. Much like previous "breakdowns in talks" were nothing of the sort, Friday's "agreement" was not one either. The FT's Peter Spiegel gives a quick summary of what the eurogroup on Friday signed off on. This was to consider extending the rescue loan if, but only if, the institutions formerly known as the troika approved the reform proposals that Athens was scrambling to write down over the weekend. So the "deal" is to keep talking, and that as soon as today.
It is a good time to clear up some more of the misperceptions riddling the running commentary. First is the notion that what Syriza agreed to on Friday differed little from what was on the table "on the day the government took office", as the Wall Street Journal's Simon Nixon puts it. That's quite wrong. A blog by Norbert Häring lists the ways in which Athens got the eurogroup to sign off on a statement that preserves a lot of negotiating space to press for a bigger rejection of the "memorandum" policies Syriza was elected to end. That's in addition to some small but substantive movement on the strictness of the fiscal targets. (In a companion piece, he argues that the German side got nothing that Greek finance minister Yanis Varoufakis had not already offered on February 11.)
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Greece On The Brink
Hoover Institution
February 23, 2015
Germany and Greece have both wisely blinked on how best to renegotiate Greece’s outsized debt to its reluctant playmates inside the European currency union. The present fix will last for only four months, which means that the unresolved issues will surge to the fore yet again if some long-term solution is not crafted in the interim. In dealing with bailouts of this sort, financial gurus unduly rely on macroeconomic principles. In my view, that approach overlooks the gritty transactional challenges that routinely arise when parties attempt to work out delinquent loans in the shadow of bankruptcy. The picture is not pretty.
To see how the process unfolds, start with a simple situation where a lender advances $1 million to a debtor who at the appointed hour is unable to repay the loan in accordance with its terms. At this point, the lender first looks to foreclose on any specific collateral that the borrower has given to secure the loan. But specific assets do not secure many loans, like those made to Greece.
In dealing with these unsecured debts, one option open to the lender is to insist that all the money be repaid, come hell or high water. But if the current funds are not available, these futile and aggressive demands could easily disrupt the debtor’s productive capacity, so that the lender will cut off its nose to spite its face. Backing off on these onerous collection demands, by taking some reduction to the principal or interest, or both. Typically, these revised deals also require delay in repayment, but that haircut, as it is usually called, ultimately works to the lender’s benefit. To see why, do the math: backing down results in a higher probability of collecting a smaller amount. Its present value is often worth more than some lower probability of collecting the original debt with interest in full.
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Now Comes the Hard Part for Greece
Bloomberg
February 23, 2015
Greece and the euro zone dodged another bullet Friday. After tense negotiations, they stumbled into an 11th-hour agreement -- at least in principle -- on a four-month extension of the external funding program supporting the country’s reform and recovery.
Financial markets celebrated; and it didn’t take long for some of the negotiators to publicly declare victory, though the two sides presented competing (if not mutually exclusive) narratives.
Rather than a decisive breakthrough, Friday’s agreement was a small step in a drawn-out and complicated process. Its robustness will be tested as early as today when Greece is required to present a list of policy intentions for the approval of euro-area finance ministers.
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Greak Leader Tsipras Can Expect More Humble Pie
Wall Street Journal
February 22, 2015
Greece’s membership in the eurozone looked less precarious by the end of last week than it did at the beginning—but it still hangs in the balance.
Faced with escalating bank runs and rapidly deteriorating public finances, Athens finally bowed to the inevitable and did what it had vowed not to do: request an extension to the country’s current bailout program—and commit in good faith to completing it. In doing so, the new Greek government has averted certain economic collapse and bought itself time to break yet another promise as it tries to secure a new bailout.
Little was agreed upon at Friday night’s meeting of eurozone finance ministers that couldn’t have been agreed on the day the government took office. Athens invested the better part of a month in the pursuit of the legally as well as politically impossible fantasy of unconditional loans from the European Central Bank and eurozone taxpayers.
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