Germany Shows Openness Toward Greek Referendum on Bailout Program

Wall Street Journal
May 11, 2015

A referendum in Greece on the country’s international bailout program may be a good idea, Germany’s finance minister said Monday.

“It may even be a right measure to ask the Greek people to decide whether it’s ready to accept what is necessary or whether it wants the alternative,” said Wolfgang Schäuble said as he arrived for a meeting with his eurozone counterparts in Brussels.

Calling a referendum on the bailout would be a risky move for both the government in Athens and the rest of the eurozone, adding further unpredictability to a tense situation. A negative vote would likely herald Greece’s exit from the eurozone.

Several of the overhaul measures demanded by Greece’s international creditors—including pension cuts and new laws that make it easier to lay off workers—clash with the promises the new left-wing government made when it was elected in January.

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Greece seemingly has no Plan A or Plan B on debt

by Hugo Dixon

Reuters
May 11, 2015

Strategy is a word with Greek roots. But, sadly the current government led by Alexis Tsipras doesn’t seem to have a strategy for extricating the country from its parlous state.

Its government lacks a credible plan for reaching agreement with its euro zone creditors and the International Monetary Fund. It doesn’t seem to have a thought-out fallback plan of how to default while containing the damage either.

Greek financial markets have perked up in the past few weeks, largely because Yanis Varoufakis, the combative finance minister, has been sidelined from discussions with the country’s creditors.

The new composition of the negotiating team has, indeed, led to more productive talks. But there is still a mountain to climb and little to no chance of a deal when euro zone finance ministers meet on May 11.

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I.M.F. and Central Bank Loom Large Over Greece’s Debt Talks

New York Times
May 10, 2015

Greek leaders have fought fiercely in recent months with politicians from other European countries over relief on Greece’s vast debt load.

Yet the power to decide the fate of Greece lies not just in the hands of these national governments, but also with unelected officials at two powerful institutions: the European Central Bank and the International Monetary Fund. Each is a creditor to Greece, and each is expecting the country to repay it billions of dollars of debt in the coming weeks.

The influence of the E.C.B. and the I.M.F. will be felt behind the scenes on Monday, when finance ministers from Greece and other European nations meet in their latest effort to break an impasse that is paralyzing the Greek economy and frightening global markets.

Greece is expected to repay 750 million euros, or $840 million, to the monetary fund on Tuesday as scheduled. For the rest of the year, however, its debt repayments to the fund and the central bank total nearly €12 billion.

The politicians at the meeting are racing against the clock to forge a deal that would give Greece enough money to repay both this summer.

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IMF Works With Greece’s Neighbors to Contain Default Risks

Wall Street Journal
May 10, 2015

The International Monetary Fund is working with national authorities in southeastern Europe on contingency plans for a Greek default, a senior fund official said—a rare public admission that regulators are preparing for the potential failure to agree on continued aid for Athens.

Greek banks are big players in some of its neighbors’ financial systems. In Bulgaria, subsidiaries of National Bank of Greece SA, Alpha Bank SA, Piraeus Bank SA and Eurobank Ergasias SA own around 22% of banking assets, roughly the same as Greek banks own in Macedonia. Greek banks are also active in Romania, Albania and Serbia.

“We are in a dialogue with all of these countries,” said Jörg Decressin, deputy director of the IMF’s Europe department. “We are talking with them about the contingency plans they have, what measures they can take.”

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Merkel Pressed to Give Up on Greece as Germans Urge Strong Euro

Bloomberg
May 10, 2015

German Chancellor Angela Merkel is coming under growing pressure from within the ranks of her own party bloc to give up on Greece for the sake of the euro.

Members of Merkel’s Christian Democratic bloc are openly challenging her stance of keeping Europe’s most-indebted country in the 19-nation currency region. Even some officials in the Finance Ministry are leaning toward the conclusion that the euro area would be better off without Greece, two people familiar with the matter said.

“The euro would be strengthened if Greece left,” Alexander Radwan, a Merkel-affiliated lawmaker who voted for granting Greece a temporary extension of its bailout in February, said in an interview. “The other countries could then move closer together and apply the rules more strictly.”

With European finance ministers due to resume talks on Greece on Monday, hardening sentiment in Germany risks sending mixed signals to investors as Prime Minister Alexis Tsipras’s government attempts to reach a deal with creditors.

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Greek leader faces revolt by party hardliners as debt showdown looms

by Helena Smith

The Observer
May 10, 2015

The epic struggle to keep Greece solvent and in the eurozone intensified on Saturday night amid signs of a looming crisis within the anti-austerity government that took Europe ablaze barely three months ago.

As prime minister Alexis Tsipras scrambles to secure a financial lifeline to keep the debt-stricken country afloat, hardliners in his radical left Syriza party have also ratcheted up the pressure. In a make-or-break week of debt repayments, the politician once seen as the harbinger of Europe’s anti-establishment movement has found himself where no other leader would want to be: caught between exasperated creditors abroad and enraged diehards at home.

With government coffers almost at nil and Athens facing a monumental €750m (£543m) loan instalment to the International Monetary Fund on Tuesday, it is the last act in a crisis with potentially cataclysmic effect. Either Tsipras betrays his own ideology to deter default – reneging on promises that got him into power – or he goes down as the man who allowed his country to do what no other EU member has done: enter the uncharted waters of euro exit. It is a moment of truth with consequences far beyond the borders of Greece.

“No doubt he is having nightmares about betraying ideas that he has held dear all his life,” said Aristides Hatzis, associate professor of law and economy at Athens University. “To make such a U-turn he is going to have to cross red lines that require a leap of faith I am not sure he has.”

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Greek PM forecasts 'happy end'; Eurogroup chief cites progress in talks

Reuters
May 8, 2015

Greek Prime Minister Alexis Tsipras forecast a happy end soon to fraught negotiations with creditors on a cash-for-reform deal, and the chairman of euro zone finance ministers said talks were making progress, though not enough for a deal next Monday.

However, with Greece's cash reserves dwindling, EU officials said there was no breakthrough in talks with the International Monetary Fund, the European Commission and the European Central Bank on sticking points such as pension and labor market reforms and budget targets.

"The organization and structure of the talks has improved, compared to what it was before, but we are still quite some way away from a situation that you could describe as a final agreement being well in sight," a senior euro zone official said.

Greece's leftist-led government, which was elected earlier this year on promises to end austerity policies, has dragged its feet on accepting unpopular reforms promised by a previous government under the country's EU/IMF bailout program.

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Documents Distributed by Greece’s Yanis Varoufakis Baffle Eurozone Officials

by Viktoria Dendrinou

Wall Street Journal
May 8, 2015

Economic plans and growth estimates distributed by Greek Finance Minister Yanis Varoufakis to some of his eurozone counterparts have baffled officials involved in the talks over its international bailout.

Officials say that the files differ greatly from what has been discussed at the technical level in Brussels in recent days and underline how Mr. Varoufakis continues to complicate progress toward a financing deal.

The 36-page document, entitled “Greece’s recovery: A blueprint” and seen by The Wall Street Journal, was presented by Mr. Varoufakis to his counterparts in Paris and Rome, as well as senior officials in Brussels, while he was touring European capitals over the past week, according to four European officials.

Mr. Varoufakis declined to comment on the document Friday in Madrid after meeting with Spanish Finance Minister Luis de Guindos.

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Five Years On, Doctor and Patient Split on Greek Cure

by Marcus Walker

Wall Street Journal
May 7, 2015

Greece and its creditors, deadlocked over fresh financing, agree on at least one thing about the country’s mammoth bailout, launched five years ago this month: It hasn’t worked as hoped.

But Athens and its lenders—the eurozone and the International Monetary Fund—disagree diametrically on why the bailout program has flopped. This dispute about the past five years helps explain why the players so often seem to be talking past each other today, and why reaching agreement on further aid is proving so hard.

Lenders, led by Germany, believe that the bailout’s blueprint was and remains correct, but that Greece failed to follow it. Rapid deficit-cutting was the only way to cure Greece’s debt problem. The rollback of stifling regulation and unaffordable social benefits and an injection of free-market competition were unavoidable if Greece was to grow sustainably.

German leaders such as Finance Minister Wolfgang Schäuble see Greece as the patient that didn’t take its pills, unlike others in the same hospital, such as Portugal and Ireland, who swallowed the same medicine and recovered. To many Greeks, however, the eurozone seems more like the psychiatric ward in the Ken Kesey novel One Flew Over the Cuckoo’s Nest, where a domineering “Big Nurse” controls the inmates through punishment and humiliation.

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TRAC: A market-based tax on capital flight as an alternative to Grexit

by Daniel Gros

Centre for European Policy Studies
May 7, 2015

In this CEPS Commentary, Daniel Gros turns his attention to the main outstanding problem facing Greece today, namely capital flight. Fearful that the country will leave the euro, depositors are withdrawing cash from their bank accounts – thereby making this event more likely. He outlines a proposal in which outgoing payments from Greek banks in the form of cash or via the TARGET system would be limited to the amount of incoming payments, i.e. revenues from exports or tourism, via an auction system. Greece could remain formally a member of the euro area, but the price for cash withdrawals would encourage depositors to wait and stimulate exports.

Download the Commentary (PDF)

The Other Damage Greece’s Government Is Doing

by Yannis Palaiologos

Wall Street Journal
May 7, 2015

Greece mostly attracts attention these days for the difficulty it’s experiencing negotiating new terms with its creditors. But that’s only half the story. Over the past four months an economy that had barely managed to grind into first gear last year has shifted back into reverse.

The European Union’s spring economic forecast, released this week, now predicts Greece’s economy will grow by a mere 0.5% this year. Only three months ago the EU expected Greece to expand by 2.5% in 2015. Because this economic contraction weighs on tax receipts, the International Monetary Fund now expects Athens will run a fiscal deficit before debt service this year. Even if the government succeeds in its negotiating aim to set a target primary surplus of 1.5% instead of 3% for 2015, it would take significant further fiscal retrenchment to meet it.

Such a downturn was far from inevitable. Investing in Greece had always been difficult, even before the crisis that began in late 2009. The sclerotic bureaucracy, the corruption, the ever-shifting tax rates and the constant danger of judicial deadlock meant that Greece had some of the lowest foreign-direct-investment rates in the eurozone. The crisis, and above all the threat of a Greek exit from the common currency, made this considerably worse.

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Putin Tells Greece Financial Aid Is Tied to Russian Pipeline

Wall Street Journal
May 7, 2015

Russia’s President Vladimir Putin said Thursday he was ready to consider financial help for debt-stricken Greece, so long as Athens signs up to a project to bring more Russian gas to Europe.

Greece’s leftist government, which is locked in negotiations on economic overhauls with its international creditors, has hoped to receive an economic boost from Russia.

But despite a trip to Moscow by Greece’s Prime Minister Alexis Tsipras in early April, Athens has so far failed to secure any help, either in the form of cheaper natural gas supplies or an exemption from Moscow’s ban on European food imports.

Both Mr. Tsipras and Mr. Putin said at the time Greece wasn't looking for financial aid.

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The sorry saga of Syriza

Economist
May 9, 2015

In recent months the walls of the B. & M. Theocharakis Foundation in Athens have been lined with mementoes of European support for Greece’s freedom. “Philhellenism”, an exhibition, tells the story of the material and moral backing that Romantics like the English poet Byron gave Greece during its independence fight against the Ottomans. The contemporary resonances are obvious. Showing some children around, Dimitra Varkarakis, who with her husband, Michael, owns the works on display, pointed to a German painting. One girl stopped short. “Aren’t we in a fight with Germany?” she asked. “No,” replied Mrs Varkarakis. “We are all friends.” After recounting this tale she casts Charlemagne an earnest look. “Europeans,” she says, “must love each other.”

That is a noble aim, for some Europeans have lately struggled even to speak to each other. Two weeks ago, after a particularly disastrous meeting, Yanis Varoufakis, Greece’s finance minister, declared that he welcomed the hatred directed against him in the euro zone. After more than three months of fruitless negotiations with Mr Varoufakis, the reserves of Philhellenism among Greece’s partners have run utterly dry. “They are living in cloud-cuckoo land,” says one Brussels official.

Perhaps it was naive to expect anything else. A few years ago many of the men now in charge spent their time discussing the contradictions of capitalism over coffee and cigarettes. Few had ever run anything, let alone a government. Their European contacts were limited. Syriza, their party, typically won only 3-4% of the vote. But Greece’s economic calamity transformed its prospects. In 2012 it came within a whisker of power. And after January’s election it went one better, forming a governing coalition.

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Greece Saunters Across the Autobahn

by Michael Lewis

Bloomberg
May 7, 2015

A few years ago, the Berkeley Police Department applied for and received a grant from the state of California to improve the behavior of local drivers. The grant came on the heels of data showing that Berkeley was perhaps the most dangerous city in the state in which to cross the street: The previous year more pedestrians had been struck by automobiles in Berkeley than in any of the 55 other comparably sized California cities.

But as anyone who lives here knows, the drivers aren't really the problem. Or rather, they aren't any more of a problem than they are any place else in California, and probably a lot less of one.

The Berkeley pedestrian, on the other hand, seems bent on his own destruction. In daylight hours you can find him sprinting from behind tall bushes into busy intersections, ear buds in place to ensure he remains oblivious to any danger; at night he dons dark clothing and slips, ninja-like, from shadows onto poorly lit streets. It's California law that a pedestrian, when he arrives at a crosswalk, must stop and make eye contact with any approaching driver: Hardly anyone here pays that law any attention. If the Berkeley pedestrian glances up at all, it's to glare at any driver moving slowly enough to notice his sudden, almost magical appearance in the middle of the road.

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Greece overturns civil service reforms

by Kerin Hope & Peter Spiegel

Financial Times
May 6, 2015

Even as the Greek government scrambled to reach an agreement on new economic reforms with its creditors in Brussels, it began reversing similar measures agreed during previous bailout negotiations in a parliamentary session in Athens.

A new law proposed by the leftwing Syriza-led government and passed Tuesday night opens the way to rehire thousands of workers cut loose from the country’s inefficient public sector in a reform enacted by the previous government.

The move came on the same day the new government announced changes to a finance ministry system of electronic procurements and public payments that was supposed to improve transparency and had been blessed by international lenders.

And it followed legislation passed last week to reopen the state broadcaster, ERT, which was shut down by the previous government as a cost-cutting measure.

The moves highlighted the conflicting impulses of Greece’s new left-wing government and creditors bent on securing economic reforms in exchange for their support.

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Yet Another Greek Secret: The Case of Phantom Assets

by Steve H. Hanke

Bloomberg
May 5, 2015

When banks are in distress, it is important to assess how easily the bank’s capital cushion can absorb potential losses from troubled assets. To do this, I performed an analysis using Texas Ratios for Greece’s four largest banks, which control 88% of total assets in the banking system.

We use a little known, but very useful formula to determine the health of the Big Four. It is called the Texas Ratio. It was used during the U.S. Savings and Loan Crisis, which was centered in Texas. The Texas Ratio is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

Despite the already worry-some numbers, the actual situation is far worse than even I had initially deduced. A deeper analysis of the numbers reveals that Greece’s largest banks include deferred tax assets as part of total equity in their financial statements. Deferred tax assets are created when banks are allowed to declare their losses at a later time, thereby reducing tax liabilities. This is problematic because these deferred tax assets are really just “phantom assets” in the sense that these credits cannot be used (read: worthless) if the Greek banks continue to operate at a pretax loss.

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The reality of trying to build a business in Greece today

by Marco Veremis

Financial Times
May 5, 2015

As I fly out of Athens on a spring afternoon I can’t escape the thought that, in my lifetime, my country has never had it so bad. The prolonged crisis has cost us a quarter of our GDP, the state is rapidly running out of money and Greece’s isolation grows by the day. Greece is perilously close to losing its European path. And with it our connection to the liberal values and prosperity that it promised.

Amid the nationalistic rhetoric in Athens, voices from the real economy, the internationally-minded people and businesses whose exports and services offer the only lasting hope of recovery, go unheeded. It brings WB Yeats to mind: “The centre cannot hold . . . the best lack all conviction, while the worst are full of passionate intensity.”

My vantage point has been at odds with the Greek depression. Upstream, the mobile commerce company I co-founded, has tripled its revenues and headcount in the past three years. We have built a global business that develops software in Athens and exports it to 42 countries, with nine offices around the world.

Our team, with an average age of 29, gives the lie to the stereotypes that abound of Greek professionals — by turns lazy, inward looking or living in the past. Instead, they are determined, adaptable and competitive.

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IMF takes hard line on aid as Greek surplus turns to deficit

by Peter Spiegel

Financial Times
May 4, 2015

Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors.

The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF’s European department, raises the prospect that it may hold back its portion of a €7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy.

Half of the €7.2bn, which is the subject of intense negotiations between Athens and its creditors in Brussels-based talks that resumed on Monday, is due to come from the IMF. Without the funds, Greece is expected to run out of cash this month.

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Sound Money through Monetary Competition

by Pedro Schwartz

Library of Economics & Liberty
May 4, 2015

Money is the wild card of the capitalist game. In the past century, financial and monetary upsets recurred, with the Great Depression as the nadir. In the present century, just when the End of History was around the corner and political and economic democracy seemed victorious over all other social systems, the Great Recession hit. We do not yet have a complete picture of why this happened, but there is little doubt that our monetary arrangements proved defective. This was especially so when central bankers went beyond their duty to supply sound money and tried to manipulate the real economy: some even thought they had the means to get rid of the business cycle once and for all. The enemies of the free economy now sing three mantras: climate change, growing inequality, and the malfunction of financial markets. The first two I will leave to the care of statisticians, who can better analyze the defective extrapolations of data on which they are based. Today I will concentrate on money, an institution that is of the essence of the market economy and that gainsayers proclaim can, under no circumstances, be left to the market.

My Peruvian proposal for Greece

My thesis is as follows: A sound currency is a necessary condition for people safely making the free choices that lead to sustained growth. Sadly, however, sound money seems to be beyond the ingenuity of most countries. In some instances, monetary competition results in sound money, especially in Latin America, where the outstanding case of parallel currencies is Peru. In contrast is the failure of the 'eurolization' of Greece (if I am allowed the neologism), by which an outside currency, the euro, is imposed on a country incapable of fulfilling the necessary conditions for is success. My suggestion will be that Greece move to a scheme of parallel currencies of the kind I observed in Peru during my last visit there. With both the euro and a new drachma running in Greece, the country could stay in the Eurozone but do so under less offensive political restrictions and at a much lower social cost.

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Grexit may be the best end for a bad marriage

by Gideon Rachman

Financial Times
May 4, 2015

The relationship between the government of Greece and the rest of the eurozone increasingly resembles a bad marriage. The two sides are sick of the sight of each other. Mutual trust has broken down. Efforts to patch things up continue, but nothing seems to work.

The conventional solution to such a dilemma in a real marriage is well known: divorce. Divorce settlements usually mean that both sides suffer financially. The two parties go ahead anyway, because they are prepared to pay a heavy price to get out of a bad relationship. We have now reached that moment with Greece and the eurozone. The relationship is broken. It is time for both sides to make a fresh start.

Those who fear the consequences of a Greek exit from the euro — a Grexit — would point out that the marriage metaphor could be dangerously misleading. There are well-established processes for breaking up a union between two people. There are far fewer precedents for breaking up a currency union. The risks involved have been ably set out in a recent column by my colleague Gillian Tett, who highlights the danger that Grexit could lead to a global financial meltdown, similar to the one triggered by the 2008 collapse of Lehman Brothers, because of the unquantifiable legal and financial risks involved.

However, German negotiators and some elements of the Greek government give the impression they think that the risks of Grexit are containable. If they believe that, they should take a deep breath and go for it. At this stage, it could be better for both sides.

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