Greece’s Finance Minister Evangelos Venizelos’s meetings in Washington last night were ‘celebrated’ here with missals (“Not Debt Restructure” Greek press) and flourish promises. Greek Fin Min told Greek media that the Troika will come back to Athens, the 6th bailout tranche will be released and Greece will meet all its obligations. At the same time IMF-Chief Christine Lagarde has been stressing “Implementation, Implementation, Implementation”. So far the Greek government has been playing ‘deaf’ to Troika’s demands. It failed to meet even those demands I personally agree with; like combat big scale tax evasion, closing down state institutions, kick out superfluous civil servants, cut their incredible high salaries and pensions, stop overspending, privatize state-run enterprises. Instead the government choose to lay back and watch, and bowed to protect the army of its voters in the public sector and PASOK-unions. Result: Greece will never manage to escape the spiral of debts-borrowing-austerity-new taxes-poverty. In fact, I can hardly believe that a bunch of politicians insist on ruining our country. A default seems inevitable but to what conditions and consequences.
Here is an approach by KTG-Reader Cheshire Cat. An economist from UK who lives in Greece and has good insight on the situation of the citizens here.
The latest €8-billion of emergency funding for the Greece will go in through one door of the state and straight back out through another to the banks. It is Orwellian to call it a Greek rescue package. On every occasion the Government receives its ‘bailout’ money, the average Greek is left with less in his hands. Greeks are not dancing on the streets.
Austerity is so damaging that default comes as a relief. It has become a question of survival. It is impossible for Greece to repay debts by measures that reduce its ability to pay. Targets will be missed again. Greece’s public debt was supposed to peak at 160% but now the IMF forecasts 189%. Nearly a quarter of the working population will be out of work by December. The strains on Government revenues and ability to collect taxes are plain to see.
Internal devaluation is a broke wand. The inability to deal with cartels, local monopolies and market power makes internal devaluation impossible. Wages and incomes fall and many small private businesses close down. Some stay open by not paying their works for months. Greece, once full small families businesses, becomes a country full of empty premises and closed shops
Greece will default, but it needs to default on its terms not on the creditors. The protesters on the streets are saying ‘We won’t pay! because they can’t’. This threatens an disorderly default. Meanwhile urgent discussions and a complicated poker game is being played in Washington. A G20 statement said the euro zone would take action to “maximize” the impact of the region’s bailout fund by mid-October. There is an increasing recognition that default and an substantial ‘haircut’ on Greek debt is essential. George Osborne, the UK finance minister said “They have six weeks to resolve this crisis”.
In other words, they have six weeks to prevent an orderly default becoming a disorderly one.
Default, and the knock on effects on the other PIIGS economies, could mean that some members, such as Greece or even Germany, leaving the Eurozone. The Greek government has to prepare for events that unfold.
For instance,if Greece finds itself with a new currency, the new drachma would fall dramatically. It would immediately restore competitiveness, boosting the tourist industry and exporters would be able to sells goods and services aboard more cheaply. Imports would become more expensive and the country’s trading deficit will shrink. Trading imbalance solved. The problem is the financial side of the economy and how this affects people’s pockets.
The new drachma would fall rapidly turning any debts remaining in Euros into a crippling burden – a prospect that creates a massive run on the Greek Banking System. To some extent this has already happened. The Greek banking system is in very bad shape, dealing with holdings of government debt and a flight of depositors. Banks will have to be re-capitalised, provided with liquidity and socialised.
How would the Greek Government do this by itself? Businesses, mortgages holders and savers will need protecting. A strategy would be required to re-negotiate and/or convert debts into local currency. Printing local money for this would create an inflationary period. This will further devalue the worth of savings. Protection would need some form of compensation with a stake/ shares in the re-capitalised banks. At some point the government will need to turn off the printing presses? In other words is the present government is capable of managing the resulting crisis without going back to the back habits of the 1970s and 1980s?
How bad crisis will be depends now on the power struggle that is now taking place in Washington. To want extent creditors to accept their losses.
It is in this struggle, that the Greek government still has some weapons. Greeks governments bonds were issued and written under Greece law (and not yet in English law). It can reverse the tables and call for much bigger haircuts. The ability to inflict large losses on the creditors ought to make them more receptive to the demand of the debtors. Hence individuals and companies usually have assets seized, but countries don’t. The meaning of selective default should be changed. Good and bad creditors and debts should be separated and investigated. The international law on odious debts needs to be tested. I refer to the famous debtOcracy video.(http://www.youtube.com/watch?v=qKpxPo-lInk&feature=player_embedded)
Greece must prepare for the consequences while it still has cards remaining in its hands. Default is inevitable but events could lead to an euro exit. Greece needs to prepare steps to protect both it debtors (mortgages) and depositors.
Defaulting on debts means losing creditability and the ability to borrow on markets. But Greece has already lost this. Being shut out of capital markets meaning ‘Greece living within its means’, which is what the austerity measures are supposedly doing. On the bright side of an Euro exit, the economy can be competitive again. It won’t be by a Troikia imposing austerity that forces the population to live and work on third world wages. It will be far less than the 10 years that austerity promises. Greece’s unemployed and talented young can’t wait 10 years and Grrece can’t afford to lose them.
The profits motive has a very selective memory. Greece still has resources and householders that are potential under-leveraged savers (who actually haven’t been ‘spending above their means’ to the extent that Germans have) which can provide a basis for growth. Everyone is speaking about Argentina and its 2001/2 default crisis. Don’t cry for it. It did better than most during the 2007/8 financial crisis and today it has growth approaching 10 per cent.
Everyone is talking about Lehman’s shock that triggered the 2007/8 meltdown. Don’t. A Greek default is no longer a surprise. The only question is now how we deal its consequences.
You can follow Cheshire Cat’s Blog Here
The crucial (another ‘crucial’….) meeting between Venizelos and Lagarde will take place in Washington on Sunday, at 10.30 pm Greek Time.