It is commonly accepted: the second bailout for Greece is not about saving Greece (the country) or the Greeks (citizens). It’s all about saving banks, lenders and the eurozone. Recently I asked the Cheshire Cat to write about the two bailouts that will enslave Greeks for the rest of their lives, their children’s and grandchildren’s lives. And here is the excellent article:
Second Greek Deal: an Exercise in ComPact StuPIGidty
The reward for the years hardships that will be imposed by the “Second Greek bail-out”, is a sovereign debt is a sustainable debt/GDP ratio of 120% in eight years time. What makes 120% the magical ratio of debt sustainability nobody has clearly answered yet. Leaving that aside, to get to it the new “bailout” projects a path that would having Greek GDP falling until 2013 but somehow magically pops back up by 2% in 2014 to move to a 120% debt/GDP in the year 2020. 20/20 EuroVision, if you like. How Greece, which is now a wrecked economy after five years of recession with still more deeper austerity bloodier cuts to come, would return to growth by 2013 is one of those mysterious secrets of the inner sanctum.
Apparently, it was also a mystery for the IMF and the EC technocrats themselves. Within hours a IMF leaked Debt Sustainability Report (find here) stated a worse (more likely) case scenario of the debt being 160% of GDP in 2020. Below is the leaked Greek Debt sustainability analysis, annotated in red by G Jenkins (Swordfish Research Ltd via FT’s Alphaville)
“Strictly Confidential” (It has already appeared on Wikileaks so give away as you like)
“Baseline assumptions…the 2011 outturn was worse than expected…the macroeconomic outlook has deteriorated significantly…Medium term potential growth assumptions have been maintained” (Yes, I know it doesn’t make any sense not to alter the growth assumptions when all the inputs have deteriorated but unless we keep the figures the same then even we can’t fudge this one)
“Fiscal path has been adjusted…still bring Greece to a primary general surplus of 4.5% of GDP by 2014, although additional measures will need to be identified to secure this outcome” (I can’t get it to add up)
“… uncertain whether market access can be restored in the immediate post-programme years…” (I mean, would you lend your own money to this lot?)
“For the purpose of constructing the DSA baseline Greece is assumed to maintain good policies post-programme” (Yeah, knew that one would make you chuckle!)
“…if the primary balance gets stuck below 2.5% of GDP” (which it probably will), “then debt would be on an ever-increasing trajectory” (I am working on the Bail-out III paper this weekend…)
“Debt dynamics under an alternative unchanged policies scenario” (Think of it like alternative comedy…it all becomes mainstream in the end, so this is the more likely outcome. It’s not the wrost case scenario — jeez, you definitely don’t want to see that…)
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned…” (Hey, can you blame them? They have to live there…)
“Greater wage flexibility may in practice be resisted by economic agents” (Turkeys don’t vote for Christmas…)
“Service market liberalisation may continue to be plagued by strong opposition from vested interests” (Expect more riots…)
This was quickly followed by the EC admitting that its own prediction from last Nov for 2012 is “markedly” wrong, with economic activity being much weaker than anticipated. The new EC forecasts (23/02/2012 click here ) exploded the numbers in the Greek bail-out deal. So, after years of suffering and having lost its independence, the best the Greek economy can hope for is to be in the same unsustainable place as where it is now.
To inflict this monstrous deal, the Greek Constitution has to be changed to give creditors first priority to take any revenues that “Greek” government can squeeze from its own population. The money to pay these creditors must be placed into “escrow account” so that it can’t be diverted to other purposes. Any leftover spare cash raise from government revenues will be used to run whatever remains of the country.
The Greek deal acts as a template for the new “Stability and Growth Pact. – a template where rules and agreements are made behind closed doors by unfamiliar officials and technocrats guaranteeing the rights of creditors above those of citizens. It serves as a austere lesson to discipline all other budget ‘sinners’. Made effective, without loopholes, it means that during a global downturn (eg a supply-side shock such a rise oil prices e.g Iranian crisis) a governments will face lower tax revenues. more welfare payments and an increase in its budget deficit. The government will either have to cheat, or cut and deepened its own economy’s recession. As the recession deepens, there will be another fall in tax revenues, increased expenditures and yet more missed targets.
The country is then placed in a debtors’ jail with its finances placed under stringent watch to enforced deeper more bloodier cuts. Government revenues are that then prioritized to towards the creditors. To embedding such rules into a national constitution is like pressing the ‘Find and Replace’ button, zapping out the word ‘citizens’ to replace it with ‘creditors’.
Unless Greece manages to achieve primary surplus (tax revenues exceeding expenditures excluding interest payments on debt), which is proving to be practically impossible, it will either have to borrow yet more money or break even more obligations to its citizens. More exasperated taxing and expenditure cuts, will slash against those designed for economic reform as the economy spins further into its death spiral.
Hardy any of the “Greek 130 billion “euro bailout” is going to the Greek people. It locks them up in a debtors prison, and then throws away the key…..
- Exchanging of existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law will both diminishes their sovereignty and makes the eventual default far more difficult.
- Exchanging bonds issued to private investors for loans from quasi-governmental agencies will make the eventual default far more difficult.
- The pledging of gold reserves will eliminates a vital resource needed to buy imports during a default and devaluation process.
which will make any future defaulting or exiting of the euro more expensive and more painful.
The agreements to cut minimum wages, health care, pensions and “whatever it takes” will reduce domestic demand and deepen the recession. Cartels and power interest groups, buffered by funded aboard will survive. Small competitive businesses won’t. 423,000 businesses have shut down while People live of the garbage and sleep on pavements. Ignore the semantics of default, citizens will default everyday on their mortgages, loans and bills. The Troika does not offer bail out for ordinary citizens or save small businesses them bankruptcy. internal devaluation is proving to be a disaster of epic proportions for the Greek economy.
Competitiveness in the Greek economy is not simply measured by a macroeconomic ‘real wage level’. Wages cannot be cut off from productivity, productivity cannot be cut off from the structural inefficiencies of the Greek economy, and this, in turn, cannot be cut off from the current political regime in Greece. Competitiveness in the Greek economy is about cartels, monopolistic market structures and a system of clientelism that kills off development and innovation. Foreign and domestic Cartels, collude, carve up markets, fix prices while regulators look the other way. When innovation occurs, it is forced to retreat from officialdom in the black and grey economy. Lower incomes groups, struggle to escape a system that tries to make them pay more. The wealthy have off-shore accounts, lawyers and accountants that cut through a complex legal system. Austerity and reforms are applied to the weakest first. A turkey does not vote for Christmas.
Greece is in desperate need for more not less democracy. Real investment has to be the priority, not debt servitude in an up-side-down economic development model that takes economy down to Third World conditions. The increasing numbers of people exiting the euro and turning up at soup kitchens, shows how far the third world colonialism has entered into Europe. An economy with nearly half its youth wasting away or emigrating can not be said to an efficient use of resources. Growth not austerity is needed to engage them. Legal, political, and not just economic restructuring, are essential to move the country towards greater democracy. Reforms that motivate ordinary citizens to participate, invest and feel they have a share in the benefits from them. Europe is edging towards war, dictatorship or revolution. The choice is yours.
“It’s all about saving banks, lenders and the eurozone.”
Only about 80% of it! The other 20% are earmearked for spending by the government, to cover the deficit. And if you think that Greece doesn’t benefit from the 80%, do I have to remind you that no modern economy can work without a financial sector? You gotta have a least some banks, preferrably more rtraditionally minded ones that don’t engage in speculations but provide credits for the productive sector and secure savings for the citizens. If Greece defaults, that would hurt Greek banks the most, and the government can’t really afford to bail them out.
Dear Gray, Germany!
1. Banks have stopped giving lone’s to anybody for a while now, which kills of every single healthy business that was still standing.
2. Greeks are pulling their cash out of banks at a rate unprecedented in recent history. Normal Greeks use it to cover their daily expenses and pay all the double and triple taxation that has come their way. And any fat cat had his/her money transferred abroad (examples are the 1 million euro parliamentarian and the 10 or so colleagues of him/her that did the same with a bit less money.
Looking at these two facts, please answer this: why should we give on f*** about any bank, let alone a f****** Greek bank? We have to fend for ourselves. We entered in an banter economy. No banks needed. In fact, no money needed either: Euro nor Drachma.
Dear Antonis, barter trade flourishes during times of low liquidity, out of necessity, but you can’t run a modern economy on that principle. The transaction costs (the efforts going into trade until you get the product you want) are much too high, and Greece can’t get of this mess if it becomes even less competitive in relation to other nations. If there aren’t any positive economic developments soon (and there’s nothing on the horizon so far), then Greece’s only realistic option is to go back to the drachme. That wouldn’t magically solve all the problems, the state will still need to go on with modernizing itself, but it at least would bring fresh money to the people and boost economic demand again. Sadly, it would most probably come with high inflation, but Greece already had that in the past and managed to get along with that. Also, it would certainly lead to some banks going bankrupt, but, you’re right, why should the people give a f*** about that?
Dear Gray, I have experienced here in Greece that not only low liquidity leads to a barter system but also a state that prowls on it’s own citizens and is so dysfunctional that it should be called a failed state.
let’s stay best in our way @Xiotie. It could create stupid jokes and misunderstandings lol
your right
🙂
Population of Greece: 10.8 Million
Number of Households in Greece: 4.2 Million
Greek Bailout Size: €130 Billion
Bailout Size per Greek Person: 130,000,000,000 / 10,800,000 = €12,037
Bailout Size per Household: 130,000,000,000 / 4,200,000 = €30,952
My question to you guys, how much money do you think it would take to make every household in Greece completely energy self-sufficient via solar panel utilization. More then €30,952 per household?
Next question, if you can grow your own food, collect water from the sky, generate energy from the sun, what point do you think Government serves? If society ever hopes to achieve sustainability in the near future, what point do you think Government would serve then? The answer, Government is there to suppress us, and the very notion behind a free society. Technological advances in the last 10 years should of allowed for great advances in quality of life. This is not happening, poverty rates worldwide are rising and globally quality of life has been going down since 2008. The debt cycle is a well thought out plan to stop advances in technology from creating a completely self-sufficient way of life, which society would of naturally progressed to with the recent advances in technology. Debt will and is being used as a weapon to restrict and enforce control upon society. The battle between your right to freedom and debt is just beginning, believe me. Debt will instil fear upon society, and as more countries become like Greece, it will ultimately be the people that will blindly accept the solution of a one world currency. After that, you will never know freedom ever again. Your life and existence will serve a one world bank, a one world government, and a one world currency.
with such bureaucracy and the banks not giving one euro loan, you can grow only tomatoes in your balcony.
Eh KTG?! Isn’t there a law against home growing???
@Mike. This is a country where you need a chest x-ray to be able to start up a e-business, for you need FIVE medical exams before you can go to a public swimming pool and you need signatures from the Town Planning Department and the DEH (state electricity company) and they don’t want you to (or you should have a little envelope, allegedly)
home growing?
you forgot to add the first bailout 110 billion euro, although not all tranches have been given to Greece.
I don’t understand why Greece puts up with this. Why does this ‘show’ keep going?
I feel disgusted that we in northern Europe demand things like this, but Why do your politicians just accept it? why not say lets take some pain now (default) and move on in 5 years, instead of being enslaved forever?
Is it really your problem if the European banks can’t handle Greece defaulting, I think not, save yourselves.
The only thing they are busy with is their own position, the next election. Do you know what the Finance Minister did this whole weekend? Sitting with the top of his party fighting it out who will become the next leader of PASOK.
And do you know what Mr. Samaras of ND did this whole weekend? Sitting with the top of his party looking for ways to win the next elections and working out strategies to become the next PM.
Do you know what most Greeks did this Carnival Weekend? Visiting family, but not if that involved long drives with high tolls and petrol at 1,70/l; not going out for diner, not holding children’s parades; not buying anything more than one coffee on the plateia; not buying kites to fly on Monday; not…
See the pattern here?
“I feel disgusted that we in northern Europe demand things like this”
Our governments demand “things like this” austerity because the Greek states spends much more than its income (“budget deficit”). To make up for the missing money, Greece has run up incredibly high debt until the markets wouldn’t lend the state any more. But the missing money still has to come from somewhere, or else the government would have to cut the expenses in a devastating way (austerity ain’t nothing compared to this). Now, there’s no political support in the North for putting Greece on artificial life suppport forever, so there have to be changes. Thus, the troika demands.
Well, we can argue if one or the other of the conditions make much sense, of course, but imho there can’t be much reasonable argument about the need for balancing Greece’s finances. Or do you like your tax Euros being used to support irresponsibly high spending by foreign governments, year after year after year? It’s either bailout credits and austerity, or an Euro exit and high inflation. Both options come with their own hardships. There is no free lunch, and money doesn’t grow on trees.
Gray, Greece, to all intents and purposes should never have been allowed to join the euro, which has been their downfall. It is a well known fact that Goldman Sachs, with the full knowledge of the EU, fiddled/fudged, it means the same, the figures to allow entry. I think it’s criminal for Greek politicans/EU to be punishing ordinary Greeks for their criminality, while making sure the French/German banks are saved…..All those that condoned the fiddled/fudged figures should be forced to give up all their assets to be shared out among the Greek people…….Britain’s chancellor informed the public that there’s no more money, it’s only the fact they kept their own currency and can print money, although that can’t go on forever. The EU (a very small minority of unelected bureaucrats, with the active help of homegrown politicans) has destroyed Europe’s nation states, and the lives of millions of people. Yet Greeks remain stubborn in wanting to keep the euro/EU even though they don’t get a cent of the bailout, after all they’ve suffered, and what’s still to come, which has baffled me for a long time. Whether they actually believe the troika will relent and stop the austerity and share the bailout with them remains a mystery to me. So I agree with the last paragraph of the guest post, edging towards war, dictatorship (which isn’t far removed to what the EU is, and what they desperately want, complete control) or revolution…. All the world over one cannot help but have heartfelt sympathy for ordinary Greeks.
I know the polls tell us that something like 65% of Greeks want to keep the Euro, but where I am just about everyone I’ve spoken to thinks that Greece should get out of the Euro ASAP; and not only that, but that joining the Euro in the first place was a disaster for the country. So I’m not sure where the pollsters were asking their questions.
It’s also worth wondering exactly what the polling questions were. By asking questions in the right way, you can pretty much guarantee getting the result you want. Deviousness is generally a prerequisite for members of parliament.
Dear Gray
A “Reasonable” argument about balance finances and fiscal disciple!
So lets have a look at these “balanced finances” as found in any country’s national accounts books (this is Basic Macroeconomics 101 – skip the simple algebra, if you like)
The resources of a country can be used for consumption (C), investment (I) or public/government consumption (G) or be exported (X).
A country can also import and export resources : (X – M) the country’s current trading account)
Net National product NNP (adjusted for resources going in and out of the country)
NNP = C + I + G + (X – M) (exports – imports)
and producing this net output NNP will generate incomes (Y).
This income can be spent (C) saved (S) or taxed (T) or Y = C + S + T
So: producing Net Output = incomes
C + S + T = C + I + G + X – M
S + T = I + G + X – M
Economists and national accountants (rearrange) write this as:
(S – I) + (T – G) = (X – M)
This shows the difference between income and spending for private sector (S-I), public sector (Government budget T-G)) and for country (X-M)
At any moment in time, the sum of the private and public sector surpluses must equal the external current account (trading account)
Put most simply, the sum of the country’s two internal balances, those of the private and public sectors, must equal the external balance (the trading account).
So if we import more than we export, the country’s external balance must be in the red. This in turn means (by definition) that, internally, either the private or the government sector (or both) must be in the red to a corresponding degree
So if we have persistence trading deficits then we must have deficits also occurring in the private or public sector.
In a sense the forced balancing of deficit in the public sector is now being passed on to private sector, with businesses going bankrupt and people defaulting on loans and mortgages, and a reduction in imports.
Cheshire Cat, imho I made it quite clear that I was talking about the public sector, the government’s finances. So, why the excourse into economics 101?
Of course, the private sector’s balance of im- and exports is important, too, but without a reform of the administration first, it will be almost impossible to fix that. One step after another, let’s better focus on the public sector and politics for now. And for that, actual numbers would be more helpful for the debate than a refresher lesson about accounting identities (we can find this at Wikipedia or elsewhere, if necessary).
You are missing the point of this ‘accounting identities’ lesson.
There is no effective/flexible mechanism in the Euro system to replace the role of exchanges rates in restoring ‘competitiveness’. Trading trading surpluses and deficits will accumulated in different parts of the euro zone. Greek fiscal profligacy is not at root of the Euro crisis.
The underlying characteristic that each of the crisis-hit periphery countries share is their trading deficits. These have to be financed, one way or the other:—>
X-M = (T-G) + (S-I) —>>>
By implication, in a country that has a current account deficit, either the private sector or the public sector has to run a deficit. No matter how awful the Greek administration is, it not just about Greece.
Well, CC, of course there’s no exchange rate mechanism in a unified currency! And the Greek government knew that when they joined the Euro, and that the rules even prohibited that other Eurozone governments would be liable for the Greek debt. Despite this, Staphanopoulos & Co. did nothing to adjust the nation’s finances and economy to that serious change. That was the main reason for their nation’s downfall.
Now, if the careless spending by Athens is at the root of the crisis, or just one factor that led to it (quite obviously, other governments enegaged in different malpractices), is this something we should focus on in these discussions? It can’t be denied that the Greek “profligacy” resulted in a major problem, and since this blog is about Greece, we should focus on the different alternatives for getting out of that mess, instead of talking about, say, the Irish situation. Right?
As for the impact of the current account deficit – sorry, but it is far from proven if this made the BUDGET deficit unavoidable! There’s lots of countries who have run such a trade imbalance for long times (Germany had a negative current account during all of the 90s!), but not all of them also have a budget deficit. So, there’s no strong evidence of a causal relationship, and imho this only diverts the attention form the foremost issue, the necessary balancing of the state’s finances. Of course, it would be desirable if Greece’s exports would equal the imports (and there has been some progress lately), just like the Irish managed to achieve, but this all is moot without serious reforms of the administration and improvements for the domestic businesses.
Dear Gray, we have to agree to disagree – sadly my vote in Greece (a small indebted euro country) is less valuable than yours is in Germany.
It is really becoming a north verses south attitude: “its not our crisis, its the indiscipline south’s crisis” & the “morality” that therefore they should have to deal and suffer it.
You are also failing to see that surpluses (reckless credit)are equally as bad as deficits feeding bubbles Spain & Ireland, government malpractice elsewhere (look up Minsky’s financial instability hypothesis). You cannot confine your focus to one country alone.
The escalating conflict between Spain and EC on permissible deficit may well expose the Fiscal Compact as Stupidity Pact version 2.0. You cannot fix or institutionalize macroeconomic disequilibria through a European Court of Justice(!)
Just remember the first “measures” – before it became “European” – in beginning of 2010. I’ve translated a flyer of OTE workers pointing out that this first package of 5 billions is exactly the same sum the 161 biggest companies of Greece saved in 2009 just because the state changed big biz tax from 42 to 20%(ND) (Pasok:25) … so, why not tax the rich? Because they will run away and invest abroad? And then? Be fortress Europe and close the borders for their products!
It’s just a shame that Germany only builds most of it’s frat cars as a gift for Chinese slavedrivers!