Wednesday, September 21, 2011

Troika Flirting With Disaster?

Ekathimerini reports, Troika keeps Greece hanging on for loans:

Greece will have to wait until later this month or even next month, after top officials from the European Commission, European Central Bank and International Monetary Fund have returned to Athens, to find out if it has done enough to secure an 8-billion-euro loan installment that would stave off default.

Finance Minister Evangelos Venizelos held a second teleconference with the troika representatives on Tuesday night to discuss the measures that the government can adopt straight away to reduce its deficit. A brief statement after the talks said that the two sides had reached an agreement that paves the way for the troika officials to come to Athens next week.

Prime Minister George Papandreou is due to chair a cabinet meeting this morning to discuss the steps that were set out during the teleconferences on Monday and Tuesday. These included public sector sackings, reductions to pensions, civil servants’ salary cuts and some tax hikes.

Sources indicated that the measures likely to be adopted include at least 25,000 sackings in the public sector with another 70,000 civil servants being placed on labor reserve, where they will receive reduced wages for a limited time before being laid off.

Public servants’ salaries are likely to be cut by up to 50 percent, while state pensions are due to be capped at under 1,700 euros per month.

The government is also thought to have agreed to equalize heating oil tax with the levy on diesel fuel, which will lead to the price of the former rising by 40 cents per liter.

There were also discussions between Venizelos and the troika about reducing the tax-free threshold for incomes. Currently at 8,000 euros, the ceiling could be brought down as far as 4,000 euros. Combined with other measures, the adjustments are designed to save at least 1 billion euros this year and 6.5 billion in 2012.

Earlier, deputy government spokesman Angelos Tolkas said that PASOK’s priority would be to reduce costs in the public sector. “Our primary target is to shrink the state,” he said. “The state budget had stopped paying the wages of about 200,000 civil servants over the past two years and we will continue with this.”

Meanwhile, credit ratings agency Fitch cast doubt on whether further austerity measures would help Greece avoid default. Fitch said that it foresees a Greek default but that the country would not leave the eurozone.

“Concerns over the risk of a breakup of the eurozone are greatly exaggerated,” said David Riles, head of global sovereign ratings at Fitch.

I agree, with every new austerity measure, the risk of default increases but concerns over a breakup of the eurozone are greatly exaggerated. This crisis, however, has exposed another concern, namely, indecisiveness in Europe and how they still do not have a game plan to tackle the debt crisis. And problems in Greece are already impacting the global economy as the IMF sees a deeper 2012 recession:

The International Monetary Fund on Tuesday upped its forecast of contraction for the Greek economy this year, in line with an increasingly gloomy global outlook.

The economy will not recover in 2012, as previously expected, and unemployment and debt will keep rising, the IMF said in its autumn report.

Gross domestic product is seen contracting by a further 2 percent, after a projected slide of 5 percent this year, reversing a forecast last June, when the IMF saw GDP falling 3.8 percent this year and returning to recovery with 0.6 percent growth in 2012.

Biting austerity measures, agreed to under pressure from Greece’s international creditors, seem to be depressing the country’s ailing economy further still.

Greece’s GDP shrank 7.3 percent in the second quarter from a year earlier, after a decline of 8.1 percent year-on-year in the first quarter, the Hellenic Statistical Authority said on Tuesday.

The IMF sees unemployment climbing from 12.5 percent last year to 16.5 percent this year and 18.5 percent in 2012. Among European Union states, only Spain is seen faring worse than Greece, with the jobless rate falling from 20.7 percent this year to 19.7 percent next year.

An increase in the number of jobless is also expected for Portugal, from 12 percent last year to 12.2 percent this year and 13.4 percent in 2012.

The IMF’s projection for Greece’s public debt this year remains unchanged at 166 percent of GDP, but is forecast to increase to 189 percent in 2012 from 172 percent in June. It is then seen falling to 188 percent in 2013, 179 percent in 2014 and 165 percent in 2015.

The projections are based on the assumption of no default for any individual country.

The IMF has also revised downward its growth projections for the eurozone to 1.6 percent in 2011 and 1.1 percent in 2012, from respective figures of 2 percent and 1.7 percent previously.

For Greece, the report forecasts that the consumer price index will slow down from 4.7 percent last year to 2.9 percent in 2011, and will in fact fall 1 percent next year.

The only positive forecast for Greece concerns its current account balance, where the deficit is seen shrinking from 10.5 percent of GDP in 2010 to 8.4 percent this year and 6.7 percent in 2012.

There is nothing positive about the Greek economy as politicians are caving into troika's demands and going after pocket change from overstretched Greeks. I can tell you that reducing the tax-free threshold to 4000 euros is sheer lunacy! Even 8000 euros is peanuts to live on in Greece. And cutting pensions of older Greeks is completely unfair as many are struggling to get by on a pittance.

I often wonder if these economists at the IMF and EU have a clue about what is really going on in Greece. The real unemployment rate is double the official rate and even though there is a huge underground economy, the majority of the population is suffering and fed up with these austerity measures. Meanwhile, billions of euros have fled the country and are in Swiss banks or invested in London real estate. Instead of going after the real big tax evaders, troika is putting the screws on regular hard working Greeks. And now they're "revising" their forecasts downward, realizing how way off they were in their economic scenarios.

Unless troika and European policymakers come to their senses, I see tensions in Greece boiling over this winter. With the tourist season pretty much over, unemployment will climb and people will take to the streets to protest deep cuts. I understand the structural nature of the Greek debt crisis but policymakers are going about it all wrong. Instead of stabilizing the crisis and focusing on growth by fast-tracking foreign investments, guaranteed by troika, they're cutting across the board, placing the onus on poor, working poor and pensioners.

In short, troika is flirting with disaster and the repercussions will be felt across the global economy via a banking crisis. They should be forcing Switzerland, England and Cyprus to help Greece catch its biggest tax evaders and stop imposing draconian austerity measures which will only sink the economy further into depression and highten the risk of another global meltdown.

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