Sunday, February 19, 2012

The Greek Experiment?

Ambrose-Evans-Pritchard of the Telegraph reports, Germany bows to global pressure and signals Greek rescue deal:

Germany’s finance minister Wolfgang Schäuble toned down threats to force Greece out of the euro, bowing to intense pressure from France, Italy, and the US-led bloc of global leaders.

Mr Schäuble said the country is "on the right path" and signalled that pension cuts agreed by the Greek cabinet over the weekend would be enough to secure approval for the loan package from EU ministers on Monday.

"If Greece can implement all the necessary promises by the end of February and clear up any other open questions, the second aid package can be approved," he said.

Austria’s finance minister Maria Fekter said Greece faced stringent conditions on new aid but said that the "majority" of EMU countries not want to risk a dangerous misadventure that would cost even more in the end.

"We are not going to abandon Greece. It would be even harder for Greece to repay its debts with a devalued drachma," she told ORF television. A deal will unlock the next tranche of money from the EU-IMF Troika and allow Athens to meet a €14.5bn payment to creditors on March 20.

However, it is unclear whether the complex package can command political consent for long in either Greece or Germany. Greek elections in April may see a political revolution with the hard Left in ascendancy.

"If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma," said Theodoros Dritsas, a leading MP from the Syriza party.

In Germany, Chancellor Angela Merkel’s coalition partners are in revolt over the aid package. Bavaria’s finance minister Markus Söder said the stability of euro as a world reserve currency is more important than Greece’s welfare. "It would be better if Greece stepped out of the euro," he said.

The current package is already out of date since austerity has tipped the Greek economy into a violent slump, playing havoc with the country’s debt trajectory.

Officials say Greece’s public debt will still be 129pc of GDP in 2020, far above the 120pc ceiling set by the International Monetary Fund as a condition for its further involvement. A further €15bn will be needed.

Mr Schäuble said there might be wiggle room up to 123pc, but this still means that private creditors may face a yet bigger haircut after agreeing 70pc losses already.

The European Central Bank has already taken action to insure that it suffers no loss on its Greek holdings, automatically reducing other creditors to junior status. This sets a precedent for Ireland, Portugal. Spain, and Italy. Bond veterans accused the ECB of legal legerdemain that will have grave consequences.

The softer line from Germany comes after French premier François Fillon said it was "utterly irrepsonsible" to put the idea of a Greek default into play, and came close to saying that Chancellor Merkel needed to rein in her finance minister.

Mr Fillon said Greece was making serious sacrifices and that it now behoves Europe to "step up to its responsibilities."

Britain’s Foreign Secretary, William Hague, said it would be a technical nightmare if Greece is forced out of EMU.

"They don’t have the old currency sitting in the vaults ready to distribute. It’s not straightforward to leave the euro. It was built without exits," he told the BBC’s Andrew Marr show.

The Shadow Chancellor, Ed Balls, accused Berlin of playing with fire over recent weeks. "I don’t think Germany has faced up to the reality it’s in a single currency and there are collective obligations in a single currency," he told the BBC.

"A messy Greek default, which raises questions that the markets will ask Spain and Italy next, at a time when Germany and the European Central Bank are not able to face up to the common obligations you need in a single currency: that could lead to a crisis which would be very dangerous indeed," he said.

Mr Schäuble’s olive branch to Greece on Sunday came with the usual thorns. "You can only help people who wants to help themselves. We have been ready for some time to help the Greeks build a more efficient tax administration but the offer has still not been taken up," he told Tagesspiegel.

In fact, officials from ten EU governments, the European Commission, and the IMF are already helping Greece reform its tax system.

As I wrote in my last comment on Greece, eurozone's leaders are playing with fire. Thousands of protestors in Greece -- hundreds of thousands in Spain -- took to the streets Sunday to protest spending cuts they say will force ordinary people to bear the brunt of the debt crisis.

In his comment on austerity and growth, Paul Krugman notes the following:

Watching Europe sink into recession – and Greece plunge into the abyss – I found myself wondering what it would take to convince the chattering classes that austerity in the face of an already depressed economy is a terrible idea.

After all, all it took was the predictable and predicted failure of an inadequate stimulus plan to convince our political elite that stimulus never works, and that we should pivot immediately to austerity, never mind three generations’ worth of economic research telling us that this was exactly the wrong thing to do. Why isn’t the overwhelming, and much more decisive, failure of austerity in Europe producing a similar reaction?

I don't understand why policymakers in Europe continue on this path of insanity, focusing solely on austerity at a time when economic activity is contracting. Then I listened to Michael Hudson discussing the Greek experiment and it all made sense (see below). They're going to push Greeks to the brink to see how far they can go before they get a social revolution. They should be careful for what they wish for because after Greece, le déluge!

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