Wednesday, November 21, 2012

The End of European Solidarity?

Andreas Rinke and Lefteris Papadimas of Reuters report, Greece's lenders fail again to clinch debt deal:
International lenders failed for the second week to reach a deal to release emergency aid for Greece and will try again next Monday, but Germany signaled that major divisions remain.

Euro zone finance ministers, the International Monetary Fund and the European Central Bank were unable to agree in 12 hours of overnight talks in Brussels on how to make the country's debt sustainable. They want a solution before paying the next urgently needed loan tranche to keep Greece afloat.

Several European officials played down the delay, saying the disagreements were technical and a deal would be reached when they meet again on November 26.

But German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door briefing in Berlin that the lenders were split over several key issues including how to define debt sustainability and fill a hole in Greek finances.

"He sees the extension of the debt sustainability goal as one of the main bones of contention. The other is how to cover the Greek financing gap of 14 billion euros through 2014," said one lawmaker who attended Wednesday's meeting of Chancellor Angela Merkel's centre-right Christian Democrats in parliament.

Merkel herself told the lawmakers the gap could be plugged by lowering interest rates on loans to Greece and increasing guarantees provided to the euro zone's temporary EFSF bailout fund, in which Germany would take its share, a participant said.

She suggested a deal could be struck as early as next week but rejected the notion that big, bold actions could solve the debt crisis overnight.

"I believe there are chances, one doesn't know for sure, but there are chances to get a solution on Monday," Merkel told the Bundestag lower house of parliament during a debate.

Greece needs the next 31 billion euro aid tranche to keep servicing its debt and avoid bankruptcy. Its next major repayment is in mid-December.

Athens says it has carried out the tough reforms required in the bailout program but needs more time to reach fiscal targets agreed with its lenders because its economy has continued to shrink.

European governments want to give Greece an extra two years, until 2022, to cut its debt to a sustainable level but the IMF does not agree. The Europeans, led by Germany, are refusing to write off any loans. Both options would make it easier for Greece to meet the targets in the bailout program.

French Finance Minister Pierre Moscovici said agreement was close, echoing overnight comments from Eurogroup chairman Jean-Claude Juncker, who said talks were stuck on technicalities.

"We are a whisker away from a deal. I am very confident we will get there on Monday," Moscovici told Europe 1 radio.

Greece is increasingly frustrated about the repeated delays in releasing the aid and says it has done what is necessary.

"Greece did what it had committed it would do. Our partners, together with the IMF, also have to do what they have taken on to do," Prime Minister Antonis Samaras said in a statement.

"Any technical difficulties in finding a technical solution do not justify any negligence or delays."

Samaras will meet Juncker in Brussels on Thursday and has cancelled a trip to Qatar next week to monitor the talks, a government spokesman said.

The prime minister is under growing pressure from his own coalition allies and the opposition after pushing through deeply unpopular austerity measures that he said were the only way to get more aid to avert bankruptcy.

"Τhe eurozone cannot use Greece as an alibi to justify its weakness in dealing effectively and definitively with the crisis," said Evangelos Venizelos, head of the co-ruling PASOK party. Opposition leader Alexis Tsipras, whose party is rising in polls, said Samaras had lost all credibility.

Investors were disappointed with the news. Greek banking stocks fell nearly 6 percent in morning trade. Most of Greece's next aid instalment has been earmarked to shore up the country's tottering banks.
The euro, European shares and the prices of higher-yielding euro zone debt lost some ground but later recovered some of the losses.

NO WRITE DOWN

A document prepared for the meeting and seen by Reuters showed that Greece's debt cannot be cut from 170 percent of GDP to 120 percent, the level deemed sustainable by the IMF, unless either euro zone member states write off a portion of their loans to Greece or the IMF extends its deadline by two years.

Germany and other EU states say writing down their loans would be illegal. The European Central Bank, a major holder of Greek bonds, has refused to take a "haircut" on its holdings.

Berlin contends a debt haircut would not tackle the roots of Greece's debt problems and would be unfair to other euro zone countries that have taken tough steps to improve their finances.

"It would cost money, it would be a fatal signal to Ireland, Portugal and possibly Spain, as they would immediately ask why they should accept difficult conditions and push through difficult measures...and it would have consequences under budget law," Norbert Barthle, budget spokesman for German Chancellor Angela Merkel's Christian Democrats said.

Without corrective measures, the Eurogroup document said, Greek debt would be 144 percent in 2020 and 133 percent in 2022.

Juncker said after a meeting a week ago that he wanted to extend the target date to reduce Greek debt by two years to 2022, but Lagarde insists the 2020 goal should stand. She is believed to favor euro zone member states taking a writedown.

The European commissioner for economic affairs, Olli Rehn, said on Tuesday that the euro zone should be ready to do more for Greece in the coming years, an apparent nod to the idea of government-sector debt writedowns.

"It's essential now that we take a decision on a set of credible measures on debt sustainability and, at the same time, we need to be ready to take further decisions in the light of future developments," Rehn said.

DEBT BUYBACK

Among the main measures under consideration to bring the debt burden down as rapidly as possible is a buy-back under which Greece would offer to purchase bonds from private investors at a sharp discount to their face value.

Schaeuble told the lawmakers on Wednesday that a debt buyback could be part of the solution.

Several options are under consideration including using about 10 billion euros of money lent by the EFSF to buy back bonds at between 30 and 35 cents on the euro.

There are also proposals to reduce the interest rate on loans already extended by euro zone countries to Greece, to allow a long moratorium on interest payments and lengthen the maturities on loans, all of which would cut the debt burden.
The Greek tragedy/ Euro soap opera continues. Meanwhile, as Europe's leaders dither and delay "bold" actions, things are not getting any better in Greece, Spain, Italy and Portugal. And pretty soon, the euro storm will hit France and Germany.

Economists Costas Meghir, Dimitri Vayanos and Nikos Vettas wrote an excellent op-ed for Bloomberg View, Greece Needs Growth, Not Austerity:

Greece’s economy and society are imploding.
Gross domestic product has declined more than 20 percent since 2008. The unemployment rate has tripled, and now stands at 25 percent, with joblessness among youth at twice that level. Crime is on the rise, as are racist incidents, and ideologies of the extreme right and left are gaining significant support.

Worse, current policies aren’t stemming the economic decline. The new three-party government elected in June has focused its energies on negotiating a new package of austerity measures to meet the conditions set by the so-called troika (the European Central Bank, the European Commission and the International Monetary Fund) for the disbursement of the next tranche of the bailout loan.

The reforms that are the only pathways to growth, such as building a well-functioning public administration and liberalizing markets, are resisted by Greek politicians and vested interests. They are also greatly underemphasized by the troika’s push for austerity.

Unless there is a change of course, Greece is headed for disaster: further declines in GDP, a possible chaotic default on its debt, extremist political parties in power, and isolation from Europe. The European Union also stands to lose because a Greek meltdown would reverse the decades-long process of integration and undermine the credibility of the single currency. And Greece’s creditors won’t get any of their money back.
Debt Reduction

To avoid such an outcome, which could occur soon, Greece’s European partners should devise a long-term strategy with two mutually reinforcing objectives: a drastic reduction of Greece’s debt and a thorough overhaul of the country’s dysfunctional economy.

Greece’s debt is projected to rise to 189 percent of GDP next year, from 129 percent in 2009. This is despite the restructuring of privately held debt and severe austerity measures that have almost wiped out the government’s primary deficit.

Most of the increase in the debt-to-GDP ratio can be attributed to the large decline in GDP. Further austerity measures, designed to generate the large primary surplus necessary to begin reducing the debt, will cause GDP to fall further, making the debt-to-GDP ratio even larger. This will make it impossible for Greece to ever repay its debt in full. Its European partners should recognize this state of affairs and write off a significant fraction of the debt. This would allow Greece to grow and repay the rest.

Writing off Greece’s debt can be done in a way that preserves, and even promotes, incentives for reform. A portion of the officially held debt -- 50 percent or more -- should be set aside to be written off gradually over the next five years or so, on the condition that Greece completes a set of institutional and market changes. The steps include making the public administration more efficient, speeding judicial proceedings, reducing corruption and liberalizing markets.

Achievement of these milestones could be monitored using existing indexes designed by institutions such as the World Bank and the IMF. Such a system would not only promote reform, but would put Greece’s debt, which cannot be repaid in full in any case, to good use.

More generally, the troika should emphasize structural changes rather than the rapid accumulation of a primary surplus. The initial emphasis on reducing the deficit was appropriate given the unsustainably large budget shortfall.
Retaining Talent

However, continued austerity will be counterproductive because it undermines reform. For example, deep salary cuts in the public administration are causing talented personnel to leave, thus impairing an already weak system and worsening the core problem of low public-sector productivity. The agencies in charge of essential tasks such as tackling tax evasion, supervising financial markets and prosecuting white-collar criminals, are often short of funds, equipment and the ability to attract talent. The troika should ensure that those funding needs are met, regardless of the effect on the deficit.

And it is hard to imagine how the Greek politicians and vested interests who have successfully resisted reform could continue to block institutional changes that are the condition for writing off a large part of the debt and averting disaster.

An emphasis on transformation and debt reduction would be welcomed by the Greek population, whose support is necessary for these efforts to succeed. Giving voters the chance to back debt relief in exchange for reforms will dim the appeal of the extremist parties.

The only way forward is to overhaul the Greek economy. For the population, that means recognizing that resisting structural reforms would be suicidal. For its part, the troika should acknowledge that further budget cuts would be catastrophic, and could only lead to a continuing deterioration of the economy and to the severing of Greece’s links with Europe.

(Costas Meghir is a professor of economics at Yale University; Dimitri Vayanos is a professor of finance at the London School of Economics; and Nikos Vettas is a professor of economics at the Athens University of Economics and Business. The opinions expressed are their own.)
I'm not in full agreement with everything expressed above but the main thrust of their argument is absolutely correct. No country can cut its way out of a debt crisis. The focus must first and foremost be on growth, not austerity.

Where I disagree with these fellow economists is that they and other Greek economists (like Yanis Varoufakis) fail to acknowledge that austerity has disproportionately hurt Greece's private sector, leaving the bloated public sector largely intact. That is the ultimate Greek tragedy.

To be sure, there have been cuts in wages, pensions, increase in retirement age, and some attrition in the public sector, but nothing remotely close to the savage job losses experienced in the private sector. Economists will tell you that more job cuts in the public sector will "destroy" the Greek economy, but they fail to acknowledge that decades of rampant and unsustainable public sector growth have already destroyed the Greek economy.

A friend of mine put it succinctly:
Although I agree with the precept that austerity does not work in large doses, Greece still needs to break the financial shackles that have been created by the size of its public service. It is truly sucking the life out of the country in the form of excessive taxation.

Just a few statistics, Canada has a population of 32 million people, GDP of $1.74 trillion, and an area of 9.8 million square kilometers. The size of its civil service is approximately 1.2 million employees (Federal, Provincial, and Municipal).
Greece has a population of 11.3 million, GDP of 0.3 trillion, and an area for 0.1 million square kilometers. Greece's civil service is the same size as Canada`s (1.2 million). By every measure, Greece's civil service is approximately three times larger than it should be. So when a bunch of municipal workers in Thessaloniki attack a German diplomat, it just shows me they need a good slap in the face.

I am very impressed with (Greek Finance Minister) Stournaras. He has done a great job at repositioning Greece. This latest set of austerity measures are now viewed as the last straw (i.e. Greece has done its part and has no more to give). Any further restructuring means debt haircuts on sovereign debt.
He has also convinced Lagarde to step-up and help him lead the rest of the EU away from the self destructive austerity bandwagon. He is working actively in the background and making real progress to restore some of the major investments that were put on hold over the last few years. These private sector investments will restore some confidence in Greece (which is now considered to be toxic by most institutional investors).

So, I am convinced that Greece has hit bottom (unless the government falls). Saying this, the country will just stay at the bottom of the ocean floor endlessly unless it downsizes the civil service and reduces corruption. There is no way that the country can "grow" its way out of these problems.
My friend is right about downsizing Greece's bloated public sector, rooting out rampnant corruption and inefficiency, but he's way too cynical on growth prospects in Greece.

In my (grossly biased) opinion, Greece is an incredible country that has a lot to offer in terms of human capital, natural beauty and a relatively stable democracy. When the country finally gets on the right track, it will grow by leaps and bounds and be the place everyone wants to live and retire.

It's too bad Greece's prime minister, Antonis Samaras, postponed his trip to Qatar to meet with representatives there. According to Gulf Daily News, Samaras was supposed to meet Qatar's Amir and prime minister as well as top officials from Qatar's sovereign wealth fund to discuss investment possibilities, including equity participation in Greek state-owned companies (he should come to Canada to meet with leaders of our large pension funds).

One of those state-owned companies is OPAP, one of Europe's biggest betting firms, which brave investors are eying. But austerity measures are taking a bite out of OPAP's profits (Duh! When you don't have money to cover basic needs, you're not going to buy lottery tickets!).

A bigger tragedy in Greece is youth unemployment. There are far too many young people with advanced degrees in computer science, engineering, health sciences, finance, struggling to find work. There are even unemployed doctors (and getting into medicine in Greece is next to impossible, almost as hard as getting into Harvard Medical School).

Economists worried about talent leaving the Greek public sector make me laugh. I'm far more worried about the huge brain drain hurting the economy as their best and brightest leave in search of building a better life elsewhere, including Australia which made the wise decision to open up their immigration to Greeks when the crisis erupted (Canada and Quebec are still asleep).

Finally, take the time to read Andreas Koutras's latest comment on the endgame in Greece. I've also covered the endgame for Greece and Europe. There is simply no choice but to save Greece, write down a good chunk of its debt (with explicit conditions of downsizing public sector) and most importantly, stop the foolish austerity which has disproportionately hurt the private sector and introduce massive new investment programs to spur growth across many sectors of the ailing economy (beware of massive corruption! Would rather have the EBRD take over these investment projects).

Schnell, Frau Merkel, time is running out for you and northern Europe. You've done everything you possibly can to pander to your insolvent banks, but it's time to fess up and tell Germans that the Greek bailouts are nothing more than corporate handouts. If you don't change course, Europe will implode, threatening global peace and prosperity.

Below, a brilliant clip from Portugal dedicated to the German people. Watch it and you'll understand why Southern Europe has its fill of austerity and is rightly questioning European solidarity. Also, Andrew Palmer and Zanny Minton Bedoes of the Economist discuss how to end the agony, arguing that Greece needs another debt-reduction deal with explicit conditions to continue on the path of reform.