Friday, January 30, 2015

Greece’s Do-Or-Die Moment?

Shawn Tully of Fortune reports on Greece’s do-or-die moment:
If Greece’s newly elected government sticks to its sloganeering stance, it will probably exit the Euro. And that could snowball into an economic disaster.

It’s the showdown the world’s been dreading. On January 25, the ultra-leftist Syriza party won an overwhelming victory in the Greek parliamentary elections, defeating center-right New Democracy and ousting its leader, prime minister Antonis Samaras.

Syriza’s chief and Greece’s new prime minister, Alexis Tsipras, is brazenly defying the European nations and institutions that support its stricken economy. Tsipras lost no time declaring that his triumph marks the moment when Greece “leaves behind catastrophic austerity … and five years of humiliation and suffering.”

Tsipras blames Greece’s descent on the slate of tough, even brutal, reforms that its EU neighbors demanded in exchange for gigantic bailouts. He’s pledging two major shifts in policy that, if enacted, will infuriate his European neighbors. First, Tsipras denies that Greece has any obligation to enact the liberalization measures that its creditors—which include the International Monetary Fund, the European Commission, and the European Central Bank, known as the “Troika”—negotiated with two previous governments. “The Troika is dead!” Tsipras announced in his post-election address.

Second, Tsipras is demanding a substantial reduction in the roughly $270 billion in debt that Greece owes to the EU nations. Those funds are dispensed through the European Stabilization Mechanism, an EU organization that gets its money directly from Eurozone members such as France, Germany, and Spain. It’s designed to provide a firewall to protect the Euro. Tsipras contends that his Eurozone partners should suffer big losses, paid for by their taxpayers, for the benefit of Greece.

The Eurozone is witnessing an unprecedented display of hubris, the undoing of ancient Greek warriors. Rather than demanding debt relief the usual way, by promising deeper reforms, Tsipras has pledged to renege on Greece’s debts while scuttling all commitments to unshackle its economy.

“It’s a surreal situation,” marvels Yannis Ioannides, an economist at Tufts University. “The new government is promising to do things with no money to do them. What does it mean for a government to say we don’t recognize the agreements signed by the previous government?”

If the new government sticks to its sloganeering stance, Greece—probably through a stumbling accident—will exit the Euro. Given its policies, a “Grexit” would unleash a wave of hyperinflation unseen in Europe for decades. But it’s not at all certain that Tsipras will let ideology lead to disaster. Greece depends on the EU and European Central Bank for the funds it needs to keep running—and hopefully, that reality will temper Tsipras’ demands. The crux of Greece’s problem isn’t that it has embraced the reforms demanded by its creditors. In fact, the nation has skirted those reforms and, in the process, done far too little to modernize its markets.

To be sure, Greece has made progress on the fiscal side. It has substantially reduced government spending and lowered once-yawning budget deficits to the point where it now generates a “primary surplus,” meaning that its revenues exceed expenses before covering interest. That’s a big improvement, since the government is no longer forced to borrow heavily simply to make interest payments (which, as we’ll see, are manageable due to a 2012 restructuring deal with its EU creditors}.

Yet the shrinkage in Greece’s super-sized public sector did nothing to lessen the suffering of its citizens. In moving towards a balanced budget, the Greek government has substantially lowered wages and pensions, and companies followed suit. But shrinking pay failed to translate into a like decline in prices, as it would have in a competitive economy. Instead, the prices of groceries and drugs—and the overall cost of living—fell far less than the decline in incomes. That painful combination means that Greeks increasingly buy less and less of anything. To make matters worse, Greece imports an usually high proportion of the goods it consumes, from cars to PCs, and the prices of foreign products remained steady while Greek incomes shriveled.

Why did the cost of local goods stay so high during the downturn? It’s the legacy of over-regulation that’s governed Greek products and professions for decades, rules specifically designed to stifle competition. “Every aspect of economic life is highly regulated in Greece,” notes Costas Meghir, an economist at Yale University.

Greek law mandates that pharmacies generate minimum profits of 15% and grants them a monopoly on the sale of non-prescription drugs and even baby formula. That regime effectively prevents lower-cost retailers from giving consumers a better deal. Licenses for truck drivers cost over $600,000, and no new ones have been issued since the 1970s. A lawyer practicing in Athens lacks the authority to serve clients in Thessaloniki. Foreign cruise lines are effectively barred from starting and ending journeys in Greece. That’s driven the big operators to run their tours from Turkey and Israel instead. Companies are banned from laying off more than 4% of their workforces without receiving government permission that’s predictably hard to obtain.

For many years, those rules prevented Greece from emerging as a force in technology and manufacturing, despite its hard-working, well-educated workforce. Its output-per-worker is just 75% that of its European neighbors, the same meager level as at the start of the financial crisis. Under an agreement with its EU creditors, Greece is obligated to achieve a long list of market-opening reforms. That deal is known as the “Mnemonio,” the Greek word for memorandum. Even the previous center-right government did not do enough to comply with the Mnemonio. It masked the lack of progress with half-measures, laws that were passed but never implemented, and requests for more time.

“The crisis created chances for structural reforms, such as the opening of closed professions, tax reform, and privatizations to increase competition,” says Nicholas Economides, a professor of economics at NYU’s Stern School of Business. Even the previous government, he says, “tried not to change much.” Following a poor showing in the European parliamentary elections last year, it fired reformist ministers and retreated on plans to trim the government’s bloated workforce.

So what’s next for Greece? Here are two possible scenarios. The first is the “Greek tragedy” path, which could proceed from a number of causes—the many possibilities are in themselves a major cause for concern. The second is the pragmatic, compromise approach, which could allow Greece to remain in the Eurozone.

What could cause the Greek tragedy? If Tsipras continues to demand that Greece renege on its debts, dump the reform agenda, or both, Greece is headed for disaster. In the next several months, Greece will need to confirm past commitments or repay loans and retire bonds to secure continued funding from the EU and ECB, funding it can’t do without. Defying its creditors at any of these three junctures could seal its fate. The IMF was scheduled to give Greece $8 billion in fresh funding in September. But because Greece is lagging on its reform agenda, the IMF hasn’t agreed to make the payment. Yet the new government is counting on that money, and over $2.5 billion more from the IMF in 2015, to make its budget work. It’s also planning to spend an extra $22 billion or so to hire more government workers and raise their pensions and pay. But it’s highly unlikely that the IMF will provide that money if Greece ditches the reform agreement.

Greece faces a second, crucial showdown with the European Central Bank. The nation’s banks have suffered large withdrawals of cash in recent years, a trend that accelerated just before the recent elections. On January 22, the ECB advanced Greece’s central bank around $45 billion in emergency funding to supply liquidity to the banks it regulates—in addition to the more than $60 billion it had previously given to those banks. Greece agreed to repay about $8 billion to the ECB in July. Tsipras now claims Greece won’t make the payment. “The ECB operates under extremely strict rules,” says Economides. “It’s likely the ECB would withdraw all of its support for the banks if Greece refuses to pay.”

The third obstacle is Syriza’s demand that the EU nations forgive a big chunk of its debt. “That’s totally unfeasible, insane,” says Economides. “No politician will say to their taxpayers, ‘You need to pay for the Greeks!’”

If Greece defies the EU and ECB over any of these commitments, Tsipras will lack the funds to keep the government running, or, in the latter two cases, the EU will remove the essential support of the ECB, causing a credit crisis. In that case, Greece would need to flee the Euro and reinstate the Drachma. It would then be free to print new currency to pay its debts and fund its vision of a still-bigger government. That’s a recipe for rampant inflation.

None of this has to happen. The interest rate on Greek debt is just 1.82%, and it isn’t obligated to pay any interest for between 13 and 25 years on 80% of its borrowings. If its creditor nations agreed to extend the maturities to 75 years, Greece could easily handle its current debt load. It might be enough for Syriza to withdraw its pledge to roll back previous reforms and to honor its debts in exchange for those longer maturities. “I think they will make a u-turn,” says Economides. “The money they need is so gigantic. They will not have a choice.”

The EU has long been girding for a Greek departure from the Euro. The new government will not succeed in blackmailing its neighbors into granting more bailouts just to keep Greece in the club. Europe’s mainstream governments dread making a special deal with Greece a lot more than a Grexit. If the Troika caves, they’ll hand a powerful weapon to radical, anti-bailout parties that rail against the cost and constraints of the Eurozone and EU.

In theory, pragmatism should prevail. Then again, just look at all the ways in which things could go horribly wrong. The sheer number of them is scary indeed.
I thank professor Nicholas Economides of NYU's Stern School of Business for sending me this excellent article which covers what's at stake following the political earthquake that just hit Greece and the eurozone.

But even this article made some huge errors, especially when referring to "the shrinkage in Greece’s super-sized public sector." Are you kidding me? Greeks working their butts off in the private sector would laugh out loud, or more likely cry, reading such utter nonsense and for good reason.

The sad reality is that over 50% of all jobs in Greece are still directly or indirectly related to its bloated public sector. The proportion of civil servants in the working population easily ranks among the highest in the world, if not the highest. I often joke that Greece has almost as many civil servants as China, and trust me, I'm not far off!

Yes, troika drastically cut pensions and wages in the public sector but they did the exact same thing in the private sector and that's where most of the savage job cuts took place. When you read about Greece's sky-high unemployment, keep in mind that it's almost all due to cuts in the private sector. Also, many pensions and wages in the public sector needed to be drastically cut because they were ridiculously lavish to begin with, a by-product of decades of profligacy from Greece's two main parties -- PASOK and New Democracy.

And now that Syriza is in power, what did it do? It hired a bunch of of public sector workers that were let go, proposed to raise the minimum wage to 751 euros a month, added a 13th month to pensions despite the system being at a breaking point, announced the cancellation of the privatization of Piraeus Port Authority (that didn't fly too well with the Chinese who let them have it), and that's not all.

Greece's new left-wing government will cancel plans to sell the state natural gas utility and is firmly opposed to a Canadian gold mine that is among the biggest foreign investment projects in the country, the energy minister told Reuters on Friday.

If I was André Bourbonnais, PSP Investments' new CEO, I'd be very concerned with these actions as they demonstrate a flagrant disregard for public-private partnership deals and could significantly jeopardize PSP's stake in Athens' airport.

I asked a friend of mine who is an expert in infrastructure to share his thoughts. I specifically asked him if Syriza can renege on deals struck by the previous government and jeopardize PSP's take in Athens airport. He replied:
"Sure it can. Syriza can pretty much do whatever it wants. But there will be consequences to all these actions and Greece will go the way of Pakistan which pissed off foreign investors a long time ago and hasn't been able to strike any major PPP deal in the last 15 years."
He added: "Varoufakis (Greece's new finance minister) is being used as a political pawn. He doesn't realize it yet but his head will be chopped and Syriza will use him as the fall guy when the shit hits the fan -- and the shit will hit the fan the way these guys are governing the country."

Other Greek friends of mine are convinced that Syriza is a party of left-wing lunatics that really want 'Grexit' so they can go back to the drachma and implement some kind of socialistic dream (while they enrich the capitalists outside of Greece funding their party).

No doubt about it, Syriza's leaders aren't bluffing, but I remain unconvinced of all the political theatrics and think there is a lot of smoke and mirrors being played out right now in Athens. Let me go over some important points:
  • First, as the Telegraph rightly noted, Yanis Varoufakis is no extremist and he understands what's at stake if Greece defaults and reneges on previous private-public partnerships. In a recent interview with the New York Times, the feisty finance minister spread a more moderate message. But he will negotiate hard, piss off plenty of his counterparts and he just announced he will not cooperate with troika or seek aid extension, but when the real high stakes game comes, I just don't see him risking 'Grexit'. This is a tactic he is using to negotiate hard with Germany and the IMF.
  • Second, Greece's pivot away from Europe (and the U.S.) toward Russia which Zero Hedge keeps harping on is more utter nonsense. Greeks support Russia and want Russian tourists but they know where the real money lies and it ain't Russia! If anything, I think Alexis Tsipras is another U.S. puppet who is being used to shake things up in Europe (more on that below).
  • Third, fears of Grexit are way overdone, which is one reason Greek banks rallied a lot on Thursday after selling off hard earlier this week. I wouldn't touch Greek bank shares now because of the political uncertainty but exaggerated fears offer hedge funds big opportunities (I prefer businesses that have little to do with the domestic economy, like Plastika Kritis, a company which my uncle founded with the help of my grandmother's brother, and has flourished as the euro keeps declining).
  • Fourth, the Telegraph covered three myths about Greece's enormous debt mountain, highlighting misconceptions on the Greek debt. The article rightly notes that "Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history." 
Now, I don't pretend to have a monopoly of wisdom when it comes to Greece and Greek politics. I've traveled there all my life, love the country and its people, and have recounted some of my observations from my trip to the epicenter of the euro crisis back in September.

You have all sorts of economic experts telling you what they think on the Greek crisis. Paul Krugman has written a couple of great articles on Greece. He wrote about ending Greece's nightmare, raising excellent points which the Germans have to understand if they are serious about saving and maintaining the eurozone (read his latest, Europe's Greek test).

In his article, Is Democracy Dead In The West?, Paul Craig Roberts raises more excellent (and disturbing) points on the Greek crisis and ends by stating the following:
Accommodation is unlikely to occur, because a reasonable accommodation is not the desire of Washington, the EU, or of Greece’s creditors.

A purpose of the “Greek financial crisis” is to establish that EU members are not sovereign countries and that banks that lend to these non-sovereign entities are not responsible for any losses with regard to the loans. The population of the indebted countries are the responsible parties. And these populations must accept the reduction of their living standards in order to ensure that the banks do not lose any money.

This is the “New Democracy.” It is a resurrection of the old feudal order. A few super-rich aristocrats and everyone else serfs obliged to support the ruling order. The looting that began in Greece has spread into Ukraine, and who knows who is next?

With only 37% of the vote, does Syriza have the clout to stand up for Greece against the looters? Can Greece escape from a situation comparable to the European Dark Ages when populations were ravaged by marauding raiders? Perhaps if Greece realigns with Russia and gains financing from BRICS.
But as I stated above, the pivot away from Europe and the U.S. toward Russia is just smoke and mirrors. Andreas Koutras, who just wrote an excellent article on his blog on the deja vu of Mr. Tsipras (in Greek), shared these thoughts with me:
Basically, the story goes as follows. Tsipras and his team have bought the scenario that there is an austerity/ anti-austerity battle and Syriza needs to get on the bandwagon. This is why the Anglo-Saxon media refer to his party as anti-austerity and not radical left party.
Tsipras thinks that America will save the day and the anti-austerity camp is going to win. The truth is that he is probably right about this. Germany eventually will lose the battle. The question is at what price.
Tsipras is being used as a pawn in this high-level battle and he does not know it. He thinks that he is riding a "wave" of change. This is why he is moving on a collision course. The outcome would be known rather soon.......
Keep all this in mind as you read the garbage being fed to you in the Greek and Western media as well as blogs like Zero Hedge. America's new economic hitmen have been planning this 'Greek crisis' for a long time.

Finally, a friend of mine who tracks developments in Israel very closely, shared these thoughts with me:
I'm really curious to see what will happen next. This has been inevitable for a long time now. But it's one thing to criticize - its another thing to rule. Let's see what they do now.

Also, I think the big threat to the Euro is not Greece leaving. The biggest threat is Greece leaving, suffering for two or three years - and then rebounding. The first two or three years after leaving would be a disaster. There would be inflation. There'd be a devaluation. But in the end, they have one of the biggest trading partners in the world on their border. And they'd be a cheap tourist destination and a cheap source for goods. Managed properly (eliminating corruption and bureaucracy) - they could recover in 18 to 36 months. And then, what do the Spanish and Italian people think, looking at a growing Greek economy?

That's the real threat.
He also sent me a Haaretz article on Panos Kammenos, a right-wing politician who said Jews don’t pay taxes, and was just appointed the new defense minister of Greece (he is part of this strange coalition government made up of radical left and right wing parties):
Kammenos, who heads the ultranationalist Independent Greeks, was appointed to the post in the new government on Tuesday after joining the coalition of the newly elected far-left Syriza party, which won handily in Sunday’s national elections.

While the parties are far apart on most issues, they are united by a common rejection of the harsh terms imposed on Greece in the financial bailout.

Kammenos drew condemnation from Greece’s Jewish community in December after he said on television that Greek Jews don’t pay taxes — a remark denied publicly by a government official, who called it “conspiracy theories, lies and slander” that had become a part of “the dark side of the Internet.”

As defense minister, Kammenos will oversee the military ties with Israel that have become much closer in recent years. Even considering the taxes statement, he is still likely to be more pro-Israel than the Syriza lawmakers, who have taken part in protests against Israel, with some even participating in the flotillas to Gaza.

Conspiracy theories are rife in Kammenos’ ultranationalist party, which frequently blames outsiders for the economic woes befalling Greece.

A recent Anti-Defamation League poll found that anti-Semitic stereotypes are widespread in Greece and that the country had the highest percentage of anti-Semitic views in Europe.

In the elections, the neo-Nazi Golden Dawn party retained its position as the third-largest party in Greece.
When I shared this article with my father, he replied: "Yes, it's true, many Greeks are anti-Semitic until their health is on the line at which point they run to the closest Jewish doctor which they love and admire."

In all seriousness, if this new Greek government had any brains at all, it would be building on the efforts of the previous government, forging much closer alliances with Israel, not Russia.

But I'm not a fan of Panos Kammenos, who many Greeks regard as an idiotic right-wing blowhard, and think he chose that particular ministry for the same reasons that a former Greek defense minister is now serving a 20-year jail sentence (basically, that's where the biggest bribes take place!).

As you can read, I'm very cynical on developments in Greece and the eurozone. I think too many people are being caught up in the theatrics of it all and a lot of investors are losing precious sleep over a lot of nonsense. More worrisome, they're not focusing on the bigger story, global deflation and the possibility of the Fed making a monumental mistake.

Below, Emmanuel Macron, economy minister of France discusses the potential bailout negotiations with Greece, saying it should respect its commitments as part of the European Union. Mr. Macron should worry about his country and its bloated public sector.

Second, Bill O'Neill, head of the UK investment office at UBS Wealth Management talks about Russia's sanctions and debated whether Greece is using the Russia sanctions as "leverage" in terms of debt negotiations. I laugh at the thought of using Russia as leverage as oil prices keep sliding to new lows.

Third, John Perkins, author of Confessions of an Economic Hitman and The Secret History of the American Empire, discusses how economic hitmen and jackals work to ensure the interests of America's 'corporatacracy'. The full "Zeitgeist: Addendum" extended interview is available here.

There is a lot of truth in what Perkins says but I'm not into these Zeitgeist conspiracy theories. The biggest social issues plaguing humanity today are rising inequality, the lack of jobs and the coming war on pensions which most people seem to ignore until pension poverty stares them right in the face.

Finally, Yanis Varoufakis, Greece's new finance minister, was interviewed on BBC Newsnight. On his blog, Varoufakis states the following regarding the interview: "As a fan of the BBC, I must say I was appalled by the depths of inaccuracy in the reporting underpinning this interview (not to mention the presenter’s considerable rudeness). Still, and despite the cold wind on that balcony, it was fun!".

Update: Nikos Chrysoloras of Bloomberg reports that Greek Prime Minister Alexis Tsipras sought to repair relations with creditors after a week-long selloff in bonds and stocks, triggered by his pledge to end the country’s bailout agreement.

Looks like Syriza did the math and decided it's better to negotiate and not piss off their creditors in the first week of office.

Also, read my follow-up comments on why the ongoing euro crisis likely spells checkmate for Greece and whether Germany will push Greece over the edge. Stay tuned, this isn't over, more Greek drama ahead as the world sinks into deflation.




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