Wednesday, March 25, 2015

Greece's Lose-Lose Game?

Tom Beardsworth and Francine Lacqua of Bloomberg report, Soros Says Greece Now Lose-Lose Game After Being Mishandled:
The chances of Greece leaving the euro area are now 50-50 and the country could go “down the drain,” billionaire investor George Soros said.

“It’s now a lose-lose game and the best that can happen is actually muddling through,” Soros, 84, said in a Bloomberg Television interview due to air Tuesday. “Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Greek Prime Minister Alexis Tsipras’s government needs to persuade its creditors to sign off on a package of economic measures to free up long-withheld aid payments that will keep the country afloat. Since his January election victory, he has tried to shape an alternative to the austerity program set out in the nation’s bailout agreement, spurring concern that Greece may be forced out of the euro.

The negotiations between Tsipras’s Syriza government and the institutions helping finance the Greek economy -- the European Commission, European Central Bank and International Monetary Fund -- could result in a “breakdown,” leading to the country leaving the common currency area, Soros said in the interview at his London home.

“You can keep on pushing it back indefinitely,” making interest payments without writing down debt, Soros said. “But in the meantime there will be no primary surplus because Greece is going down the drain.”

Soros said in January 2012 that the odds are in the direction of Greece leaving the euro region.

“Right now we are at the cusp and I can see both possibilities,” he said in Tuesday’s interview.
Aid Payment

Tsipras is meeting with German lawmakers in Berlin on Tuesday after Chancellor Angela Merkel encouraged him to follow the path set out by Greece’s creditors. European Parliament President Martin Schulz said in an interview with Italian newspaper Repubblica that he expects a deal by the end of this week that will allow the release of at least some money.

The start of quantitative easing by the ECB at a time when the U.S. Federal Reserve is considering raising interest rates “creates currency fluctuations,” said Soros, one of the world’s wealthiest men with a $28.7 billion fortune built partly through multi-billion dollar trades in currency markets, according to the Bloomberg Billionaires Index.

“That probably creates some great opportunities for hedge funds but I’m no longer in that business,” he said. Soros, who was born in Hungary, said the war in eastern Ukraine between government forces and rebel militia supported by Russia’s President Vladimir Putin concerns him the most.

Without more external financial assistance the “new Ukraine” probably will gradually deteriorate and “become like the old Ukraine so that the oligarchs come back and assert their power,” he said. “That fight has actually started in the last week or so.”
Soros is no longer managing money himself but his family office, Soros Fund Management, is alive and well and I can guarantee you it's been shorting the euro aggressively. You can listen to his exclusive Bloomberg interview here (his thoughts on Ukraine and Russia scare me because he and U.S. politicians are playing a dangerous game).

Is Soros right? Could Greece go "down the drain"? It sure looks hopeless but let me take a step back here and offer some additional thoughts, ones that his hedge fund eminence, Soros, chooses to ignore (as he does with his myopic and antiquated views on Russia and the Ukraine).

Kimon Valaskakis, former ambassador of Canada to the OECD and now president of the New School of Athens Global Governance Group, published a comment on LinkedIn, Greece and Europe: The Real Choice Is Win-Win or Lose-Lose:
Greece and Europe are contemplating divorce. In the first of a two part series which I published on March 17 2015 in the World Post, the global division of the Huffington Post. I have argued that this would be a masochistic lose-lose outcome when alternative win-win solutions exist.

The present essay is an expanded version of the World Post article which can be found here. It's also permanently listed in my author archive: http://www.huffingtonpost.com/kimon-valaskakis/

Following the recent Greek election where a new government was elected on an anti-austerity platform, an attempt to renegotiate the Greek Debt under the supervision of the so-called Troika (EU, Euro Zone and IMF) has, so far, been inconclusive. The final agreement (or non-agreement) will be decided upon in the next few months, although past experience has shown that most so-called ‘agreements’ tend to be quite temporary.

Behind this ambivalence and the protracted negotiations, what are the real choices ? How can we fly above the accountants quarrels to higher ground and see the whole forest ?

Many observers have presented the negotiations as a standard win-lose game. Either Europe ‘wins’ and Greece ‘loses’ or vice versa. In this post and its sequel I argue that the real choice is between ‘win-win’ for both or ‘lose-lose’. In developing my arguments I must acknowledge my intellectual debt to a colleague and friend John Evdokias, portfolio manager for his perceptive insights.
Argument 1 : The Debt Issue is Surprisingly Insignificant

The debt issue, blown out of proportion by professional alarmists, is actually relatively trivial for many reasons.

First the debt itself is small by global standards. 315 billion euros is high for you and me but small in the European and world economy. It can be managed.

What is much more problematic is Greece’s capacity to repay it quickly, given current conditions. The debt is 175% of GDP because the Greek Economy has contracted for the last 6 years due to imposed austerity. To ask for quick repayment is like asking an unemployed worker to immediately reimburse his mortgage. Not possible.

Second, since the debt is held not, thankfully, by the Mafia but by supposedly ‘friendly’ institutions including the European Central Bank and the IMF, what should be at issue are convivial repayment modalities, not the principle of repayment which has been accepted by both parties, These modalities involve (a) the date of maturity and (b) the rate of interest.

Concerning the date of maturity, it may surprise the reader to discover that long term loans (going to one hundred years) are increasing in popularity. At one point Disney Corporation obtained such a loan and as Evdokias pointed out “if a Mickey Mouse company can get such a loan, why not Greece”. Some countries allow 100 year mortgages and some companies issue 100 year bonds. What would have been unthinkable many years ago may become commonplace.

So, an extension of repayment of the Greek Debt would not be absurd perhaps to a hundred years but to a long enough time horizon.

As far as the rate of interest is concerned, as we all know, we live in a period of very low rates which are, in some cases, actually negative. What that means is that lenders are now paying to lend, an aberration a few years ago but now more and more frequent.

The reason behind both trends, longer repayment periods and lower interest rates is simple. Contrary to popular belief, the world is awash with capital both private and public (via money creation and quantitative easing). The challenge for investors is, now, not where to get the highest returns but where to park their money, especially when the capital they themselves invest is usually obtained at extremely low rates. When you lend other people’s money, as banks do, you expect less than when you invest your own.

Given the above, a Greece-Europe divorce based on disagreement on debt repayment would be ridiculous. That’s not how things should be settled between members of the same family.

As to future debt, the question of structural reform, (preventing further imprudent borrowing etc.) is valid and will be addressed in my second post. For now, the argument I am advancing is that past debt issues should not be the casus belli or the cause of the divorce.
Argument 2 : Greece’s Exit From The Eurozone Would Be Very Dangerous For Both Parties

The 19 country Eurozone with a common currency, the euro, is a work in progress. It was designed as a one way street leading towards more and better European integration.

In fact there is no clear mechanism to expel a delinquent member. In addition, consider that new members, joining the European Union, are now obligated to eventually join the Eurozone, although this does not apply to the original members.

If Greece leaves the Eurozone, it may have to leave the European Union itself.

The Eurozone was meant to be followed by some sort of fiscal union and ultimately a political union : the United States of Europe. This has not happened yet, because the economic problems of Europe, at large, since the Great Recession of 2008 have created many Euro skeptics.

A withdrawal from the Euro Zone and the adoption of a new national currency by Greece, may well offer short term benefits for that country since the new drachma will, most likely, be devalued vis-a-vis the euro thus making exports more competitive (and imports more expensive).

But how long will that benefit last ? The strategy of devaluation works if one country devalues and not others. In the 1930s Western countries, faced with depression and mass unemployment, resorted to competitive devaluations, which cancelled each other out. As a result everyone lost.

Furthermore, Grexit, as it is called, may not be an isolated phenomenon. If successful, other countries may be tempted to follow suit, including Spain, Italy and even France, if Marine Le Pen were to become the next French President .

Grexit could then be the first step to a break-up of the entire euro zone. It is very easy to destroy something and much more difficult to build it up. The negative momentum which this would entail, not immediately but over time, would be disastrous for the Old Continent and put the entire European Project in grave jeopardy.
Argument 3 : Beyond economics, serious geopolitical dangers lurk for both parties unless the issues are resolved.

If Greece is forced to stay in the Euro Zone under humiliating conditions this may not be the end of the matter. Right now the Syriza Government is the last bastion for left of center ‘respectable’ parties. If Syriza fails, then much more extreme and less ‘respectable’ parties from the far left and the far right, may be elected with ominous consequences.

Greece will then be vulnerable to serious social upheaval. Putin’s Russia may well seek an interesting new pied a terre in Greece, invoking the common link of orthodoxy. This will not please Western oriented Greeks. The upheaval, may, God forbid, lead to armed violence, including a potential civil war. It must not be forgotten that Greece went through a particularly bloody civil war, on class lines, after the end of World War II, where the extreme left opposed the extreme right. The scars are still there.

Not only would an unstable and weakened Greece be bad news for itself, it would also be very bad news for the entire European Union.

Beyond economics, Europe faces three additional threats. One comes from a newly aggressive Russia, as discussed above seeking to reverse the demise of the Soviet Union. A second one comes for the expansionist and disruptive ambitions of ISIS and radical jihadi terrorism. A third comes from the disaffected euro-skeptics, all over the Continent, some advocating a departure from the euro zone, others against the European Union itself and still others, promoting separatist movements designed to break up existing countries.

The balkanization of Europe would be bad, not only for this continent but for the world, because the European integration experiment which was started after the Second World War was initially seen as a model for better global integration. It could still serve as such a model, once it is restructured, perhaps even reinvented.

To give all this up for a mere question of debt, in a world drowning in unused capital would be to show unbelievable myopia and even masochism.

The Greece-Europe marriage can and must be saved. A reasonable accommodation is quite possible because of the win-win vs. lose-lose potential.

As self appointed ‘marriage counselor’ my recommendations for this accommodation will be found in a subsequent post.
I respect Kimon Valaskakis and John Evdokias and think they're absolutely right, in a world awash in debt and capital, there is no reason to kick Greece out of the eurozone based solely on its debt.

But as I've stated many times in my blog comments, Greece desperately needs major structural reforms. Amazingly, even during Greece's do-or-die moment, there has been no serious austerity whatsoever in the bloated Greek public sector. And by serious austerity, let me be crystal clear, they cut pensions and wages but they didn't cut any public sector jobs.

Importantly, this huge imbalance between the Greek public sector and private sector is the root of all evil in Greece and all political parties have maintained this farce because Greek politicians never dared to cut the hand that feeds them. Powerful public sector unions keep threatening to crush them if they ever dared cutting the Greek public sector beast down to size (keep in mind over 60% of the few jobs remaining in Greece are directly or indirectly related to the public sector, a staggering figure for a country of just 11 million population).

What Greece needs now is a Maggie Thatcher, someone with the courage to stand up to self-entitled Greek oligarchs, special interest groups and ever powerful public sector unions and crush them. This may sound like sheer right-wing lunacy but the reality is that unless Greece implements serious reforms to its grossly antiquated economy, the country will never grow properly and will always remain one step away from bankruptcy.

Of course, as my friend's father reminds me, in the history of Greece, Greeks haven't been kind to heroes like Eleftherios Venizelos, Ioannis Kapodistrias and many others who have tried to change the country for the better. "Greeks have a long, sordid history and the country won't change until they change their collective mentality and stop blaming others for their mistakes," he keeps telling me.

I'm afraid he's right which is why while it pains me to see the big fat Greek squeeze -- knowing full well that more austerity without proper growth initiatives will only exacerbate the euro deflation crisis -- but something has to be done to finally break the Greek public sector shackles and introduce proper reforms in an economy that desperately needs them.

But I warn Germany and other creditors, ramming more austerity onto Greece and other periphery economies without infrastructure growth projects will be a lose-lose proposition for the eurozone.

And it's not just the periphery economies that worry me. Marine Le Pen may not achieve her 'Frexit' referendum promise but she's absolutely right when she recently stated on Greek television that "as long as the government tells the Greek people they can remain in the eurozone while fighting against austerity, it will at worst be lying and at best wrong." 

In a weird twist of irony, the "economic and financial disaster" of Greece's ruling Syriza party has hit the chances of other populist parties gaining power in Europe, analysts told CNBC, after surprising shifts in voting in local elections in France and Spain this weekend. Perhaps this is why Le Pen wants Greece to exit the euro.

As far as Yanis Varoufakis, Greece's "rock star" finance minister, he wrote antoher comment on Project Syndicate, Deescalating Europe’s Politics of Resentment, where he states:
The fact is that Greece had no right to borrow from German – or any other European – taxpayers at a time when its public debt was unsustainable. Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private-sector creditors. But this “radical” argument was largely ignored at the time.

Similarly, European citizens should have demanded that their governments refuse even to consider transferring private losses to them. But they failed to do so, and the transfer was effected soon after.

The result was the largest taxpayer-backed loan in history, provided on the condition that Greece pursue such strict austerity that its citizens have lost one-quarter of their incomes, making it impossible to repay private or public debts. The ensuing – and ongoing – humanitarian crisis has been tragic.

Five years after the first bailout was issued, Greece remains in crisis. Animosity among Europeans is at an all-time high, with Greeks and Germans, in particular, having descended to the point of moral grandstanding, mutual finger-pointing, and open antagonism.

This toxic blame game benefits only Europe’s enemies. It has to stop. Only then can Greece – with the support of its European partners, who share an interest in its economic recovery – focus on implementing effective reforms and growth-enhancing policies. This is essential to placing Greece, finally, in a position to repay its debts and fulfill its obligations to its citizens.

In practical terms, the February 20 Eurogroup agreement, which provided a four-month extension for loan repayments, offers an important opportunity for progress. As Greece’s leaders urged at an informal meeting in Brussels last week, it should be implemented immediately.

In the longer term, European leaders must work together to redesign the monetary union so that it supports shared prosperity, rather than fueling mutual resentment. This is a daunting task. But, with a strong sense of purpose, a united approach, and perhaps a positive gesture or two, it can be accomplished.
There is a lot of truth in what Varoufakis writes but as someone who has visited the epicenter of the euro crisis many times throughout my life, let me tell you, Greeks are perennial whiners and they never take responsibility for their economic failures.

But it's also high time that Germany and other creditors take responsibility for the euro deflation crisis which threatens to spread throughout the world. Something is fundamentally broken in the eurozone and all this endless political dithering is hardly inspiring confidence among nervous global investors and worse still, it's betraying an entire generation of young Europeans looking to work and start a family.

Also, I think my readers should read another comment on Project Syndicate by Yannos Papantoniou, Greece’s former Economy and Finance Minister, where he discusses Sustaining the Unsustainable, as well as a superb comment by Robert Skidelsky, Messed-Up Macro.

On this Greek Independence Day, let us all hope that Greece and the eurozone aren't embroiled in a lose-lose game. The Marine Le Pens and Nigel Farages of this world may want the dissolution of the eurozone but this is not in the best interest of Europeans or the global economy, which looks increasingly more fragile.

Below, Greece risks running out of cash by April 20 unless it secures fresh aid, a source familiar with the matter told Reuters on Tuesday, leaving it little time to convince skeptical creditors it is committed to economic reform.

Greece said it will present a package of reforms to its euro zone partners by next Monday in hope of unlocking aid to help it deal with a cash crunch and avoid default. See the Reuters clip below.

And professor Stephen Cohen, America's top Russian expert, says that he and other authorities have no input into US policy toward Russia. He says that there is no discourse, no debate, and that this is unprecedented in American foreign policy.

Cohen says that the "ongoing extraordinary irrational and nonfactual demonization of Putin" is an indication of "the possibility of premeditated war with Russia." Key points from Cohen's speech can be found here, and you can watch it below.

Keep his comments in mind as U.S. politicians voted on Monday to send lethal arms to Ukraine, dangerously escalating an already tense situation. That, Mr. Soros, is the real lose-lose game you're funding.


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