Monday, April 27, 2015

A New Deal For Greece?

Greece's Finance Minister Yanis Varoufakis wrote a comment for Project Syndicate, A New Deal for Greece:
Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece. But they have not yet produced a deal. Why? What steps are needed to produce a viable, mutually agreed reform agenda?

We and our partners already agree on much. Greece’s tax system needs to be revamped, and the revenue authorities must be freed from political and corporate influence. The pension system is ailing. The economy’s credit circuits are broken. The labor market has been devastated by the crisis and is deeply segmented, with productivity growth stalled. Public administration is in urgent need of modernization, and public resources must be used more efficiently. Overwhelming obstacles block the formation of new companies. Competition in product markets is far too circumscribed. And inequality has reached outrageous levels, preventing society from uniting behind essential reforms.

This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles. First, we must concur on how to approach Greece’s fiscal consolidation. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society.

Beginning with fiscal consolidation, the issue at hand concerns the method. The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.

The result of this method, in our government’s opinion, is an “austerity trap.” When fiscal consolidation turns on a predetermined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.

Our government’s position is that backward induction should be ditched. Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors.

Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.” The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.

Our partners believe that, given time, this agenda will work. If wages fall further, employment will rise. The way to cure an ailing pension system is to cut pensions. And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).

Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch. And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment and vast undeclared labor). Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.

The current disagreements with our partners are not unbridgeable. Our government is eager to rationalize the pension system (for example, by limiting early retirement), proceed with partial privatization of public assets, address the non-performing loans that are clogging the economy’s credit circuits, create a fully independent tax commission, and boost entrepreneurship. The differences that remain concern how we understand the relationships between the various reforms and the macro environment.

None of this means that common ground cannot be achieved immediately. The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed.
I read Mr. Varoufakis comment and was unimpressed. For a bright guy, he conveniently misses what is truly ailing the Greek economy. I left this comment on Project Syndicate's site:
"The pension system is ailing." I would say the Greek pension system is on the verge of collapse. The jobs crisis doesn't help but an even bigger problem is the total lack of proper governance surrounding Greek pensions. Instead of creating something akin to the Canada Pension Plan Investment Board, Greece has allowed their pensions to slowly wither away, much like its economy which is in desperate need of major reforms. Of course, the biggest problem in Greece remains its grossly over-bloated public sector which Syriza will fight for tooth and nail until its leaders are forced to implement drastic cuts (one way or another, cuts are coming, especially if Greece leaves the euro and goes back to the drachma). Mr. Varoufakis knows this. Tsipras knows this. They are playing a dangerous game with no leverage. Greeks are only fooling themselves if they can't see past Syriza's dangerous lies. It's time for Greeks to take responsibility for years of economic failure and finally bring their economy into the 21st century by implementing much needed reforms to make it more competitive and open to foreign investors. Varoufakis laments that Greece needs a new deal but he fails to see the world has its own problems to deal with and if Greece doesn't reform, it will be left out, or worse, thrown back into the Dark Ages.
Now, I realize there is only so much you can cover in a short comment, but my main points are all there. Either Greece reforms its antiquated economy -- which is being held back by a grossly over bloated public sector supported by powerful unions, special interests groups which includes lawyers and pharmacists that don't want foreign competition, and a handful of ultra wealthy families milking the Greek economy dry -- or it will die of a painful death. And going back to the drachma will only make this death more painful, something that Greeks know all too well.

Greece's creditors know this all too well too. They've implemented a united strategy to squeeze its leaders until they yield. Mr. Varoufakis is already feeling the heat. At last week's rumble in Riga, his  counterparts lost patience with him, calling him an "amateur" who constantly lectures them but has implemented no serious reforms:
When Yanis Varoufakis warned his fellow euro-area finance chiefs of the dangers of pushing his government in Athens too far, Peter Kazimir snapped.

Kazimir, Slovakia’s finance minister, launched a volley of criticism at his Greek counterpart, releasing months of pent-up frustrations among the group at the political novice. They’d had enough of what they called the economics professor’s lecturing style and his failure to make good on his pledges.

The others at the April 24 gathering in Riga, Latvia, took their cue from Kazimir -- they called Varoufakis a time waster and said he would never get a deal if he persisted with such tactics. The criticism continued after the meeting: eight participants broke decorum to describe what happened behind closed doors. A spokesman for Varoufakis declined to respond to their descriptions.

“All the ministers told him: this can’t go on,” Spain’s Luis de Guindos said the following day. “The feeling among the 18 was exactly the same. There was no kind of divergence.” The others who provided an account of the meeting in interviews asked not to be named, citing the privacy of the talks.

Varoufakis’s isolation raises the stakes, which include a potential default and keeping the euro indivisible. After more than five years as a ward of the European Union, Greece is virtually out of cash. The aid pipeline is shut until Prime Minister Alexis Tsipras, elected Jan. 25 promising to push back against budget cuts, bends to EU policy demands.

Alluding to the political conflict, Varoufakis borrowed a line from a 1936 speech by U.S. President Franklin D. Roosevelt. “They are unanimous in their hate for me; and I welcome their hatred,” Varoufakis said on his Twitter account on Sunday. The quotation is “close to my heart (& reality) these days,” he wrote.
Looming Payments

The breakdown came as Greece heads into a week of heightening fiscal tension. The first of two International Monetary Fund payments is due on May 6 and the government still doesn’t know if it has enough money to pay pensioners and state employees this week.

Varoufakis sought to squeeze aid from the rest of the euro area accepting the full slate of EU demands, a gambit rejected by the group’s leader, Jeroen Dijsselbloem.

Varoufakis described the talks as “intense” and said his country is ready to make “big compromises” for a deal.

“The cost of no solution would be enormous not only for us but also for all,” he said.

Varoufakis cut a lonely figure on Friday morning as he prepared for the meeting. The 53-year-old academic walked with no entourage through the lobby of the Radisson Blu Daugava Hotel clutching a mobile phone and a newspaper.
Pension Stalemate

In remarks to the assembled ministers, he defended protecting public pensions, a key sticking point in the negotiations. He threatened to walk away from talks if creditors pushed too hard.

When Dijsselbloem invited the group to respond, he was greeted by silence. He asked again, and Kazimir spoke up.

Varoufakis’s refusal to accept the conditions of its creditors particularly riled the Slovakian because his government has slashed the budget deficit and cracked down on tax evasion. His position also may have fallen on deaf ears among his hosts in Riga.

Latvia’s economy shrank by more than a fifth in 2008 and 2009 when the country was led by Valdis Dombrovskis, now vice president of the European Commission and a participant in the Friday meeting. Dombrovskis pushed through some of the world’s harshest austerity measures -- equivalent to 16 percent of gross domestic product. The Greek economy has shrunk by about a quarter since 2008.
Photo Shoot

Political gaffes have afflicted Varoufakis from the outset. He offended the Italian government, a potential ally, when he said Feb. 8 their country was close to bankruptcy. Most famously, he posed for a photo spread in Paris Match magazine, showing the minister and his wife on their roof terrace overlooking the Acropolis in Athens.

For any European governments sympathetic to the plight of Greeks, the picture made it harder to justify additional aid to their voters. The episode also hurt Varoufakis’s credibility and gave other ministers an easy way to needle him.

After his comments to the meeting in Riga, Varoufakis was approached by France’s Michel Sapin, a Socialist.

“I told him I had read Philosophie Magazine,” Sapin said, alluding to Varoufakis’s academic style. “It’s better than Paris Match.”

Varoufakis has the backing of a majority of Greeks, according to an Alco survey published in Proto Thema newspaper. Some 55 percent of respondents said they had a positive view of him, compared with 36 percent who said they viewed him negatively.

Still, the schadenfreude in ministers’ reactions was leavened with concern about the consequences of the policy deadlock.
Calls for Plan B

Greece needs to begin paying monthly salaries to civil servants and retirees on Monday, and faces a string of obligations leading up to a $770 million IMF payment on May 12.

Tsipras tried to bypass the finance ministers last week, who have to sign off on any aid disbursement, to make his case directly to German Chancellor Angela Merkel and French President Francois Hollande at a summit in Brussels.

With the prospect of a default hanging over the session, Slovenia’s Dusan Mramor urged the group to consider a “plan B” to mitigate the fallout if negotiations fail. Others echoed his calls. In their public comments, EU Economic Commissioner Pierre Moscovici and De Guindos both said there was no plan B, while Dijsselbloem refused to comment on the prospect, saying it would only fuel speculation in the media.

“Any mention of a plan B is profoundly anti-European,” Varoufakis said in an interview with Euronews.

Before the session broke up and Dijsselbloem briefed the media, Varoufakis implored him to say that progress had been made toward a deal on releasing aid.

“There are still wide differences to bridge,” Dijsselbloem said, standing alongside European Central Bank President Mario Draghi, Moscovici, and head of the European Stability Mechanism Klaus Regling. “Responsibility mainly lies with Greek authorities.”
Varoufakis's troubles with his counterparts have reached a boiling point. The Wall Street Journal reports Greece has shuffled the team involved in bailout talks with the country’s international creditors, a senior government official said Monday, in a move that may reduce the influence outspoken Greek finance minister Yanis Varoufakis has on the slow-moving negotiations.

The FT also reports that Greece’s dire financial position is forcing eurozone authorities to look beyond Mr Varoufakis to Alexis Tsipras, prime minister, much like in February when Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup, brokered an extension of the current bailout program:
According to two eurozone officials, Mr Dijsselbloem phoned Mr Tsipras from Riga in an effort to mend fences after Friday’s feisty eurogroup meeting, where Mr Varoufakis was rounded on by his eurozone colleagues.

In a sign that Mr Varoufakis’s combative approach is prompting concern in Greece as well, a senior Athens official said the Riga meeting was likely to lead to him being sidelined as Mr Tsipras and his deputy Yannis Dragasakis take a more hands-on role.

Amid the acrimony, differences over a new list of reforms that is to be agreed by Athens were barely discussed at the meeting, putting off indefinitely a deal to unlock access to the funds left from Greece’s €172bn bailout.
I want you to remember the name Yannis Dragasakis because when it comes to Greek politics, he is the most powerful man in Greece and Tsipras listens to him very closely. It looks like Dragasakis has had enough of Varoufakis's "rock star personality" and this means the finance minister will be quietly pushed out of the negotiations with EU partners (my buddy predicted this a long time ago saying "Varoufakis is being used and he doesn't even know it").

Still, changing the players doesn't change the sticking points. Greece is on the verge of collapse and Nicholas Economides is right, at this point, only a miracle can save it from disaster. Unless Tsipras, Dragasakis and the rest of Syriza agree to some major reforms which will be unpalatable to most of the party's left-wing base, it's hard to see how any agreement will take place. Creditors are demanding major reforms and Tsipras and company keep saying they've done all they can, which is an outright lie but given their mission to stay in power as long as possible, this is their stance.

But Greeks are finally waking up to Syriza's dangerous posturing. In a comment in Naked Capitalism, Wolf Richter argues the Greek people just destroyed Syriza's strategy, noting the government's "extortion strategy" is quickly losing popular support:
The approval rating for the government’s strategy has plunged to a measly 45.5%, from 72% just last month, according to a new poll. A terrible cliff dive.

On a scale of 0 to 10, the administration got whacked in its details, earning 4.6/10 on the economy, 3/10 on immigration, 3.7/10 on crime-fighting and security, 4.2/10 on education, 5.5/10 on foreign policy and defense, 4.5/10 on public administration, and 4.4/10 on health.

Only 3% of the Greeks were confident their household finances would improve over the next 12 months, while 26.5% expected their situation to get worse, and another 15% were certain it would get worse.

How did they feel about a “Grexit” – and a return to the drachma? “Fear!” That’s what 56% said – up from 45.5% in March. Only 23% claimed they were indifferent, down from 26.5% last month. And just 9% thought there was no chance of it happening, down from 17% in last month.

Greece’s exit from the Eurozone and return to the drachma, of which it could print an endless amount to pay its bills and salaries and other schemes, would entail a vertigo-inducing devaluation, and all that comes with it.

The Greeks know how that program works. They have experienced the drachma. They see it as a tool by which the government tries to steal from them. They don’t trust their government with the administration of a currency any more than they trust their banks. And Greek parliamentarians don’t want the drachma either. They want their rich pensions to be paid in euros, not in devalued drachmas.

Thus, a Grexit is off the table as far as threats is concerned. It might happen, but it can’t be used as a threat to extort better terms from donor countries. The Greek game-theoreticians can evoke it all they want to, through leaks and on the record, and they can bandy about the threat of blowing up the world markets, but if they want to stay in power and if they want to face their people at home, they can’t go down that road.

Alas, all their negotiating partners know that too. The global financial markets know that. They all could digest a Grexit, but the Syriza government could not. Time to stop playing games and start talking in earnest. Or face some very, very angry folks at home.
I can only hope Greeks finally wake up and boot the clowns running the country out of office before it's too late, but my fear is that the damage Syriza has done is so severe that the endgame is coming no matter what and it won't be pretty. If Greeks thought austerity under Troika was bad, then they haven't seen anything yet. It will be much worse if Greece exits the eurozone and returns to the drachma (never mind what Nobel-prize winning economists claim).

And if Greece falls, no one wants their prints on the murder weapon, but the reality is every member of the eurozone will be responsible for this failure, especially Germany which has thus far profited the most off the euro crisis and endless Greek tragedy. It too will eventually feel the economic pain of others as its leaders were incapable of taking the leadership they had to in order to solidify this fragile union.

As far as the bigger picture, Greece's lose-lose game is yet another reminder that things aren't as solid as many economists and financial analysts claim. The global economy is a lot weaker than we think, and if the China bubble bursts, watch out, we're in for a prolonged period of global deflation. Ironically, this is why I don't agree with hedge fund managers who think it's time to short the mighty greenback.

In an environment of heightened global uncertainty, investors will flock to U.S. bonds, stocks and real estate to seek refuge but if deflation comes to America, there will be a lot more pain ahead as the mother of all carry trades unwinds. At that point, we won't be discussing a new deal for Greece, but a new deal for the world.

For now, all is calm as greenshoots are talking up global recovery. But mark my words, this is the calm before the storm, which is why I keep trading the liquidity rally focusing my attention mostly on tech and biotech stocks but very nervous about what happens if big investors start shorting the Fed.

Below, Yanis Varoufakis and Joseph Stiglitz discuss the eurozone crisis at the latest New Economic Thinking forum. Take the time to listen to their comments but keep in mind, the Greek economy is a beast that Stiglitz and Krugman fail to understand. Even Varoufakis fails to understand what truly ails the Greek economy and his antics cost him as he will be pushed out of negotiations.

Also, Constantine Michalos of the Greek Chamber of Commerce and Industry, recently discussed the best course of action to boost Greek business. Those of us who often travel to epicenter of the euro crisis know what Greece needs but my fear is that until Syriza is ousted and new, courageous leaders take the helm, the country will be mired in an endless depression.

There is an old Greek expression "Η Ελλάδα ποτέ δεν πεθαίνει" (Greece never dies), which we Greeks play on by saying "Η Ελλάδα ποτέ δεν πεθαίνει , αλλά πάντα κουτσαίνει" (Greece never dies but always limps along). It's time Greece's leaders stop playing the same narrow politics which have slowly but surely suffocated the Greek economy over the past 40 years and start thinking of how they will improve the opportunities for future generations who don't want to emigrate from Greece in search of a better life. 

Greece is the most beautiful country in the world but its leaders are hopelessly corrupt and dangerous demagogues who have never seen past their obsession of holding on to power at all cost. I look forward to the day when this vicious cycle is broken once and for all. That's a new deal for Greece those of us who love the country are all looking forward to as we anxiously watch this crisis unfolding. 


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