Tuesday, June 30, 2015

Averting a Greek Collapse?

Joseph. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, wrote an op-ed for the Guardian, How I would vote in the Greek referendum:
The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.

Of course, the economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.

We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.

But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy?

In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. When Sweden’s did, Swedes said no. They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.

And, sure enough, what we are seeing now, 16 years after the eurozone institutionalised those relationships, is the antithesis of democracy: many European leaders want to see the end of prime minister Alexis Tsipras’ leftist government. After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.

It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.

By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.

I know how I would vote.
Another Nobel Prize-winning economist, Paul Krugman, also came out recently to urge Greeks to vote no in the referendum:
OK, this is real: Greek banks closed, capital controls imposed. Grexit isn’t a hard stretch from here — the much feared mother of all bank runs has already happened, which means that the cost-benefit analysis starting from here is much more favorable to euro exit than it ever was before.

Clearly, though, some decisions now have to wait on the referendum.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.

Second, the political implications of a yes vote would be deeply troubling. The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals.
I have tremendous respect for Stiglitz and Krugman but when it comes to the Greek economy, they either do not understand what is going on or they like Varoufakis choose to state half-truths and conveniently ignore what exactly has happened in Greece over the last five years.

They both need to read an op-ed thirteen prominent Greek economists from around the world wrote to explain why Greece must sign a deal now and say yes to the euro.

First, I agree, the Troika has proven itself to be entirely incompetent. Several former IMF economists have come out to discredit the austerity measures imposed on Greece.

But here is where Stiglitz and Krugman got it wrong. The asinine austerity measures Troika imposed on Greece disproportionately hurt the Greek private sector, leaving the bloated and inefficient public sector largely intact.

I keep referring to this unsustainable figure: 1.5 million Greek public sector workers vs 2.5 million Greek private sector workers. Some people argue that my figures are off as it's 700,000 public sector workers but when you look at the broad  measure of everyone getting a paycheck from the state, it's more than double the official figure.

Keep in mind that ratio of public-to-private sector workers in Greece was unsustainable prior to the crisis and has reached disastrous levels as the private sector keeps hemorrhaging jobs. 

In any case, one thing is for sure, there have been no job cuts in the Greek public sector, even after five years of crisis. Do you know there are people who worked in public sector in Greece who are being paid right now even though they're not working? They were "shifted" and are in a "state of flux" waiting for SYRIZA to place them back into a job.

This is amazing when you think about it. In Canada, the Conservative government has (needlessly and foolishly in my opinion) shed quite a few public sector jobs over the last five years but in Greece no politician has dared to touch the public sector because they fear the repercussions of powerful public-sector unions (this is what happens when your economy succumbs to the tyranny of public-sector unions).

And it's not just Alexis Tsipras. When he was slipping in the polls, the former Greek Prime Minister and New Democracy leader Antonis Samaras hired a bunch of people in the Greek public sector in a last ditch attempt to hold on to power. This is why I keep telling you, don't trust Greek politicians, they're all liars and they put their party above their country each and every time.

So, when Stiglitz writes "a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands," I can't help but laugh. Over the last 40 years, Greeks have proven themselves incapable of governing their country properly. If they were capable of this, they would have introduced draconian job cuts to the over-bloated and inefficient Greek public sector a long, long time ago (read former finance minister Stefanos Manos's opinion piece, Leaving our statist habits behind).

And the real tragedy now is that the Greek private sector -- the little left -- will continue to experience "shock therapy" from Troika's asinine measures or worse, from a return to the drachma which will ensure more statist policies and keep this ratio of public-to-private sector workers unsustainable and ludicrously high.

Also, as I explained in my last comment on Greece's Metaxas moment, there are many dire economic and political consequences to leaving the eurozone, much worse than living under Troika's idiotic measures. Greeks aren't stupid. They know what Grexit means which is why they overwhelmingly want to stay in the eurozone. They're living a nightmare now which will only get worse once they default and their banks collapse.

Amazingly, Greek Prime Minister Alexis Tsipras remains defiant, rejecting the idea that a No vote means Grexit. Quite laughably, Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

These are acts of desperate people. Tsipras and Varoufakis know their time is up. A yes vote will usher them out quickly whereas a no vote will just buy them some time until Greeks force them out with pitchforks.

Quite worrisome, Andreas Koutras sent me this from Athens today:
If you thought that Greek FM was an expert in game theory he also proves to be an ideal chaos practitioner.

From the one hand he is saying that the referendum is not about exiting euro zone and then he goes off and pronounces injunction against the ECB. It is quite obvious that he does not know how Europe works and also that he plays for his home crowd.

Syriza is already moving the boundaries of democratic behaviour as they please. They passed a law that effectively gives more TV and radio time to the NO campaign and they changed the president of the highest court who is also presiding the referendum process two days ago. They further refused to place an independent minister in charge of the election, something that happens normally in every election. In addition they printed a ballot box that clearly aims to confuse the people and promote the NO vote. The short period of time also means that many if not most poll station would not have a representative form the judicial system and many fear that this would make electoral fraud very easy.

In terms of the economy there were rumours of lowering the 60euro limit but later this was denied. For the first time in history thousands of pensioners were not paid and some were left literally crying outside the banks. According to reports Greece has barely more than 1-3bln of cash to survive and after this chaos.

PM Tsipras in a televised interview with the state TV. An interview reminiscent of the best practices of Sadam regime. In it he hinted that he may go if there is a YES vote. Yet many now say that it is hard to believe anything that comes out from this government.

Today Greece is going to fail the IMF payment and the markets should wait for the response. If they declare Greece in arrears and in default then the ECB would be free from tomorrow to cut off any banking support.

Officially the program expires tonight and Greece would be unprotected. From Wednesday onwards Europe can pull all the plugs. There are signs that this may happen but this means a humanitarian aid program should be voted.

Reaction so far in the markets has been muted. As we have argued before the financial and economic risks are limited. Political risks are not easily quantifiable but the markets reaction so far point to faith in Europe's politicians to deal with it in a a effective way.

Just to add some news. Most ATMs have run out of 20s so they dispense only 50s. In addition pensioners with no cash cards are only allowed to withdraw up to 120 euros a week.
Andreas also told me he fears SYRIZA will move to haircut bank deposits very soon. If that happens, you will see civil war in Greece (I'm serious).

Sensing the rage of pensioners, the Greek government just announced it will open 700 banks Wednesday, Thursday and Friday to allow pensioners to withdraw a maximum of 120 euros (40 euros a day). I'm waiting to see how this will go down as many irate pensioners are going to be demanding a lot more.

There was a large crowd of anti-bailout protesters which gathered at Syntagma Square last night to support the government. I suspect most of these people work in the public sector or are unemployed and desperate. Interestingly, on camera, many were stating that they want to remain in the eurozone but will vote No on Sunday.

Unfortunately, these people are delusional and believe the garbage SYRIZA is feeding them. It's sad because they don't realize or don't understand what a no vote means and how much worse off the country will be outside the eurozone.

But when you have Nobel Prize-winning economists publicly telling them to vote no on Sunday, what do you expect these people to think? Stiglitz and Krugman aren't the ones waiting in line to withdraw 60 euros a day or waiting at banks for their pension to buy some bread as not to starve.

I suggest Krugman, Stiglitz and many other economists who don't really understand the Greek economy and what's at stake if Greeks vote no in the referendum to please butt out. Your anti-austerity agenda is fine but in Greece, austerity measures have killed the private sector, not the over-bloated and inefficient public sector. And Tsipras's big gamble will pretty much kill off the little that remains in the private sector and jeopardize the future of the country.

Greeks are worried. If they don't sign an agreement, banks will not reopen next week. There will be no money to pay pensions and public-sector wages. The country will experience riots and social unrest.

Markets are calm on Tuesday and even rallying a bit. Perhaps the smart money is sensing Greeks will come to their senses and vote yes on Sunday, which will also force SYRIZA out. I actually believe the mayhem in Greece will work in favor of a yes vote but I'm worried that far too many Greeks will vote no thinking they can reject the proposals and remain in the eurozone.

Below, RT interviewed Jim Rogers, co-founder of the Quantum Fund, who stated "Greece will collapse this week and people will be terrified." I hope he's wrong.

As I end this comment, the BBC is reporting that the Greek government is reportedly planning to request a new two-year bailout deal from the eurozone in a last ditch effort to avoid defaulting on its IMF loan. The Eurogroup is holding an emergency meeting to discuss the latest Greek proposal.

Greek deputy foreign minister Euclid Tsakalotos told the BBC's Katya Adler he believed a solution could be found. I certainly hope so but I simply don't trust SYRIZA and think the country is better off with new leaders.

Update: Eurozone finance ministers have declined to extend Greece's bailout, just hours before its expiry and a possible IMF default, but talks will continue on Wednesday after Athens asked for a new aid plan, officials said.

More interestingly, my sources in Athens tell me that polls now suggest the yes vote (47%) is ahead of no votes (43%) with the rest undecided. They tell me that rather than face a humiliating defeat, Tsipras will call off the referendum, step down and a new party formed from New Democracy, PASOK and To Potami will take over. Still, it could take weeks before Greek banks reopen. In the meantime, the Greek economy and the private sector in particular sink further into the abyss.

Late Tuesday Greece officially missed a roughly $1.7 billion loan repayment due to the International Monetary Fund -- a first for an advanced economy.

On Wednesday, the Greek government indicated to its creditors that it is willing to accept many of the terms of a bailout package that it had earlier rejected, if they are part of a broader deal to address the country’s funding needs for the next two years. For her part, Angela Merkel refuses to negotiate on new Tsipras bailout proposals before Sunday referendum

I believe Mr. Tsipras should call off the referendum and resign. If he truly cares about his country, he will step down as soon as possible and allow a coalition government to work on a new deal now.

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