Tuesday, August 28, 2018

The End of Greece's Bailout?

Yanis Varoufakis, co-founder of DiEM25 and the former finance minister of Greece, wrote an op-ed for the Guardian, Greece was never bailed out – it remains locked in an EU debtor's prison:
Over the past week, the world’s media have been proclaiming the successful completion of the Greek financial rescue programme mounted in 2010 by the European Union and the International Monetary Fund. Headlines celebrated the end of Greece’s bailout, even the termination of austerity.

Buoyant reports from ground zero of the eurozone crisis portrayed Europe’s eight-year long Greek intervention as a paradigm of judicious European solidarity with its black sheep; a case of “tough love” that, reportedly, worked.

A more careful reading of the facts points to a different reality. In the very week that a devastated Greece entered another 42 years of harsh austerity and deeper debt bondage (2018-2060), how can the end of austerity and Greece’s regained financial independence be presented as fact? Instead, last week should be cited in our universities’ media schools and economics departments as an example of how consent can be built internationally around a preposterous lie.

But let’s begin by defining our terms. What is a bailout and why is Greece’s version exceptional and never-ending? Following the banking debacle in 2008, almost every government bailed out the banks. In the UK and US, governments famously gave the green light to, respectively, the Bank of England and the Federal Reserve to print mountains of public money to refloat the banks. Additionally, the UK and US governments borrowed large sums to further aid the failing banks while their central banks financed much of those debts.

On the European continent, a far worse drama was unfolding due to the EU’s odd decision, back in 1998, to create monetary union featuring a European Central Bank without a state to support it politically and 19 governments responsible for salvaging their banks in times of financial tumult, but without a central bank to aid them. Why this anomalous arrangement? Because the German condition for swapping the deutschmark for the euro was a total ban on any central bank financing of banks or governments – Italian or Greek, say.

So, when in 2009 the French and German banks proved even more insolvent than those of Wall Street or the City, there was no central bank with the legal authority, or backed by the political will, to save them. Thus, in 2009, even Germany’s Chancellor Merkel panicked when told that her government had to inject, overnight, €406bn of taxpayers’ money into the German banks.

Alas, it was not enough. A few months later, Mrs Merkel’s aides informed her that, just like the German banks, the over-indebted Greek state was finding it impossible to roll over its debt. Had it declared its bankruptcy, Italy, Ireland, Spain and Portugal would follow suit, with the result that Berlin and Paris would have faced a fresh bailout of their banks greater than €1tn. At that point, it was decided that the Greek government could not be allowed to tell the truth, that is, confess to its bankruptcy.

To maintain the lie, insolvent Athens was given, under the smokescreen of “solidarity with the Greeks”, the largest loan in human history, to be passed on immediately to the German and French banks. To pacify angry German parliamentarians, that gargantuan loan was given on condition of brutal austerity for the Greek people, placing them in a permanent great depression.

To get a feel for the devastation that ensued, imagine what would have happened in the UK if RBS, Lloyds and the other City banks had been rescued without the help of the Bank of England and solely via foreign loans to the exchequer. All granted on the condition that UK wages would be reduced by 40%, pensions by 45%, the minimum wage by 30%, NHS spending by 32%. The UK would now be the wasteland of Europe, just as Greece is today.

But did this nightmare not end last week? Not in the slightest. Technically speaking, the Greek bailouts had two components. The first entailed the EU and the IMF granting the Greek government some financial facility by which to pretend to be repaying its debts. Then there was the harsh austerity taking the form of ridiculously high tax rates and savage cuts in pensions, wages, public health and education.

Last week, the third bailout package did end, just as the second had ended in 2015 and the first in 2012. We now have a fourth such package that differs from the past three in two unimportant ways. Instead of new loans, payments of €96.6bn that were due to begin in 2023 will be deferred until after 2032, when the monies must be repaid with interest on top of other large repayments previously scheduled. And, second, instead of calling it a fourth bailout, the EU has named it, triumphantly, the “end of the bailout”.

Ridiculously high VAT and small business tax rates will, of course, continue, as will fresh pension cuts and new punitive income tax rates for the poorest that have been scheduled for 2019. The Greek government has also committed to maintaining a long-term budget surplus target, not counting debt repayments (3.5% of national income until 2021, and 2.2% during 2022-2060) that demands permanent austerity, a target that the IMF itself gives less than 6% probability of ever being attained by any eurozone country.

In summary, after having bailed out French and German banks at the expense of Europe’s poorest citizens, and after having turned Greece into a debtor’s prison, last week Greece’s creditors decided to declare victory. Having put Greece into a coma, they made it permanent and declared it “stability”: they pushed our people off a cliff and celebrated their bounce off the hard rock of a great depression as proof of “recovery”. To quote Tacitus, they made a desert and called it peace.
Varoufakis writes well and even though he's right that the bailout was a sham to save German, French and Greek banks, he also embellishes and worse, he's a master of half-truths.

You see, while Varoufakis calls out Trump for being a right-wing egomaniac, he's a left-wing egomaniac who loves to listen to himself speak as if he's a great Greek oracle enlightening us about the Greek economy and its debt situation.

I happen to think Yannis Stournaras, the current Governor of the Bank of Greece, is a lot smarter and a much better economist than Varoufakis, but he's not an international "rock star" sounding off in the media to advance his personal agenda.

Where do I disagree with Varoufakis? First, go visit Greece today, it's hardly in a "coma" or a "permanent great depression". Sure, the country is a lot poorer and there are serious problems (youth unemployment being the biggest) but Greeks are enjoying their lives and have come to accept that they need to live with lower wages and pensions.

More importantly, Varoufakis rails against "ridiculously high VAT and small business tax rates" but fails to state that SYRIZA led by Greek Prime Minister Alexis Tsipras has increased the size of the public sector.

The austerity Varoufakis talks about has been disproportionately borne by the Greek private sector. Taking his cues from Andreas Papandreou, his mentor, Tsipras wasted no time in significantly expanding the public sector at a time when the country is still heavily indebted. That's why he's taxing the hell out of small businesses.

Being a left-wing charlatan, Varoufakis decided to ignore this truth and belabor the fact that poor Greeks are suffering under the never-ending wrath of austerity (they're not).

It's sickening, truly sickening, and Greeks deserve what's coming to them because they will never learn until they kill that profligate public sector beast once and for all.

The problem is no Greek politician dares to talk about major cutbacks in the public sector because it will mean a sure loss. I happen to think New Democracy leader Kyriakos Mitsotakis is exactly what the country needs right now but I'm afraid he will be fighting constant battles with public sector unions who yield tremendous power.

It's pretty much the same situation everywhere in Europe but Greeks have taken it to another level. I'm neither right-wing nor left-wing in my ideology but I believe in the primacy of the private sector. Unless you have a thriving private sector, you cannot have a growing public sector that keeps growing and threatening the economy in the long run.

That's not just a Greek problem, this is increasingly a problem everywhere, just look at what happened to Ontario over the last eight years.

More importantly, and mark my words on this, the Greek debt boomerang will come back to haunt us over the next three years. And I'm being generous here, some think it will be sooner.

Daniel Lacalle wrote an interesting blog comment recently stating Greece's problems are far from over:
Greece has exited bailout territory and the European Union is making a strong case of the success of the program.

While Greece has obviously ended its bailout process, the real issues of the Greek economy remain largely intact.

The real drama is that none of the measures implemented have solved Greece’s real problems. No, it’s not the euro or the austerity plans. It’s not the cost or maturity of its debt. Greece pays less than 2.3% of GDP in interest expenses and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.

Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to the gross domestic product, than Germany after the Second World War.

Greece’s challenge is and has always been one of competitiveness and bureaucratic impediments to creating businesses and jobs.

Greece ranks number 81 in the Global Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact, it has the levels of competitiveness of Algeria or Iran, not of an OECD country. On top of that, Greece has one of the worst fiscal systems, with a very high tax wedge that limits job creation with a combination of aggressive taxation on SMEs and high bureaucracy. Greece ranks among the worst countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.

No, it’s not the euro. Greece’s average annual déficit in the decade before it entered the euro was already 6%, and in the period it still grew significantly below the average of the EU countries and peripheral Europe.

Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 48%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.

One thing is sure, the Greek crisis will not finish by raising taxes to businesses, nor making small adjustments to a pension system that remains outdated and miles away from those of other European countries.

The inefficacy of subsequent Greek governments and Troika proposals is that they never tackle competitiveness and help job creation, they simply dig the hole deeper raising taxes and allowing wasteful spend to go on.

From a market perspective, the risk is undeniably contained, but not inexistent. Less than 21% of Greek debt is in the hands of private investors. Most of the country´s debt is in the IMF, ECB and EU countries’ hands.

The main risk for the Eurozone, which is already showing signals of slowdown, comes from a prolonged period of no solutions.

Greece still shows the highest non-performing loan figure relative to total loans of the eurozone.


While deficits have been contained-mostly by raising taxes-, public debt has not fallen.


The tax wedge is one of the highest in the eurozone and the OECD, making Greece and uncompetitive country in terms of job creation and attraction of capital.


While unemployment has fallen, it is still the highest in the eurozone, and unlikely to be solved with such high tax wedge.


Greece’s problem is not the euro or austerity. It is a problem of a system that penalizes job creation and private enterprise to subsidize a monstrous bureaucracy and political spending.
Lacalle is absolutely right, the main problem in Greece over the last 40 years has been the disproportionate growth of the public sector relative to the private sector as each successive government promised "goodies" to public sector unions and effectively bought votes by increasing the size of the public sector.

SYRIZA is doing what every other Greek government has done in the past, namely, increase the public sector every chance they get to buy votes.

Sound familiar? This is going on everywhere which is why we are in for a prolonged period of low growth and low rates as there's simply too much debt out there, fiscal austerity will come no matter who's in power.

Those of us who know and love Greece know exactly what the country needs, major reforms to increase competitiveness and attract foreign investors but don't hold your breath, in a country like Greece, pettiness rules the day and everyone has their hand in the cookie jar, fighting for crumbs.

And while I'm critical of Greeks who keep voting in clowns to govern them, I'm also critical of Germans who are playing stupid while they suck the rest of Europe dry, benefitting the most from the Eurozone without doing anything to ensure its long-term survival.

Europe is a disaster waiting to happen, and when the music stops, the dominos will fall and the repercussions will be felt across the globe.

So, I wouldn't say it's the end of Greece's bailout, just a reprieve, the Greek debt boomerang will come back to haunt us sooner than we think.

Lastly, Bridgewater's Ray Dalio was on LinkedIn peddling his new book, A Big Debt Crisis, which comes out on September 10th:


Ray will be giving it away free in a PDF file and make it available as an eBook or hard copy via Amazon. If you want to get a copy you can click the link here.

I couldn't resist my tongue-in-cheek reply on LinkedIn:
"Ray, go visit Greece, enjoy some ouzo and grilled octopus, talk to the locals, you’ll learn all about the big debt crisis. September is actually the best time to visit, the weather is perfect, the mad herd clamoring to visit Santorini and Mykonos is gone. Go visit my ancestral home, Crete, then visit less well-known islands like Milos, Kefalonia and Antiparos where Tom Hanks has a summer home. Enjoy! "
Below, former Greek Finance Minister Yanis Varoufakis said the euro system is "absolutely not" sustainable as he condemned the eurozone for putting economic burdens on "the weakest of shoulders" across the European Union.

Varoufakis recently sat down with STV's Political Editor Bernard Ponsonby to talk socialism, populism and Scottish independence.

Interesting discussion but I can only take Varoufakis in small doses, he's still the same pompous jerk he was back at the height of the crisis and his approval ratings in Greece have plumetted as many blame him for making a bad situation far worse (indeed, Greeks call him Varoufianos, something not to be translated in polite company).


No comments:

Post a Comment