Thursday, February 26, 2015

Greece Is A Problem That Won't Go Away

Greece A Small Economy With A huge Debt
Recently Greece has become rather obnoxious and unruly to the members of the euro-zone who have continually loaned it the money to stave off default. It appears that at least inside Greece they have accepted the argument that they are the victims of lenders willing to allow the country to fall deeply in debt. The elections have placed in power Greece's new 40-year old Prime Minister, Alexis Tsipras and left many euro-zone watchers stunned.  His far-left Syriza party took 149 seats, and along with a junior coalition partner it now holds a governing majority.

It is clear the people of Greece have decided they no longer want an agenda of austerity and what they see as destruction. This has huge ramifications on those holding Greek debt. Syriza supporters are elated and have responded with what might be described as "revolutionary" zeal. Greece's new government has a big plan. It is deeply opposed to German Chancellor Angela Merkel's "Austerity" package of spending cuts and social security reform. After making the key issue during the election a promise to renegotiate Greece's massive debt obligation the new government also promised  it will  increase government spending, believing that more government is the answer to Greece's sputtering economic malaise. Sadly, a conflict exist within Greece, it seems the Greeks deplore paying taxes to the government that provides its society with goods and services.

It is important to note that the people of Greece are not alone. All across Europe far-left groups are taking notice and hailing Syriza's rise to power as a watershed mark in how governments will deal with the economic malaise  that has settled over the continent. When the new coalition in Greece took a hard line towards austerity and how it will negotiate with "the troika" it opened the door to speculation about broader effects and how it will effect the euro-zone. As some members advise caution and concessions others disagree. A key player, German Chancellor Merkel has taken a hardline and said that she is willing to accept a Greek exit from the EU. It is important to remember the Greek economy contributes only a very small portion of the overall euro-zone GDP.

While many people in America look on and see this as another example of Greece again failing to live up to its promises many people involved in this unfolding drama believe this is a moment of systemic change. Below is an "open letter" to German citizens in which the new Greek Prime Minister recently made an appeal to the Germany people. To better understand the position of Greece it is important to read this letter that was published on Jan.13 in Handelsblatt, a leading German language business newspaper.

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence.
In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.
In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.
My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.
Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.
Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.
Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-covery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!
Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.
Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.
Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.
Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.
A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss

While the above letter represents a splendid effort to re-frame the request from Greece in a positive way it does not resolve the problem of around 300 billion dollars of bad debt and the ramifications of what happens when a default occurs.  One thing is crystal clear this creates a great deal of uncertainty for the euro-zone. All eyes will now watch this slow moving drama knowing that other countries and players will want similar concessions in regard to their debt if Greece is granted relief. While I am not interested in or advocating a particular course of action I must ask how anyone or the markets will be able to interpret this mess as good news. It appears those in power will again try to devise another way to kick the can down the road remember as I wrote earlier, Greece is a problem that won't go away.

1 comment:

  1. This is really a nice blog in you shared something about economy of Greece which is really nice.

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