The negotiations for a second bailout of Greece are
going to the wire. Indeed, the goal line
seems to be reset further back as some EU countries are wondering whether a
Greek default would be less costly than the funds they are supposed to come up
with to avoid it.
In retrospect, both the IMF and the Eurozone probably rushed
into the first bailout, and the question now is whether they would be throwing
good money after bad.
Initially, the ECB committed €45 billion and the IMF
together with EU countries and other institutions another €65 billion. In total,
€74 billion were disbursed.
What is under consideration now is another €93.7 billion from
the EFSF to be applied as follows: €30 billion to help Greece finance part of the private debt
restructuring/buyback; €35 billion to help Greece
finance the buyback of ECB financing; €5.7 billion to help Greece pay
accrued interest; and €23 billion to recapitalize Greek banks. Net net, the IMF/ECB/EU exposure to Greece would
rise to €132.7 billion.
As the clock is about to strike midnight, the wealthier
European countries seem to feel like the “punk”, wondering if he should take a
chance and reach for his gun, or back off should Dirty Harry have one more
bullet in his Magnum .357. “Well, […], do
you feel lucky today?”
The key variable in this equation is Italy . Back in the summer of 2011, markets put Italy and Greece in the same bag, and given
the size of the former, a default by the latter would indeed have been very
dangerous. But Italy under Mario Monti has
engineered a remarkable reform program, and so far, traditional political
parties have cooperated thanks to the Premier’s diplomatic skills (to wit, his
handling of the relations with Silvio Berlusconi).
Confidence in Italy
and Spain
has increased, bank funding markedly improved.
Do we feel lucky today? Do we want to face electors and tell them
they are on the hook for €100 billion to Greece and counting? If only we could be sure that Greece would
make it. Alas, that looks very
difficult.
So far, Greece
is experiencing a vicious circle with collapsing demand, investment, employment
and tax receipts. As a result, the
fiscal deficit is still growing and the population is revolting. As I wrote last January in this blog, the
risks of political instability are rising in countries under economic
stress. So, further tightening looks
counterproductive.
The more serious issues are structural, and therefore do not have
short-term solutions. According to a
study published by Natixis, Greek hourly productivity in the manufacturing sector
is good, but the value added produced by the manufacturing sector (as a % of
GDP) is 40% that of Italy ,
30% that of Germany and 26%
that of Finland :
the manufacturing sector is too small and doesn’t produce enough high value
added goods.
The service sector and particularly the bloated public
sector are the real issues. Yet Greece has done
very little to improve this, in particular by going slow on
privatizations. To date, only a few
billion euros of publicly-held assets have been sold; this compares with a €50
billion goal and a total base of €300 billion as estimated by former ECB board
member Jurgen Stark.
So Greece
looks unlikely to be able to grow any time soon. This makes structural reforms very difficult:
privatizations usually result in substantial job cuts, unless the output can be
largely increased at a profit. Think of
oil, metals and the like that are sold in US dollars yet produced in devalued
local currencies. This looks unrealistic
for Greece ;
it doesn’t produce these goods and it is in the eurozone. As to tourism, where the country has both an
existing infrastructure and great sites, competing with the likes of Turkey or even Dalmatia
looks difficult.
As if it were not enough, ingrained habits, such as skirting the law, operating on a cash basis, avoiding taxes (be they on real estate, income or sales) will be even more difficult to reverse. They may have had a rational and justifiable basis some time ago, but to the extent they have been absorbed by the culture, they will be that much harder to abandon.
All things considered, the most rational course of action
for Greece
is to exit the eurozone. Then, it could
follow either one of two models: Russia
in 1999 which greatly benefitted from a devaluation of the ruble, political
stability and positive economic policies, or Argentina in 2001 which veered to
the left and proceeded to distort economic incentives to the point that
inflation sky-rocketed, energy surpluses disappeared and the agro-industry
declined.
It is also the most rational course for the rest of the
eurozone. Advancing another net €60
billion would achieve little except a short respite, would ratchet up tensions
and in the end, destabilize both debtor and creditor countries.
Such a decision would probably cause volatility in the
markets, but that could be countered by having the ECB stand behind the
sovereign debt of the remaining eurozone members, and by having the latter to
commit to better economic policies.