You remember the
movie[1],
Thunderdome with its ghoulish MC and his famous opening line: “Two men enter, one man leave!”
Well, Thunderdome just moved North, except that we
are no longer talking about Max and Master Blaster, but Greece and Germany.
For the last few months, the new Greek government,
elected on an anti-austerity platform, has showed no interest in abiding by the
existing multilateral agreement under which private creditors were bought out
at a massive loss (≈77%) to them, or negotiating a new reform program with the
other eurozone countries, the IMF and the ECB.
Instead, the basic Greek game plan has been to play
chicken, betting that the prospects of a Greek default would scare the other Eurozone
members into caving in, while periodically demanding WWII reparations from
Germany and flying its prime minister to Russia.
The Greeks have some excuses, for while Finance
Minister Schauble has taken a clear and firm line, his French counterpart has kept
zigzagging, one day asking them to come up with serious proposals and the next insisting
that Greece couldn’t leave the currency union.
The result, so far, is that Greece is expected to
default on its IMF loan repayment today, its banking system is essentially shut
down and confidence in its government (as measured by money flows) is at its
lowest level among locals and foreigners.
Much worse, by now Greece’s economy has shrunk even more than Chile’s
did in the early 1980s, yet it has nothing to show for it while by 1986, Chile enjoyed
a nationalized but functioning banking system, a sustainable private pension
program, globally competitive non-traditional export industries, a balanced
budget and foreign debt reduction programs which met their objectives and
attracted new investments. Its GDP also
grew by 6%. And unlike Greece, Chile had
not received any multilateral financial assistance in solving its financial
crisis.
The new Greek government has planned a referendum
for July 7th, yet has lacked the honesty to set the choice right for
voters: it is not between economic austerity and flexibility, but between
staying within the eurozone and leaving it.
Greece’s “intellectual” allies decry the imposition
of reforms and spending cuts, yet Greece has already gone through the pain for
no benefit. The UK, with its much
criticized austerity policies, is doing better than most of continental Europe
for two reasons: a) its austerity policies were devised so that everyone carried
his fair share and b) capital is not blind and will go where it has a chance to
prosper.
Another bugaboo is the excessive burden of the Greek debt: creditors should (again) take a loss to make
it bearable. But what is the real burden
if interest rates are rock-bottom, interest payments are partly deferred[2],
and principal repayments extend 30 to 50 years in the future[3]? Besides, Greece has a primary budget deficit,
that is before even paying interest on its debts.
At this stage, it is difficult to predict what will
happen in the next weeks and months.
Perhaps another lifeline will be cast to Greece.
But all parties realize that by getting in deeper,
creditors are becoming hostages to their debtor.
Private creditors took a whopping 77% loss just three years ago! The new sovereign creditors are on the hook
for close to €250 billion, of which France alone gathers it is owned over €42 billion. Already, in the last go around, Finland
demanded collateral to back its bilateral loan while Cyprus, Slovakia, Ireland,
Portugal and Spain stepped out of the EFSF.
Greece has already asked for a haircut from its eurozone partners, while
providing scant details as how it will repay the rest.
More fundamentally, even if a new Greek government
were to adopt better economic policies and the population were to agree to
drastic changes in such areas as taxation, pensions, public sector employment, privatizations,
etc. it remains to be seen if Greece can really share the same currency with
the likes of Germany, unless it is to receive permanent subsidies.
Can a country, whose holders of its sovereign debt
lose 77% of their investment, really be part of the second most important
reserve currency system in the world?
Bound to the euro currency, it can only regain productivity
the very hard way: by cutting wages. Likewise, the euro linkage hampers its
tourism industry (18% of GDP[4])
as it competes with the likes of Croatia, North Africa and Turkey.
As the core economies of the
eurozone regain their health, the gap with Greece will grow. As explained above, the debt burden is NOT
the essential problem of Greece. Rather,
it is its lack of competitiveness. Not
sharing the same currency with the stronger economies is politically and
economically the only way out, even if it is unpalatable in the short run. Recurring eurozone wealth transfers are a no
go.
In the short term, Greece may not want to leave. If it stays, I expect Germany
and others to leave, eventually.
Welcome to Thunderdome! “Two countries enter, one country leave!”
[1]
Mad Max Beyond Thunderdome.
[2] Up to 2022, interest on €34.6 billion of EFSF facilities is capitalized
and then paid over the 2023-2042 period.
[3] €142 billion owed to the Eurozone countries via the European
Financial Stability Facility (EFSF) mature between 2023 and 2053 and carry
interest at the rate of about 1.5% p.a. The IMF loans amount to €25 billion and carry interest at
rates varying between 3% p.a. and 4% p.a.; €7 billion are due this month and the rest at intervals
until 2024. Another €95 billion represent traded sovereign
bonds which were already subjected to a 77% haircut. Furthermore, of these €95 billion, the ECB holds €27 billion. However, the ECB bought these bonds
at below market prices and has agreed to repay that discount to Greece. Finally, there are €53 billion of bilateral loans from
other Eurozone countries which carry interest at a rate of 3 month Euribor +
0.5%p.a. for an all-in rate barely above 0.5% p.a. (the spread was repeatedly reduced
from an original level of 3% p.a.).
[4]
The importance of tourism is understated by this percentage given the
very high contribution of the public sector to GDP.
