Greece: what’s going on? June 18, 2011Posted by Yilan in Human rights abuses.
Tags: Bankrupt, Greece
Q Is Greece about to go bust?
In most senses of the word, Greece is already bust. Insolvency means not having the capacity to pay your creditors, and an ever-increasing majority of economists would deem Greece to have fulfilled this criterion. Greece is racking up debts at a terrifying rate; its total debt is expected to hit 160 per cent of gross domestic product by the end of the year. And a country is usually judged to be in danger if its debt levels veer anywhere near 100 per cent of GDP. To make matters worse, Greece’s capacity to repay the debt is questionable, to say the least. The country has immense difficulty raising taxes; in part because of widespread and ingrained avoidance (even tax collectors have been had up for avoiding tax), in part because of an undeveloped tax collection infrastructure.
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Still, one man’s insolvency is another man’s illiquidity. While most economists believe that Greece doesn’t have the capacity to satisfy its creditors, others (and by now this basically means euro bureaucrats) insist that it merely needs time: that given some temporary support, in the long run it could well turn things around enough to pay back the staggering sums it owes. The trump card of depreciating the currency or printing extra money is not available. As a member of the euro, Greece hasn’t the independence to fiddle with monetary policy or influence its currency. So it is left with the stark choice of missing payments (outright default), or renegotiating the terms of the debt (lengthening the time it has to repay the loans – a ‘‘soft’’ default) or ploughing on with efforts to repay debt with tax rises and spending cuts.
Q We’ve already rescued the Greeks once – so what went wrong?
The International Monetary Fund and European Union did indeed bail out Greece last year, pumping euros 110 billion into the economy, which ought to keep the country afloat until next year. In return, the Prime Minister, George Papandreou, put in place deep spending cuts, pledged to start privatising nationalised industries and utilities and made efforts to bring the tax collection system into the 20th, if not the 21st century. However, this gambit hinged on the notion that these pledges would be fulfilled, and that the country was facing a temporary blip rather than a deeply entrenched fiscal crisis. In the event, the recession has been deeper (and unemployment higher) than was forecast, tax revenues have not bounced back as fast as the IMF and EU were hoping, it is taking longer than expected to privatise public industries and the spending cuts have provoked riots in Athens.
This perhaps ought not to have come as a surprise, given that the degree of austerity involved is of a scale that has not been witnessed in Greece since the Second World War. Either way, the country is already missing the targets it was given by the IMF as part of the loan package (it has a deficit of 10.5 per cent rather than the 8.1 per cent target) and hardly looks capable of returning to the capital markets next year. The scepticism is obvious in the markets, where the going rate for two-year Greek government debt was over 28 per cent yesterday, while the cost of insuring against default hit a record high.
Q What has brought on this latest crisis?
A number of factors. First, there was a question mark over whether the IMF would give the go-ahead for its latest instalment of cash this month, although yesterday it consented with gritted teeth to another euros 12 billion dollop. Second, the Papandreou government’s efforts to push through further austerity measures were upended this week by vicious riots in Athens and political infighting, forcing the Prime Minister to form a new government (which will face a vote of confidence over the weekend). Where this leaves the quest to reform the economy is anyone’s guess.
Q Is a bail-out/rescue inevitable?
Well, without one there isn’t much prospect of creditors being paid beyond this year. By some calculations, the country may need up to euros 100 billion more in emergency loans if it is to satisfy creditors into 2013. The real question is whether the EU and IMF have the appetite to continue propping up the Greek economy, and whether they believe it can ever really pull off the austerity it is promising. To complicate matters, the European Central Bank (ECB) and Germany are locked in a tug-of-war over how to structure any future bail-out, with the Germans (and some European Commissioners) insisting that a second bail-out ought to involve some pain for private sector bondholders. More bluntly, this would be default in everything but name, and something the ECB is adamantly against.
Q What’s the alternative?
The most likely is an outright default on existing debt. Alternatively, the ECB could attempt to monetise the deficit, printing money to buy Greek government debt. However, given central European memories of hyperinflation, the Bank has been highly reluctant to countenance such a prospect. Some are now contemplating Greece leaving the euro, allowing it to denominate its old debt into new drachmas, and depreciate its currency (a lot). The problem is that there is no clause in the euro’s legal structure that allows for anything but a messy and unpredictable exit from the currency union.
Q Will a second rescue package work?
If by work you mean bring Greece back to financial health, giving it time to recover economically and to repay everyone from whom it borrowed money, almost certainly not. A more realistic aspiration is that it gives European leaders time to consider how best to tackle the inherent problems facing the country and, more broadly, the euro project.
Q Are people right to say this could be the next Lehman’s?
It certainly could. As is the case in every country, Greek banks’ balance sheets are heavily invested in the country’s government debt. Should that debt suddenly be worth half its face value, the Greek banking system would become insolvent overnight. This, in turn, would trigger major losses for some of Europe’s biggest banks, some of which, particularly in France and Germany, are perilously undercapitalised. This threat may explain the ECB’s reluctance to countenance even a soft default.
Q Does the Greek situation make the collapse of the euro inevitable?
It raises major existential questions for the euro project – and not merely because the straitjacket of euro membership has so limited Greece’s options in responding to the crisis. The major counter-argument to the euro was that it is impossible to have a currency union without a fiscal union. In other words, without a central authority with the power to tax and spend, it is impossible to get an area as large as the eurozone pulling in the same economic direction. And that was what came to pass: over the past decade and a half, Greece and many Mediterranean neighbours (not to mention Ireland) have borrowed and spent too much while Germany has saved too much.
The idea that such divergent economies could issue currency that was supposedly worth precisely the same value everywhere is unfeasible. It is difficult, in economic terms at least, to imagine the euro surviving in its current state – particularly because Greece’s problems are shared by other countries. Granted, the euro is a political project. But the scale of anger in Berlin at the prospect of having to transfer billions to its Mediterranean neighbours purely to safeguard the euro project is such that it makes stark the question of whether there really is the public will to keep it alive.