Thursday, May 17, 2012

Greece: heading for the exit?

by Michael Roberts

The Greeks are having another election on 17 June.  The 6 May election was a disaster for the Troika.  An anti-austerity party, Syriza, gained the balance of power and ensured that no pro-Troika government could be formed. Now Greece is in a limbo for another month under a surprised premier, Panagiotis Pikrammenos, the president of Supreme Court.

But the Greek economy is not standing still.  On the contrary, the economy is beginning to melt down.  First, the austerity measures are collapsing.  In June, Greece should have improved tax collection by 1.5 percent of GDP, reduced social spending by 1% of GDP and implemented another pay cut and reduced public sector jobs by 12%.   It has not done so.  Also, unpaid debts owed by the government to third parties for over 90 days now stand at €6.3bn euros, or 3.1% of projected GDP this year.  Athens is supposed to shrink its budget hole to 6.7% of GDP this year based on a supplementary budget approved by parliament earlier in the year.  The EU Commission’s spring forecast sees the deficit at 7.3%.

More immediately, the Greek president announced during coalition negotiations last weekend that deposits in Greek banks are falling by up to €1bn a day.  At that rate, the banks will be under water before we get to the election result.  The banks will have to rely on emergency lending assistance (ELA) from the Greek central bank.  But that requires collateral and Greek banks are running out of those too.

Worse, the ECB is not willing now to take collateral from some Greek banks because they have not yet restructured their balance sheets since private sector involvement (PSI) bond swap, which required them to recapitalise.  Recap funds from the EFSF have been delayed because of the political impasse and the ECB wants to wait for that funding.  So, in the meantime, the banks must again rely on ELA from the central bank.  All these demands for ELA will drive up the central bank’s liabilities to the Eurosystem (already at €125bn) to new heights.  So a financial crisis is brewing in Greece while its politicians start an election campaign. 

It seems that Mrs Merkel and other Euro leaders still do not get it.  A Greek default is seen as a ‘one-off’ without serious consequences for the rest of the Eurozone.  But that’s wishful thinking.  I have estimated the exposure of other Eurozone states (and their taxpayers) to a disorderly Greek sovereign debt default.  Adding up what the Greek government owes to other EU governments from the two bailouts, what the central bank debts are to the Eurosystem and how much the ECB has already lent to Greek banks and holds in Greek government debt, we find that the Eurozone is exposed to around €500bn of potential losses, or near 5% of Eurozone GDP.

Germany and France alone are exposed to around €150bn each.  And this is just exposure to sovereign debt.  If the Greek private sector should also default on its loans, French and German banks will take a sizeable hit (French banks have about €25bn lent to Greek companies.  When you add all this in, the total exposure is closer to €750bn.

The Germans and other Euro leaders seem unwilling to renegotiate the bailout package to reduce Greek public debt and reverse the austerity measures as any Syriza-led government will demand.  That poses the likelihood that the Euro leaders will force Greece out of the euro by cutting off funding to the government and to the banks from the ECB.  The Greek government only has cash to last until the end of June to pay for public sector salaries and services.  With the ending of Troika money, it will default on its debt obligations.  Then the Euro leaders can expel it from the euro system, even if the Greeks go on using the euro for money.  The IMF reckons that this will cause a 10% contraction in Greek real GDP over the next year and with a 50% devaluation in any new Greek currency, inflation would jump to 35%.  Credit for companies and households would disappear, so bankruptcies will mushroom.  The Greek government would have to act to nationalise the banks, impose capital controls on any flight of money out of Greece and also take over major companies.

The rest of the Eurozone and Europe will not escape from the consequences of a Greek exit. The whole of Europe would be plunged into a deeper recession, probably contracting the European economy by up to 5% in one year, while inflation would rise too.  So the Germans and the other Euro leaders will have to decide what to do or the euro itself could head towards break-up before the year is out.  The firewalls against ‘contagion’ are not adequate.  The new European Stability Mechanism (ESM) is still not in place and its effective functioning could be delayed until the autumn while the German parliament gets round to ratifying it.  The ECB does not appear willing to consider any more extraordinary measures for liquidity support to the PIIGS.  And the Euro leaders are bickering about austerity or growth.

And austerity is not working.  The irony is that before the crisis, fiscally-prudent Germany saw public spending rise at a much faster rate than in Greece or Spain, but since the crisis, it is Greece that is taking a truly humungous hit to public services and conditions.

There is a way out of this. But it’s not on the basis of the pro-banking, pro-capitalist policies of the Euro leaders. Greek state finances would be fine if the richest Greeks paid taxes and did not spirit their money offshore to buy property in Kensington, London or Monaco, with the connivance of Greek banks and politicians granting their wealthy friends and multinationals all kinds of tax advantages and favours that have diluted tax revenues to the point where there is not enough in the kitty to maintain public services.  According to the Tax Justice Network, over a trillion dollars lie in offshore banks and companies in tax havens (not all Greek money of course).  Recover this money and governments could not only reduce their debts but pave the way for a lowering of taxes across the board to encourage investment and growth and increase spending power for the majority.
Capital controls, public ownership of the banks and major corporate sectors to organise a plan for investment and growth: this is not just an alternative programme for Greece but for all of Europe.

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