Sunday, June 16, 2013

Greece, the IMF and debt default

by Michael Roberts

The Greek coalition has been pushed to breaking point over the decision of the largest party in government, the conservative New Democracy, to close down the state TV and radio broadcaster ERT without warning.  The two smaller ‘leftist’ parties in the coalition have demanded that this action be reversed and instead negotiations be started to ‘restructure’ the broadcaster without first closing it down.  There were massive protests against the government’s abrupt closure and a general strike was called by Greek unions.

According to two public opinion polls, around two-thirds of Greeks are opposed to the arbitrary closure of Greece’s state broadcaster, but a majority don’t want new elections to oust the coalition: they just want the government to resolve the economic crisis.  If there were elections, New Democracy would probably poll slightly more than the socialist opposition Syriza, as in the last election, while the fascist Golden Dawn would do even better, reducing the seats for the junior coalition partners.  That would mean that the coalition would lose its majority and the fascists would hold the balance of power.  So there is no way that coalition will be allowed to fall – a deal on the ERT closure will be worked out.   Most likely, ERT will be ‘restructured’, reducing its staff from 2600 to maybe as little as 1000.  Many Greeks see the ERT as being the former mouthpiece of the military in its coups or a tool of successive governments.  On the other hand, it is the only public broadcasting network putting on quality programming.  So Greeks are somewhat ambiguous about keeping ERT as it is.

More important, behind the unannounced move to close ERT was the pressure on the government to meet the fiscal targets of the dreaded Troika (ECB, EU, IMF) set for this summer in order to get the next tranche of EU bailout funds.  The government is committed to dismissing 4000 public servants by the end of the year and 15,000 by the end of next year.  After destroying ERT, it plans to lose another 800 jobs from various state organisations this summer by closing 17 down and merging others.

And things have not been going well for the government in meeting Troika demands.  The midnight closure of ERT came right after the government failed to privatise the natural gas firm DEPA and the Greek economy was cut to ‘emerging market status’ by equity index provider MSCI, pushing down sharply the value of Greek bonds.  A senior government official said Athens was “under pressure to show visiting EU and IMF inspectors that it had a plan to fire 2,000 state workers as required and the ERT shutdown was the only option available to meet the goal”.

The irony is that while austerity in Greece continues to be applied mercilessly, the IMF recently issued a report that concluded that the Troika’s approach was mistaken in imposing severe fiscal retrenchment back in May 2010 when Greece could no longer finance its spending through borrowing in bond markets (  Back then, the Troika had three options.

First, it could have provided a massive fiscal transfer to the Greek government to tide it over without demanding massive cuts in public spending that eventually led to a fall in Greek real GDP of nearly 20%, unemployment of over 25% and government debt to GDP of 170%, with economic depression likely to continue out to the end of the decade.  Or it could have allowed the Greek government to ‘default’ on its debts to the banks, pension funds and hedge funds and negotiate an ‘orderly haircut’ on those debts.  But the Troika did neither and opted instead for a third way.  It insisted that in return for bailout funds the Greek government meet its obligations in full to all its creditors by switching all its available revenues to paying its debts at the expense of jobs, health, education and other public services.

The Troika insisted on this because it reckoned 1) that austerity would be shortlived and economic growth would quickly return and 2) if the banks and others took a huge hit on their balance sheets from a Greek default it would put European banks in danger of going bust (Greek banks first).  There could be ‘contagion’ if other distressed Eurozone governments also opted not to pay their debts, using Greece as the precedent.  Of course, economic growth has not returned and despite huge efforts on the part of Greek governments to meet fiscal targets through unprecedented austerity, government debt has increased rather than fallen and the economy has nosedived.

Eventually, the Troika had to agree that the private sector took a ‘haircut’ after all, massaged as it was with cash sweeteners and new bonds with high yields.  Now the IMF in its report admits that austerity was too severe and debt ‘restructuring’ should have happened from the beginning.  The IMF, now in its semi-Keynesian mode, tries to put the blame for the failure to do this on the EU leaders and the ECB, which has not made the latter too happy, especially as the current IMF chief, Lagarde was strongly in favour of the austerity plan when she was French finance minister in 2010.

And after all, the EU leaders and the ECB had a point.  If Greeks had defaulted back in 2010, that could have led to other defaults and Europe’s banks were in no state to absorb such losses.  As a recent study shows, German banks were heavily overleveraged back in 2010 and they are not much better even now.  There was no way the German government was going to put German banks in jeopardy and allow the ‘profligate’ Greeks to get a huge handout of German taxpayers money to boot.  No, the Greeks had to pay their debts, just as the Germans had to pay their reparations to the French after 1918, even if it meant Germany was plunged into permanent depression.  Ironically, the Germans did not and have not paid promised billions in reparations to the Greeks after 1945 – something the Greeks are pursuing in negotiations!

Table 1 below shows the degree of ‘domestic leverage’ of the systemically important banks in major Eurozone countries that were subject to the EBA stress tests (and soon will be supervised by the ECB). It is apparent that in most countries the domestic banking system would not survive a Greek-style ‘haircut’ on public debt. (In the context of the PSI operation of March 2012, holders of Greek bonds had to accept a nominal haircut of over 50%, and on a mark-to-market basis the haircut was over 80%. It is apparent that no bank that has a sovereign exposure worth over 100% of its capital would survive such a loss.)
Table 1. Domestic sovereign debt leverage (sovereign exposure/capital)

2010 Q4 2011 Q4 2012 Q2
DE 264% 241% 235%
ES 172% 131% 137%
FR 73% 53% 61%
IT 205% 155% 176%
PL 156% 141% 115%
PT 117% 102% 100%
UK 50% 52% 50%
Source: CEPS database.

What the IMF report really shows is that debt default is the only way to restore public finances without destro
ying services to the Greek people.  Why should the Greeks be forced to pay (bailout) the banks, the very institutions that triggered the crisis in the first place?  They have paid off the banks.  Now apparently, they must also pay off the European governments that insisted that they pay the banks.

But the Greek economy will not recover for many years ahead if austerity carries on.   Greek government debts are now 75% ‘owned’ by the other EU governments as the banks, pensions funds and hedge funds have been mostly paid off.  The Greeks have no chance of repaying these loans.  The Germans and the other EU governments have decided that they need to keep Greece in the Eurozone so that the euro does not break up.  So the EU leaders will relax the fiscal targets, extend the dates for repayment of their loans into the distant future and wait and hope the Greek capitalist economy gets back on its feet at the expense of the destruction of public services, small businessesand living standards in a ‘lost decade’.  The culling of Greece’s public broadcasting network is just another casualty on the way.

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