Eurogroup therapy for Greece
Yesterday at about 5am, I think we had a breathtaking moment in world economics.
Let me first try to give you the best possible spin on Greece’s bailout. Greece awakes today with its debts at 121 per cent rather than 129 per cent. The bankers, often thought of as the main beneficiaries of these bailouts, well, they got burnt. At least three times, finance ministers broke up their deliberations to get the Greeks to squeeze more out of negotiations with the bankers. The end result: a net present value loss on their Greek loans of up to 74 per cent. So bankers silly enough to treat Greece as if it were Germany, have taken a short back and sides rather than a haircut. Yet everyone seems to be maintaining the notion that this will be accepted “voluntarily” and therefore will not qualify as a formal “default”.
Still, that did not get Greece’s debt levels as a proportion of GDP to the “magic” 120 per cent level which Europe has decided is “sustainable”. So the interest rate on the Greek bailout loans was lowered again (will Portugal and Ireland get the same deal?). Then much of the remaining legwork was achieved by the European Central Bank allowing the Eurozone’s central banks (Bank of Spain, the Banque de France etc) to realise a profit on the Greek loans they had been buying over the past two years to lower Greek bond rates. The “profit”, some €12 billion, will be distributed to member states and then given back to Greece, essentially, knocking 5.5 percentage points of Greece’s 2020 debt levels, and getting it down to 120.5 per cent.
Then the quid pro quo. Greece will have to accept making three months worth of billions of pounds of debt servicing interest payments in a separate segregated account to ensure repaying its debts comes before spending decisions of the Greek parliament. This will be passed as a law within two months (before an election) and then written into Greece’s constitution as soon as possible. More than that, the troika (the IMF, EU and ECB) will have a continuous presence in Athens to “help” Greece with keeping to the plan. So it sounds a lot like the “permanent Troika presence” that the Dutch finance minister told me about yesterday. But it is rather sugar coated.
The EC vice-president, Ollie Rehn, made a stark admission about Greece’s original bailout yesterday, when he told us at 6am: “We underestimated the challenges posed by weak administrative capacity and weak political unity in Greece.” The mea culpas also stretched to the IMF who talked of how this was a plan for “growth and competitiveness” as well as fiscal consolidation.
Apart from that, though, there are a ton of pitfalls arising from this deal, from Greek sovereignty to the remarkable leaked debt (un)sustainability study. More on that shortly.
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There are 9 comments on this post
Faisal,
The bankers didn’t get “burned.”
WE GOT “BURNED.”
Ultimately it is our money. They are merely clerks who administer a system and produce nothing.
For all the esoteric details and self-congratulatory “sophistication,” that’s the bottom line.
As for Christine Lagarde, if she was a chocolate she’d lick herself. I wouldn’t trust her and her pals to empty my bin. Cheap IMF hoods the lot of them.
That the banks agreed to 74% is not a surprise if you consider that the main French Banks made provisions of 75%!
Now there is one thing which is not mentioned: part of the debt is owed by Greek banks who will not afford to accept the 74% . So they will need to be helped by the European Central Bank. Which means that the EU is paying for them!!!!
But the worse of it is that this bailout will not solve anything; very soon we shall be facing the same problem because no growth means no solution and if hudge reduction of incomes means no growth!
Regarding the Greek economy beeing monitored by the EU , the Greeks are used of that kind of situation ; during the war the German army did it ; they ruined the economy stole the gold of the Central Bank and left . The EU will do the same.
Now the EU must allocate Objective One status to Greece. Which implies loads of EU social and regional fund allocations. Because Greek average incomes have fallen steeply and may even have fallen to eastern European levels.
Moreover, Greek Banks should be allowed to access the very cheap ECB loans to re-capitalise their balance sheets. I’d prefer them to issue new bank shares to the ECB – in effect ‘Europeanise’ them. Just like the UK ‘nationalised’ RBS, Lloyds and Northern Rock etc.
We also need to support the registration of the earners in Greece’s ‘black’ economy, and bring them into some sort of tax net. With such an huge coast line at the fringe of the EU, Greece needs EU admin help with gathering its taxes. Moreover, the Greek health system is paying too much to Big Pharma and needs help to get those bills down.
In summary. Greece now needs OUR EU HELP to avoid sinking under its own debts.
What I love about Islam’s posts on Greece is that they are careful no to mention the fact that the country is being ruled by a group of unelected financial oligarchs. He says little about the fact that Papandreous was forced out of power after promising a referendum on the IMF’s austerity package. He says nothing about the fact that Papademos is nothing more than a stooge of banking terrorists intent on inflicting the maximum possible damage on the Greek nation. And he remains curiously silent on the fact that austerity is simply a means by which the rich technocrats – who caused the crisis – can move their debts onto the shoulders of those already struggling to make ends meet.
Now I wonder why Islam does this? Could it be that he spends so much time embedded in the financial community that he doesn’t realise the real social effects of economic policy? Could it be that he buys into neoliberal economics and thinks that recession is just the natural product of capitalism (in which case he’s an idiot)? Or could it be that, when all is said and one, he thinks that most people have brought the crisis on themselves? It is hard to judge the reasoning behind his apparent…
The Greek “deal” is a monstrous sham to please the Eurocrat elite. Yes, the bankers got burned as they deserved but there is an awful lot more burning yet to come and we will all end up paying as long as the EU can do what it likes with no democratic accountability whatsoever.
Greece’s only hope of salvation is to leave the Euro, devalue the new drachma heavily and default on their debt. That will be very painful but not nearly so bad as the alternative they currently face which is years and years of economic failure (read poverty for ordinary Greeks) tied to a currency way overvalued for their needs and long term inability to attract funding for inward investment.
Faisal,
Why aren’t you on to this:
http://www.youtube.com/watch?v=eL5hqvTWkYg
Scared?
I cannot understand why nobody trusts the Greeks to do what they say they are going to do.
Just because they have never done what they said they were going to do in the past, and even produced fraudulent accounts to get into the Euro, does not mean. . .
Oh. OK. I suppose it does really.
The probleme is that the Germans are accusing the Greeks of not doing much efforts to sell the 50 Billions Euros of state assets they are supposed to sell!
And the Greeks are not rushing because they noticed that German companies applied to buy the best state owned companies!
So in fact the Greeks are accusing the Germans to try to buy Greece on the cheap ; which is most probably true; and nowadays in Greece nobody wants to see more German conmpanies.
Faisal,
A bit off topic but the effect of QE on pensions is in the news today.
How about you doing a blog post or C4 slot about how Mervyn King is destroying everybody else’s pension but as his is inflation linked he is in clover?
Between 2008 and 2009 he got a 10% rise from £179k to £198k and his pension pot grew by over £500k to £5.3m. As ths is inflation linked his pension pot since then must presumably be rising exponentially to maintain his £198k pension
http://www.bankofengland.co.uk/publications/Documents/annualreport/2009report.pdf
So as far as Mervyn is concerned
His pension, tick
Any London property, tick
Any share portfolio since 2009, tick
As far as most other people are concerned
Interest on life saving and value of life saving – trashed
Every £ earned – devalued
Pension annuities – trashed
Prospects of lots of affordable housing – delayed until QE ends, people buying now at bubble prices to become debt slaves to banks as they raise mortgage rates – work devalued against property