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Greece and the Euro: What Now?

In theory, it could still work. It only requires three miracles.

Maybe the resounding “no” to the eurozone’s terms for a third bail-out in Sunday’s referendum in Greece (61 percent against) will force the euro currency’s real managers, Germany and France, to reconsider. French President Francois Hollande is already advocating a return to negotiations with Greece.

Maybe the International Monetary Fund will publicly urge the eurozone’s leaders to cancel more of Greece’s crushing load of debt. Last Thursday the IMF released a report saying that Greece needed an extra 50 billion euros over three years to roll over existing debt, and should be allowed a 20-year grace period before making any debt repayments. Even then, it said, Greece’s debt was “unsustainable”.

And maybe Greek Prime Minister Alexis Tripras will accept the terms he asked Greek voters to reject in the referendum if he can also get a commitment to a big chunk of debt relief – say around 100 billion euros, about a third of Greece’s total debt – from the eurozone authorities and the IMF. It’s all theoretically possible. It even makes good sense. But it will require radically different behaviour from all the parties involved.

Tsipras has already made one big gesture: on the morning after the referendum victory, he ditched his flamboyant finance minister, Yanis Varoufakis. The hyper-combative Varoufakis had needlessly alienated every other eurozone finance minister with his scattergun abuse, and it was hard to imagine him sitting down with his opposite numbers again after calling them all “terrorists” during the referendum campaign.

The IMF’s gesture was even bigger, if much belated. It knew the eurozone’s strategy was wrong from the time of the first bail-out in 2010, and it is finally getting ready to admit it.

Normally, when the IMF bails out a country that is over its head in debt, it insists on four things. There is always fiscal consolidation (cutting spending, collecting all the taxes, balancing the budget) and “structural reform” (making labour markets more flexible, ending subsidies, etc.). All the current Greece-eurozone negotiations have been about these issues. But the usual IMF package also includes devaluation and debt relief.

There was no debt relief at all in the 2010 bail-out, and only private-sector creditors were forced to take a “haircut” (around 30 percent) in the second bail-out in 2012. Most of Greece’s debt was owed to German and French banks, and that wasn’t touched. Indeed, 90 percent of the eurozone loans Greece has received go straight into repaying European banks.

Greece’s debt is not decreased by these transactions: it is just switched to European official bodies including the European Central Bank So the Greeks are getting no real help worth talking about, and European taxpayers are getting screwed to save European banks.

Why didn’t the IMF blow the whistle on this long ago? Because it was not taking the lead in these negotiations, and after it took part in the 2010 bail-out anyway it was deeply embarrassed. It had broken its own rules, and found it hard to admit it. It was also aware that devaluation, usually a key part of IMF bail-outs, is impossible for Greece unless it actually leaves the euro (which Greeks desperately don’t want to do).

So the usual post-bailout economic recovery didn’t happen. Over five years Greece’s debt has increased by half, its economy has shrunk by a quarter, and unemployment has risen to 25 percent (50 percent for young people). The referendum question was deliberately obscure and misleading, but most Greeks know that the current approach simply isn’t working. That’s why they voted “no” in the referendum. It was a valid choice.

If the eurozone authorities know that much of Greece’s debt can never be repaid (which they do), why don’t they just give Greece the debt relief it needs? Partly because Chancellor Angela Merkel knows that her own German voters will be angry at more “charity” funded by their taxes, whereas they stay fairly quiet so long as the debt is still on the books. And partly because other eurozone countries would see it as special treatment for Greece.

Italy, Spain, Portugal and Ireland have also been through harrowing bail-out programmes, and are still making proportionally bigger interest payments on their debts than Greece. Some other countries using the euro – Estonia, Portugal, Slovakia and Slovenia – have about the same GDP per capita as Greece, and Latvia is even poorer. They don’t see why they should pay for Greece’s folly in running up such huge debts.

“I really hope that the Greek government – if it wants to enter negotiations again – will accept that the other 18 member states of the euro can’t just go along with an unconditional haircut (debt write-off),” said Sigmar Gabriel, Germany’s vice-chancellor. “How could we then refuse it to other member states? And what would it mean for the eurozone if we did it? It would blow the eurozone apart, for sure.”

So it really isn’t possible to predict whether Tsipras and Greece will be offered a better deal or not. It’s equally impossible to say what will happen to the euro “single currency” if there is no deal and Greece crashes out of the euro in the next couple of weeks, although the eurozone authorities insist that they could weather the storm.

We do live in interesting times.
To shorten to 725 words, omit paragraphs 7, 9 and 14. (“Normally…relief”; “Greece’s…banks”); and “I really…sure”)

Greece: The Never-Ending Crisis

“The Greek government would be well-advised to act quickly – for the Greek banks, it is five minutes to midnight,” said Andreas Dombret, an executive board member of the German central bank, last weekend. And everybody whose memory extends back a few years goes: “That again? Somebody has been saying that every three months or so since 2010. Why should we believe it this time?”

The answer is that you probably shouldn’t. The ability of the European Union to dodge the issue and kick the can down the road another few months is unparallelled. But it’s the wrong question. The right one is: why is this crisis still going on five years after it began?

Normally, when a country spends itself into near-bankruptcy like Greece did, the whole cycle of crisis, default (or a tough International Monetary Fund bail-out), and recovery takes much less time than that. Whereas there’s still no end in sight for Greece, although its economy has shrunk by a quarter since 2010. But then, Greece is not a normal country. It’s a member of the European Union.

When an independent country runs out of money to pay its debts and cannot borrow any more, it has normally has two options. One is to make a deal with the IMF: in return for IMF loans to tide it over, the government promises to restructure the economy (stop subsidising favoured groups and businesses), balance the budget (collect more taxes and cut spending) and, above all, devalue the currency.

Greece has done all of that – except that it cannot devalue its currency, because it does not control it. It is locked into membership of the pan-European currency, the euro, which means that its costs stay high and foreign investment doesn’t flow in as it would after a devaluation.

There is another route out of the trap: default. If the government cannot possibly pay back all its debts, just repudiate them. You’ll be locked out of the international markets for some years, but you can only borrow at an exorbitant interest rate already, so what have you lost?

So long as the government can still raise enough in taxes to cover its own domestic spending commitments, it’s still in business. And after some years, you offer to pay all the creditors you stiffed ten cents on the dollar, they take the deal because something is better than nothing, and you can start borrowing internationally again.

A default is not necessarily a disaster. Greece has defaulted seven times before in its history, and almost every default was accompanied by a devaluation that put the economy on the road to recovery. But it has not defaulted this time, because that would almost certainly mean giving up the euro, which Greeks see as proof that they are a serious member of the mainstream European community.

Greece should never have been allowed to join the euro in the first place, but the Greek government concealed the scale of its debts and the European Union turned a blind eye to them. Then subsequent Greek governments, equally corrupt and irresponsible, exploited their euro membership to borrow a great deal more.

European banks, especially German and French ones, recklessly ignored the risk in lending to a country that was so obviously living beyond its means, because they reckoned that the central banks would bail Greece out rather than let a member of the eurozone default. There’s plenty of blame to go around, and the debt-fuelled binge went on for years, until the crash of 2008 brought the party to an end.

Greece’s debt now amounts to 175 percent of Gross Domestic Product. No other developed country has ever reached that level of debt in peacetime without eventually defaulting. But the EU goes on feeding Greece just enough money to prevent a default – and 90 percent of that money goes straight back to German, French and other European banks in debt repayments.

There is no way that Greece can ever repay its debts. Either its creditors cancel at least half its debt, or it must eventually default. Anything else is simply stretching Greece’s agony out. Indeed the Greek economy is already so badly damaged that there is some question as to whether the government could now raise enough income from domestic sources to maintain essential services after a default.

The Greeks have suffered a great deal of hardship already to stay in the euro, and they seem prepared to suffer some more. The European Union is prepared to cut them enough slack to keep them from defaulting, because its members fear the future of the euro itself if it becomes clear that countries can actually leave. However, the EU will not make enough concessions to put Greece on the road to recovery.

So this unbearable status quo will continue for a while – and eventually the Greeks will say “enough”. But it will still be five minutes to midnight for some months, and quite possibly even into next year.
To shorten to 725 words, omit paragraphs 9 and 10. (“Greece…end”)

Greece Loses, EU Wins

The first round of the battle for the euro is over, and Germany has won. The whole European Union won, really, but the Germans set the strategy. Technically, everybody just kicked the can down the road four months by extending the existing bail-out arrangements for Greece, but what was really revealed in the past week is that the Greeks can’t win. Not now, not later.

The left-wing Syriza Party stormed to power in Greece last month promising to ditch the austerity that has plunge a third of the population below the poverty line and to renegotiate the country’s massive $270 billion bail-out with the EU and the International Monetary Fund. Exhausted Greek voters just wanted an end to six years of pain and privation, and Syriza offered them hope. But it has been in retreat ever since.

In the election campaign, Syriza promised 300,000 new jobs and a big boost in the monthly minimum wage (from $658 to $853). After last week’s talks with the EU and the IMF, all that’s left is a promise to expand an existing programme that provides temporary work for the unemployed, and an “ambition” to raise the minimum wage “over time”.

Its promise to provide free electricity and subsidised food for families without incomes remains in place, but Prime Minister Alexis Tsipras’s government has promised the EU and the IMF that its “fight against the humanitarian crisis (will have) no negative fiscal effect.” In other words, it won’t spend extra money on these projects unless it makes equal cuts somewhere else.

Above all, its promise not to extend the bail-out programme had to be dropped. Instead, it got a four-month “bridging loan” that came with effectively the same harsh restrictions on Greek government spending (although Syriza was allowed to rewrite them in its own words). And that loan will expire at the end of June, just before Greece has to redeem $7 billion in bonds.

So there will be four months of attritional warfare and then another crisis – which Greece will once again lose. It will lose partly because it hasn’t actually got a very good case for special treatment, and partly because the European Union doesn’t really believe it will pull out of the euro common currency.

Greece’s debt burden is staggering – about $30,000 per capita. It can never be repaid, and some of it will eventually have to be cancelled or “rescheduled” into the indefinite future. But not now, when other euro members like Spain, Portugal and Ireland are struggling with some success to pay down their heavy but smaller debts. If Greece got such a sweet deal, everybody else would demand debt relief too.

The cause of the debt was the same in every case: the euro was a stable, low-interest currency that banks were happy to lend in, even to relatively low-income European countries that were in the midst of clearly unsustainable, debt-fuelled booms. So all the southern European EU members (and Ireland) piled in – but nobody else did it on the same scale as the Greeks.

The boom lasted for the best part of a decade after the euro currency launched in 1999. Ordinary Greeks happily bought imported German cars, French wines, Italian luxury goods and much else, while the rich and politically well connected raked off far larger sums and paid as little tax as possible. Greek governments ended up lying about the size of the country’s debts.

No less an authority than Syriza’s finance minister, Yanis Varoufakis, described the atmosphere of the time like this: “The average Greek had convinced herself that Greece was superb. A cut above the rest….Due to our exceptional ‘cunning’, Greece was managing to combine fun, sun, xenychti (late nights) and the highest GDP growth in Europe.”

Then the roof fell in after the 2008 crash, and “self-immolation followed self-congratulation, but left self-importance in the driving seat,” as Varoufakis put it.

That is why the sympathy for Greece’s plight in other EU members is limited. Moreover, the EU, and especially the Germans, have managed to convince themselves that “grexit” (Greek exit from the euro) would not be a limitless disaster.

The other PIGS (Portugal, Ireland and Spain) are in much better shape financially, and Brussels no longer fears that the Greek “contagion” will spread irresistibly to them as well. Neither does it think that a Greek departure from the euro would bring the whole edifice of the single currency tumbling down. And it knows that the vast majority of Greeks don’t want to leave either the euro or the EU – so it’s playing hardball.

When the interim deal was made public on Tuesday, Prime Minister Alexis Tsipras put the best possible face on it, saying that Greece had “won a battle, but not the war.” In fact he lost the first battle, as he was bound to. It will take him longer to lose the whole war, but that will probably happen too.
To shorten to 725 words, omit paragraphs 9, 10 and 11 (“The boom…put it”).

No Panic in Iran

10 October 2012

No Panic in Iran

By Gwynne Dyer

Iran’s currency virtually collapsed last week, and the public protests that followed in Tehran stirred memories of the massive anti-regime protests of 2009. This has caused excited speculation in the United States and its allies about the imminent fall of President Mahmoud Ahmadinejad, the abandonment of Iran’s uranium enrichment programme, or even the end of the whole Islamic regime. Don’t hold your breath.

Ahmadinejad blamed the currency crisis on the foreign sanctions that are crippling Iran’s trade, of course. His critics at home just blamed him: “The smaller part of the problem relates to sanctions while 80% of the problem is rooted in the government’s mistaken policies,” said Ali Larijani, the speaker of the Iranian parliament. But he would say that, wouldn’t he?

It’s true that Ahmadinejad has used the country’s large oil revenues to paper over some serious mistakes in running Iran’s economy, but the current crisis was caused by a steep fall in those revenues – which is directly due to the sanctions.

Four rounds of United Nations-backed trade sanctions, ostensibly meant to stop Iran from developing nuclear weapons, had already cut the country’s oil exports from 2.5 million barrels a day to 1.5 million b/d by early this year.

Then came new American sanctions that blocked any international bank doing business in Iran from access to the immense US market – so most of them ended their dealings with Iran.

In July came new European Union sanctions banning oil imports from Iran entirely. Since Europe was taking one-fifth of Iran’s remaining oil exports, that blow was enough to send the Iranian rial into free-fall.

Until 2009, the rate of exchange was fairly stable at about 10,000 rials to the dollar. Then it started to fall slowly, and then faster – and in a hectic few days last week, it tumbled a further 40 percent to a low of 35,000 rials to the dollar. That was when the protests began in Tehran’s Grand Bazaar, whose merchants were amongst the strongest supporters of the revolution in 1979.

The protests were contained without any deaths, and the shops in the bazaar are now open again. The rial has recovered slightly, stabilising at around 28,000 to the dollar. But that is one-third of what it was worth three years ago, and the effects are being felt in almost every household in the country. Formerly comfortable middle-class families are scrambling to put food on the table, and the poor are really suffering.

So the sanctions are working, in the sense that they are hurting people. But what are they accomplishing in terms of their stated purpose of forcing Iran to abandon its nuclear weapons programme? More importantly, perhaps, what are they achieving in terms of their UNSTATED purpose: triggering an uprising that overthrows the whole Islamic regime?

First of all, Iran doesn’t have a nuclear weapons programme. The International Atomic Energy Agency (IAEA) and the US and Israeli intelligence service are all agreed on that, although the public debate on the issue generally assumes the contrary. Iran says it is developing its ability to enrich uranium fuel for use in reactors, which is perfectly legal under the Nuclear Non-Proliferation Treaty.

It’s true that the same technologies give the owner the ability to enrich uranium further, to weapons grade, and there is good reason to think that Iran wants that capability. It’s probably not planning to make nuclear weapons now, but it does want that “threshold capability” in case things get really bad in the region and it needs a nuclear deterrent in a hurry.

A “threshold nuclear weapons capability” (but no nuclear weapons) is still not illegal. Other countries with enrichment facilities include Argentina, Brazil, Germany, Japan, and the Netherlands. Moreover, Iran’s stock of reactor-grade enriched uranium is under permanent IAEA supervision, and alarms would go off instantly if it started to upgrade that stock to weapons grade.

Israel’s current government has talked itself into a state of existential panic over Iran’s uranium enrichment programme, but the US government certainly doesn’t believe that Iran has any immediate plans to build nuclear weapons. So what are these sanctions really about?

Overthrowing the Iranian regime, of course. American sanctions against Iran long predate any concerns about Iranian nuclear weapons, and would not be ended even if Iran stopped all work on uranium enrichment tomorrow. The US legislation that imposes the sanctions makes that very clear.

Before sanctions are lifted, the president must certify to Congress that Iran has “released all political prisoners and detainees; ceased its…violence and abuse of Iranian citizens engaging in peaceful political activity; investigated the killings and abuse of peaceful political activists…and prosecuted those responsible; and made progress toward establishing an independent judiciary.” In other words, it must dismantle the regime.

Since stopping the enrichment programme would not end the sanctions, why would the Iranian government even consider doing so? And will the Iranian people rise up and overthrow the regime because sanctions are making their daily lives very difficult? Even anti-regime Iranians are proud and patriotic people, and the likelihood that they will yield to foreign pressures in that way is approximately zero.


To shorten to 725 words, omit paragraphs 5, 9 and 10. (“Then…Iran”; and “It’s true…grade”)