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Greece: All Passion Spent

“We understood the responsibility to stay alive over choosing suicide,” said Greek Prime Minister Alexis Tsipras, defending his decision to end his rebellion against the European Union’s tough terms for bailing out the Greek economy. He needed to defend it, since he finally gave in to even harsher terms. Sometimes defiance at all costs is a mistake.

If Tsipras really knew he was going to lose his David-and-Goliath struggle with the EU eventually, shouldn’t he have settled earlier for better terms? If he didn’t realize that, what was he doing in the prime minister’s office? So now the firebrand who turned Greek politics upside down is a bit of a zombie.

Back in mid-August, when Tsipras called the snap election that will be held this Sunday, he was still basking in the after-glow of the defiant ‘No’ that Greek voters gave to austerity in his July referendum, and the opinion polls gave his Syriza party 42 per cent support. At least Tsipras had stood up to the wicked Germans and their rich allies in the EU, even if it meant that the banks closed for three weeks and the economy went into a nosedive.

But a lot of Greeks are having sober second thoughts. Tsipras’s quixotic battle with the EU killed what was starting to look like a modest outbreak of growth in the Greek economy, and analysts are now predicting a further decline of up to four per cent in Greek GDP this year. Unemployment is still at 25 per cent (50 per cent for young people). Was it all worth it?

Maybe not, and that thought may even have occurred to Alexis Tsipras by now. He was certainly very subdued in his television debate with Vangelis Meimarakis, leader of the New Democracy Party, last Sunday, and well he might be.

In the past six weeks, Tsipras’s own Syriza party has split, with 25 of its members of parliament forming a new Popular Unity party. They condemn him for accepting austerity and want Greece to quit the euro instead. They have taken a lot of Syriza’s former voters with them, so Syriza and the centre-right New Democracy party are now neck-and-neck in the polls, with less than one percentage point between them.

That one percentage point matters a lot, since in Greek elections the party that wins the most seats is then given another 50 seats as a bonus. But even if Syriza is that party, it will still be very hard to form a new government after Sunday’s election.

During the last debate, Tsipras rejected Vangelis Meimarakis’s call for a broad coalition, saying that it would be “unnatural” for his party and New Democracy to be in government together. It’s hard to see what would be unnatural about it, considering the deal Tsipras signed with the EU, but he is still in denial about what he has done.

Tsipras, like many, maybe most Greeks, wants to have his cake and eat it too. He wants to keep the euro, because he calculates that Greece would have to leave the European Union if it went back to its old currency, the drachma. That is not technically inevitable, but most Greeks reckon it is very likely, and they desperately want to stay in the EU.

But neither Tsiras nor Greek voters want to live with perpetual austerity, which is probably the price of staying in the euro. Countries like Greece, that have run up huge foreign debts, usually deal with the problem by devaluing their currency, but there is no way for Greece to devalue the euro.

There is one way out of this dilemma, of course: get your creditors to give you “debt relief.” If they would agree to cut the amount Greece owes by half, it could probably service the remainder of its debt and still grow its economy. In fact, that’s exactly what Christine Lagarde, managing director of the International Monetary Fund (IMF) told the eurozone finance ministers last month.

“I remain firmly of the view that Greece’s debt has become unsustainable,” she said. (It’s now heading for 200 per cent of GDP.)

So she called on the European Union to make “concrete commitments … to provide significant debt relief, well beyond what has been considered so far.”

The rich eurozone countries don’t want to do that, because other highly indebted members of the EU would then demand the same relief. If they refuse to do it for Greece, however, the IMF will not take part in the 86-billion-euro bailout of the Greek government and banks.

If the IMF won’t play, several EU parliaments (notably the German) may not ratify the deal, whose final details must be settled next month. But a solution will probably be found in the end, most likely by giving Greece a very long grace period, say 30 years, during which it only has to pay the interest, not the principal, on a large part of its debt.

But it’s increasingly unlikely that Alexis Tsipras will be the Greek prime minister who negotiates that deal — even though you could argue that it was really his defiance and brinkmanship that forced Greece’s creditors to consider such a deal at all.

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.
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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.
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To shorten to 725 words, omit paragraphs 9 and 10. (“Greece…end”)

International Finance: Nowhere to Hide

24 June 2011

International Finance: Nowhere to Hide

By Gwynne Dyer

The deadline is now 3 July. That’s when the European Union’s finance ministers meet again, and by then the Greek parliament should have passed legislation mandating 28 billion euros of spending cuts and tax rises over the next five years. If it goes through each of the ten million Greeks will ultimately be about 2,800 euros (US$4,000) poorer.

That’s why they’re rioting in the street these days in Athens. But unless the European finance ministers approve the plan, Greece will not get the next 12-billion-euro (US$17 billion) instalment of the current EU-International Monetary Fund bail-out package in July, and it will default on its gigantic debt.

As the IMF recently warned, “A disorderly outcome cannot be excluded.” It was hinting that the euro itself might crash, taking the European or even the global economy down with it – and yet China seems strangely unworried.

Used-car salesmen know that if you don’t give the customers credit, they won’t buy your cars. For the past decade China has operated on the same principle, lending the US government money in order to keep the American dollar high and the orders for Chinese goods flowing. Beijing now holds $1.15 trillion of US treasury bills – but as of late last year, it has stopped expanding its US dollar holdings.

This makes sense, given that the US budget deficit is 11 percent of GDP. The US is so deeply indebted that it might be tempted to inflate its way out of its problem, and nobody wants to be sitting on a pile of a trillion US dollars when the value of the currency collapses. What is astonishing is that China is now buying large amounts of euros instead. So what do the Chinese know that the pundits don’t?

They know that there is nowhere to hide. Holding euros is risky, but holding US dollars is riskier, and the pound and the yen are only marginally safer. China has to put its money somewhere, and it calculates that the euro is not quite as bad a bet as it seems. Even though Greece certainly will default at some point, and probably quite soon.

Greece can never repay the 300 billion euros (US$425 billion) it owes, no matter how harsh the austerity measures that it forces on its own population. If it still had its old currency, it could make the debt shrink by printing more drachmas and inflating the currency, but it’s stuck with the euro.

Like other Mediterranean countries that joined the euro, it has a less efficient economy than the big northern European countries that dominate the currency. It used to stay competitive by letting inflation rip, thus making its exports cheaper in foreign markets. But the European Central Bank keeps the euro’s inflation rate low, so now it can’t do that.

It’s a trap. The euro’s low inflation rate meant a low interest rate, so although Greece could not keep its economy competitive, it could borrow money very cheaply. And since the euro’s value is backed by much stronger economies the banks were willing to lend Greece large sums. Ridiculously large sums, in fact. So large that Greece could never pay them back.

Didn’t the banks realise this? Of course they did – but they reckoned that the richer countries in the euro zone would cover Greece’s debts in order to preserve the integrity of the currency. That is what is happening now.

The banks stopped lending Greece money after 2008, and the European Union stepped in to prevent a default. The enormous sums that it and the IMF are now lending Greece (at a high interest rate) are immediately handed over to the foreign banks that let the situation get so far out of hand in the first place. But the political price extracted from Greece for this bail-out is savage cuts in the country’s budget and a soaring unemployment rate.

A lot of Greeks don’t see why they should pay such a high price for this charade. They are far from blameless – they cynically milked the EU system for a long time – but their rage is entirely understandable. So at some point Greece will decide to default on its debt.

The money that the EU and the IMF are currently giving to the banks by laundering it through Greece will then have to be shovelled directly into their coffers by the financial authorities, embarrassing though that is. And Greece, using heavily devalued drachmas. will still face a long period of austerity and falling living standards, but at least it will be in charge of its own fate.

The euro will survive all this because everybody knows that the default is coming, and is quietly making arrangements to contain the damage. China is putting its money in the right place.
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To shorten to 725 words, omit paragraph 8. (“Like…that”)

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.