The
Greek left-wing party Syriza is expected to take 145 seats in the
300-member parliament, the Interior Ministry said after counting 66
percent of the vote cast in the snap election Sunday. The leader of
New Democracy, Syriza’s main rival in the polling, has already
conceded defeat.
“The
electoral result appears to be concluding with Syriza and Mr Tspiras
in the lead,”
New Democracy leader Vangelis Meimarakis said. “I
congratulate him and urge him to create the government which is
needed and come to parliament.”
The
conservatives themselves have so far secured 75 seats
Syriza
is still falling short of an outright majority, meaning it will need
coalition partners to form a government. The party hopes to complete
this task within three days.
“I
want to repeat what Tsipras said, which is that a government will be
formed within three days,”
a source within Syriza told Reuters.
Greece’s
leftist Syriza party is most likely has turned to its former
coalition partner – the right-wing Independent Greeks. The move
will restore the state of affairs that brought Alexis Tsipras to
power in the first place nine months ago.
Independent
“From
tomorrow morning, with Alexis Tsipras as Prime Minister we will form
a government,” Independent
Greeks president Panos Kammenos told reporters.
With 3.6 percent
of the vote Kammenos’ party secured 10 seats.
The
bailout agreement reached by Tsipras and EU leaders will be
implemented, the newly-elected party promised. However, “tough
negotiations” on
the subject will continue, party spokeswoman said, Reuters reported.
“This
will be a four-year term government with a strong parliamentary
majority, which will implement the program it promised,” the
news agency cited Olga Gerovassili as saying.
“It
will continue the tough negotiations with the lenders, realizing that
this is the beginning of a battle,” she
added.
“In
Europe today, Greece and the Greek people are synonymous with
resistance and dignity, and this struggle will be continued together
for another four years,” Tsipras
said to cheering crowds, standing in a central Athens square.
“We
have difficulties ahead, but we are also on firm ground,” he
added. “We
won’t recover from the struggle by magic, but it can happen with
hard work,” he dded.
The Syriza’s closest pursuer New Democracy is
standing at 28.12 percent so far.
The
far-right Golden Dawn party, led by Nikolaos Michaloliakos, came in
third with 7.09 percent and only 19 seats in Parliament. The party,
labeled as “neo-Nazi” and “fascist” by
the media, has attracted voters with its strong anti-refugee and
anti-austerity stance.
The
snap elections were triggered by the former Greek Prime Minister
Alexis Tsipras who resigned last month after he managed to reach an
agreement with the EU and kept Greece in the eurozone, followed by a
split within Syriza.
Prime
Minister Alexis Tsipras has confirmed his resignation and early
election plans for Greece in a live address. The move comes after
Athens managed to pay a huge chunk of its €3.4 billion debt to the
ECB.
“The
political mandate of the January 25 elections has exhausted its
limits and now the Greek people have to have their say,”
Tsipras said in a televised address Thursday night.
Tsipras
said that he will now be looking for the Greek people to vote to
continue the government program of his leftist Syriza party.
Local
media have been speculating about the possible upcoming announcement
since Thursday morning. Citing a source in the government, Reuters
reported that Tsipras would propose holding the snap elections on
September 20.
The
resignation was handed in immediately after the address. However, no
specific date for the snap poll was mentioned. However, Tsipras
requested that President Prokopis Pavlopoulos hold the elections as
soon as possible.
Earlier
in the day, Finance Minister Euclid Tsakalotos told ERT that this
time the election “will
not be the same as those of 2012, because now there is agreement, and
there is a framework for the recapitalization of banks."
On
Friday, eurozone finance ministers agreed to a third bailout program
for the crisis-stricken country. Athens will receive a total of €86
billion over three years.
The
same day, the Greek parliament approved a draft law enacting a third
bailout plan. Forty-three members of Tsipras’s Syriza party,
including former Finance Minister Yanis Varoufakis, voted against the
bill or abstained. The party holds 149 seats in the parliament.
Skourletis
said that Greek PM should move faster: "I
would say elections first, then the party congress."
According
to a Syriza lawmaker in the European Parliament, Dimitris
Papadimoulis, the elections "whenever
they are announced by the government, will provide a stable governing
solution.”
“My
feeling is that Syriza will have an absolute majority,"
he told Mega TV.
‘Snap
election – smart move by Tsipras’
Syriza
party campaigner, Anastasia Giamali, said that announcing the vote
was “a very smart move” by Tsipras considering the current
situation in Greece and its political system.
“I
think that the main reason Alexis Tsipras declared a snap election is
to reduce the negative side effects for the people that voted for him
and Syriza – the unemployed, the working classes, the poor, the
pensioners,” she
told RT.
Giamali
defended the bailout deal Greece signed with the international
creditors, stressing that it “isn’t
the best agreement possible, but it’s a far better agreement that
any previous government has brought up.”
According
to the campaigner, Tsipras and Syriza “had
no choice but to accept” the
EU-IMF terms, as they negotiated “in
an environment of banking and economic asphyxiation forced on the
country.”
“And
at the same time they promised, going into this election, to tackle
tax evasion, corruption and bureaucracy – and this are problems
that are… the causes of many problems in Greece and the crisis, to
an extent,” she
said.
Former
Greek Diplomat and ambassador, Leonidas Chrysanthopoulos, told RT
that people in Greece are starting to realize that they can’t both
remain in the euro and avoid austerity.
“This
is maybe one reason, why Tsipras is making the snap election so
quickly… so that the people won’t be attacked by all the
austerity measures that will come in basically in October,” he
explained.
The
foreign creditors “will
be worried [because of the upcoming election], basically, because
from now until … the elections will be held no measure that has
been imposed upon Greece will be implemented because basically we
will have a caretaker government that will not have the power to
implement these measures,” Chrysanthopoulos
said.
Though
there has still be no agreement, it seems that we are again looking
at something like the situation that we saw in February.
Briefly,
Tsipras talks about "red lines", makes brave speeches in
the Greek parliament about the creditors "pillaging Greece",
flirts with Moscow - and then backs down.
No
doubt as we saw after the last climbdown in February a host of
economists and commentators sympathetic to Tsipras and Syriza are
going to tell us that there was no climbdown and that Tsipras has not
crossed his "red lines" - saying so on the basis of various
technical points in the proposals.
I
am afraid based on reports I am reading there is no doubt he has. He
said - or gave the impression - that further pension cuts were out of
the question. He is now offering cuts in pension entitlements
amounting to 0.4% of GDP this year and 1% of GDP next year. However
you spin it, that is a clear crossing of what he gave people in
Greece to think were his immoveable "red lines"
Whilst
this is less than what the IMF-EU were demanding, it is not
significantly so and again, as was the case last February, I can't
but think that more conciliatory diplomacy would have achieved the
same result without all the anger and trouble.
I
am starting to think that this is going to be the recurring pattern
with Tsipras. He knows how to talk the talk, but he can't bring
himself to walk the walk.
Ultimately
he is not prepared to face a Grexit, which means the IMF-EU have him
over a barrel.
There
is predictably some mumbled talk from Merkel that in return for
backing down Tsipras might get at some unspecified future time the
promise of a possible debt write-off. With Schauble and most of the
other Eurozone finance ministers implacably opposed to the idea, I
wouldn't count on it. As it happens the same promise was made before
to Samaras and it was never honoured. Besides how big would such a
write-off be?
If it is merely a token amount then it is not worth
having.
It
would be wrong to say that I welcome a Grexit. I am fully conscious
of the appalling effects at least in the short term.
However a Grexit
would at least offer some hope of an end to this never-ending drama.
It looks like my hopes that we might at last be there were premature.
Assuming - as must now be likely - that some sort of deal is done in
the next few days to tide Greece over the next few months, it looks
like we must all prepare ourselves for the next instalment of this
ghastly farce some time in the autumn.
Greece
Capitulates: Tsipras Crosses "Red Line", Will Accept
Bailout Extension
We’ve
long said that negotiations between Greece and its creditors are more
a matter of politics than they are a matter of economics or finance.
From
the troika’s perspective, breaking Greece and forcing PM Alexis
Tsipras to concede to pension cuts and a VAT hike is paramount, and
not necessarily because anyone believes these measures will put the
perpetually indebted periphery country on a sustainable fiscal path,
but because of the message such concessions would send to Syriza
sympathizers in Spain and Portugal. In short, the troika cannot set a
precedent of allowing debtor nations to obtain austerity concessions
by threatening to expose the euro as dissoluble.
On
the Greek side of the table, Tsipras must convince Syriza party
hardliners that concessions are preferable to Grexit and the economic
malaise that would come with redenomination. For some on the Left
Platform, compromising the party’s electoral mandate is simply not
an option and it’s these lawmakers (who just two weeks ago voted to
leave the euro and default) that Tsipras will need to sway or else
attempt to push an unpopular agreement through parliament a gambit
which implicitly assumes that the ensuing political upheaval and
voter backlash is preferable to economic collapse. The problem with
the latter approach is that it effectively means the troika will have
succeeded in using financial leverage to subvert the democratic
process, an eventuality that die hard Syriza hardliners are in no
mood to suffer.
After
one final attempt to table a proposal that retains some semblance of
Tsipras' defiant posturing, it appears he may have finally broken
after a meeting with ECB chief Mario Draghi where is sounds as though
the central bank warned the PM that without concessions, ELA to Greek
banks would be cut off and that, of course, would mean game over as
Greeks would take to the streets en masse.
From Bloomberg:
European
Central Bank President Mario Draghi told Greek Prime Minister Alexis
Tsipras in meeting on Monday in Brussels that the ECB will help
secure the country’s banking system as long Greece is in an aid
program, Greek government official tells reporters on the
condition of anonymity.
And
shortly thereafter (via AFP):
Greece
has accepted the principle of extending its current bailout
programme which expires at the end of the month so as to keep it
afloat while a long-term debt solution is worked out, Greek
government sources said Monday.
"For
the first time, we accept the extension of the programme as the only
way forward," one source said as eurozone leaders discussed
Greece's future in the single currency ahead of the June 30 end of
its current aid programme.
And
so, we turn to politics or, more appropriately, Greek politics
because the fate of Greece now looks to rest in the hands of Syriza's
far left factions. Dow Jones has more:
To
avert a default and possible exit from the eurozone, Greek Prime
Minister Alexis Tsipras must sell Germany'schancellor, Angela
Merkel, on his plan to fix Greece's finances.
Then
he needs to persuade Vassilis Chatzilamprou.
But
out at the Resistance Festival, an annual gathering of Greece's far
left, the lawmaker from Mr. Tsipras's left- wing Syriza party said he
was in no mood for submission.
"We
cannot accept strict, recessionary measures," Mr. Chatzilamprou
warned. It was after midnight Sunday, and the weekend festival was
winding down. "People have now reached their limits."
Syriza
isn't a traditional party but a coalition of left-wing groups with an
intricate family tree formed out of doctrinal splinters and
squabbles. It is those many, disparate factions that Mr. Tsipras must
also satisfy with any potential bailout agreement with Greece's
creditors.
Mr.
Chatzilamprou, for instance, is a member of the Communist
Organization of Greece, which is an outgrowth of the Organization of
Marxist-Leninists of Greece. It is distinct from the Communist
Tendency, which has a Trotskyite bent. (Neither should be confused
with the Communist Party of Greece, which is outside Syrzia.)
That
unusual composition has made it especially hard for Mr. Tspiras to
strike a deal with eurozone and International Monetary Fund
officials. "The people who are responsible for the negotiation
move within a frame that is determined by the central committee of
the party," says Alekos Kalyvis, a longtime union official who
is on the committee and responsible for its economic-policy
portfolio.
The
negotiators have some latitude to make decisions, he said, "but
this shouldn't be interpreted as if they have a blank check from the
party--neither them nor Tspiras."
Many
of Syriza's factions regard the party's rise as a epochal moment for
the left--and any compromise on a bailout as a deep betrayal of its
principles.
Stathis
Leoutsakos, another Syriza member of Parliament, said Germany and the
other creditor countries are determined to defeat Syriza. "In
my opinion, their aim is to humiliate the Greek government," he
says. "They want the message that no other politics are accepted
in the eurozone."
It
is also uncertain exactly what kind of deal would be acceptable to
the left wing of Syriza. The party's argument that fiscal
austerity--steep budget cuts and tax increases--has deepened Greece's
economic slump has been central to its popular success.
Most
on the party's left wing reject any additional pension and wage cuts
outright, saying Greek workers have suffered enough in years of
depression since Greece's first bailout.
Mr.
Leoutsakos, like others on the far left, also insist that at least
some of Greece's debt must be forgiven. "In order to service it,
we'd need to execute the Greek people," he said. "And
nobody in Syriza is willing to do it."
There
is also the question of Mr. Tsipras's future as prime minister if he
does compromise. No one here is unaware of the fates of former Greek
premiers George Papandreou and Antonis Samaras. Both signed bailout
agreements with Europe.
Both
lost their jobs, and Mr. Papandreou's party has been all but
destroyed.
Going
back on his leftist principals "would be political suicide for
Tsipras," Mr. Chatzilamprou said. "It would mean he is also
recyclable: They could replace him with someone else."
And
DB has more color on the political fight Tsipras faces in the coming
weeks:
Subject
to further progress this week, focus is likely to shift very quickly
to the Greek domestic political front. Disbursements for Greece
ahead of the IMF tranche due at the end of the month will require
domestic parliamentary approval. It is likely that the Greek PM would
first attempt to obtain approval from the SYRIZA party's 200-strong
Central Committee before bringing an agreement to parliament. In the
event of failure at the party level, a referendum would likely be
called. In the event of party approval, a vote would be likely taken
to the parliamentary floor. Depending on the process adopted, such a
vote may take between 2 days to a week.
It
will remain a major challenge for the Greek PM to successfully pass a
potential agreement through parliament. Local press reports that
10-40 SYRIZA MPs are likely to dissent (the government has an 11 MP
majority), while overnight the Independent Greeks junior coalition
partner (12 MPs) has also raised the possibility of withdrawing from
government. How the political process plays out largely depends
on the number of MPs the current government loses. A loss of less
than thirty parliamentarians may force a change in coalition to
include the two small moderate parties in parliament (PASOK and the
River) jointly controlling 30 MPs. More substantial losses requiring
the support of major opposition party New Democracy would open up the
possibility of broader changes to the government or a referendum.
We'll
close with what we said last week about the tough choice the PM
faces: "Tsipras must decide how he wants history to
remember his tenure as Prime Minister. Either he will be the leader
who allowed Greece to crash out of the euro on its way to a
redomination-driven economic collapse, or he will go down as the
fiery advocate for change who caved under pressure and allowed the
troika to stamp out democracy in the place where it was born."
*
* *
And
because this is Europe after all, someone had to deny the "rumors":
MERKEL
SAYS THERE WAS NO DISCUSSION OF EXTENSION SCENARIOS ON GREEK BAILOUT
Thousands
have gathered in front of the Greek Parliament in support of Athens’s
place in the eurozone, calling for a debt agreement to be reached as
EU leaders and international creditors race against time to avert the
country’s looming default.
Greece
Will Not Sign Unachievable Plan With Creditors – Finance Minister
Greek
Finance Minister Yanis Varoufakis describes the Greek financial
crisis as a European-wide problem which should be settled via
European institutions. He said he would participate in a Eurogroup
meeting on Thursday.
Greece
will not ink with creditors an agreement which presumes unachievable
financial obligations, the country’s Finance Minister Yanis
Varoufakis said in a TV interview on Sunday.
"The
point is that we will not agree with an unachievable fiscal plan,"
the minister stated.
He
also commented on the current differences over the target budget
surplus. The target surplus of 1.2-1.5 percent was possible in March,
but now it is impossible, he said.
The
minister underscored that technically it is easy to hold
negotiations, however political decisions are also important.
"A
compromise between the two parties is technically easy to achieve,
but political will is highly needed to make the compromise
sustainable," Varoufakis said.
He
said that Greece has already agreed to numerous compromises.
Varoufakis
describes the Greek financial crisis as a European-wide problem which
should be settled via European institutions. He said he would
participate in a Eurogroup meeting on Thursday.
The
minister again rebuffed the recent claims that he was banned from the
negotiations saying they are "undermining of government’s
negotiation efforts."
Varoufakis
also answered a question on the possibility of snap elections saying:
"It would be a terrible mistake if we hold elections or a
referendum, because we have just been elected by our people."
Greece's
total debt is currently estimated at $350 billion, with $270 billion
owed to its top three major creditors — the European Union, the
European Central Bank and the IMF.
The
new round of talks between Greece and the troika starts on Sunday.
During the negotiations, Greece will present a set of financial
measures. They are supposed to save €4 billion for the country’s
budget while the creditors are demanding austerity measures of €5.8
billion.
Both
sides in the Greece/creditor negotiations have said they have reached
the limits of what they are prepared to give.
Talks
on Sunday fell apart after a mere 45 minutes.
The immediate impasse is an inability to bridge the gap on what the
IMF surgically calls “making the numbers work” or meeting the
creditor’s primary surplus target of 1% for this year. Greece had
proposed in its 47 page document a target of 0.6%, which it increased
to 0.75%. The difference between the two sides the path by which
Greece gets to a stringent primary surplus level of 3.5% a year by
2018 is a bit under a €2 billion per year gap. The lenders pushed
for more cuts in pensions, higher taxes on energy, and VAT increases,
and the Greek side would not budge.
The
locus of decision-making is again at the political level.
The key date is JUne 18, when the Eurogroup meets. However, ECB chief
Mario Draghi is speaking at the EU parliament today at 13:00 GMT, and
the ECB also has one of its regularly scheduled two week meetings
this Wednesday at which they decide whether or not to increase the
ELA.
Even
though an IMF default is not a bright white line, June 30 is not just
the date when Greece will default absent somehow cinching a deal, but
it is also when the bailout will expire unless the Eurozone countries
all agree to extend it. The sour mood on both sides makes that seem
well-nigh impossible. More former supporters of Greece are siding
with the Troika. For instance, Sigmar Gabriel, the head of Germany’s
Social Democratic party, which has taken a more sympathetic stance
towards Greece, took a much harsher tone in an op-ed in Bild over the
weekend. A
translation from the Financial Times:
“The
game theorists of the Greek government are in the process of gambling
away the future of their country…Europe and Germany will not let
themselves be blackmailed. And we will not let the exaggerated
electoral pledges of a partly-communist government be paid for by
German workers and their families.“
The
key creditors all appear to have reconciled themselves to loss
recognition.
One of the fallacies we’ve seen in both media and financial
commentary is that a Greek default will trigger a loss. Assuming the
creditors don’t have a way to finesse it, what it instead triggers
is loss recognition and a wrangle over who absorbs how much of it.
Even
though the financial media keeps citing the face amount of Greek
debt, that’s not what is at issue. Like a house that someone bought
at $200,000 but is now worth $90,000, everyone knows that Greek loans
are less than their face amount. As we’ve stressed, they’ve
already been cut in economic terms by extensions of maturities and
reductions of interest rates. The creditors fully expected to take
more economic losses; had Greece gotten through the bailout and
gotten its €7.2 billion in bailout funds, it was set to roll right
into a new negotiation over debt levels, which the lenders have
called the third bailout (with the 2010 and 2012 rescues as the
predecessors; confusingly to those without a scorecard, the €7.2
billion “bailout” at issue now is part of the previous deal).
Good
economics tells us that the Greek debt burden should have had a
severe haircut three years ago at the latest. That’s not what
happened and yes, that was a mistake. However, now that everyone’s
been watching this for years there’s just no possible political
manner in which this demand could be accommodated. Because the
citizens in those other eurozone countries understand all to well
that it is their tax money which has been lent to Greece. And if
there’s a haircut then it’s their money that is being lost.
Whether this is true or not doesn’t matter: but the Northern
Europeans view the Greeks as work shy people who retire very early on
indeed. And they simply will not put up with having to pay for that.
Again, that’s it’s mostly not true simply does not matter:
politics is about what people believe.
There
are ways to do this and no one will complain. In fact, it’s already
been done. By lowering the interest rate that Greece has to pay,
offering capital repayment holidays, extending the terms (some of
this debt need not be repaid for 50 years) the net present value of
what is owed is rather smaller than the headline amount. Those
eurozone citizsens have already lost ther money but it’s been lost
to opportunity cost and inflation, not to a haircut that they can
actually see. There’s undoubtedly another iteration of that which
could be done to lighten the burden again upon Greece. But, Tspiras,
for his own domestic political reasons, needs to have that headline
cut. The very thing the other eurozone governments cannot give him if
they are to keep their own holds on political power.
Now
again, remember, the creditors were willing to provide more in the
way of covert haircuts; indeed, they fully expected to do that. And
many commentators’ assumption was that the political unpalatability
of having to financially unsavvy voters know that all that Greek debt
that their governments hold has been written down in a big way was a
third rail issue. That in turn would mean Greece had a negotiating
trump card without having to go the Grexit route (which is remains
unpopular with Greek voters). A default would mean loss recognition
which would put elected European officials in all sorts of hot water.
We
had concrete evidence that ‘fessing up to Greek losses wasn’t the
Eurozone leader political death threat Greece believed it to be in
May. Remember that Tsipras said Greece would default in mid-May, only
a few days later to have Greece borrow against an IMF reserve account
to pay the IMF. The creditors did not offer any concessions then to
forestall a default.
I
thought at the time that the creditors holding their ground meant
they had some sort of trick up their sleeve, that they might not have
to recognize the losses (as in write them down) even if Greece
defaulted on the IMF, which is the most senior creditor. But the
willingness to tolerate a Greek default may be the result of
something simpler. The creditors have succeeded in moving public
opinion in most Eurozone countries even more to their side (witness
the Bild op ed), so that if Greece defaults, the elected officials
believe they can pin enough of the blame on Greece so as to limit any
damage to them personally.*
A
Greek default is not a “get out of paying” card.
When countries default against mere private lenders, they don’t get
away with not paying . The debt gets restructured, as in written down
in economic terms to something that the borrower can hopefully meet,
and the various lenders scrap among themselves. And remember,
official creditors are in a much better position to extract what
there is to be had than private lenders.
The
ECB may lower the boom on Greece.
The creditors, assuming they can reach agreement, may try a last
“offer you can’t refuse before the Thursday Eurogroup meeting.
The ECB would be the most likely enforcer. Mario Draghi is speaking
later today, so he may show a bit of steel. Peter Spiegel of the
Financial Times mentions one option we have discussed previously,
that of a
repeat of a brute force move used successfully against Ireland and
more recently Cyprus, to remove the ELA:
….
eurozone negotiators may resort to the “take it or leave it”
strategy used on Cyprus at a eurogroup meeting two years ago.
On
that occasion, an ECB representative warned that without a deal, the
central bank would be forced to cut all emergency funding to Cypriot
banks — essentially laying waste the country’s financial system.
There have been similar pressures on the ECB in the past week to take
the same stance with Athens.
However,
my guess is that the ECB will not do this immediately, although it
might based on what Greece does in the coming weeks (as in they’d
like to be able to pin the blame firmly on Greece). It may well
depend on their reading of how much sway Varoufakis and like-minded
members of Syriza have on Tsipras. Varoufakis has long been opposed
to a Grexit, and has written forcefully that it’s not at all like
an Argentina-style mere severing of a currency peg. The viability of
the ECB playing the heavy is reinforced by the fact that….
The
Left Platform is still pushing for a Grexit.I’m
not sure It’s distressing to see the Left Platform, which has a far
more acute grasp of the power dynamics of the negotiations that the
Syriza mainstream has, to be so out of their depth as to what actions
to take in response. While a default is less destructive to the Greek
economy, the Ambrose Evans-Pritchard reports that the Left Platform
has called for an “Iceland-style default”. Remember,
Evans-Pritchard is a Euroskeptic and has regularly taken a
Syriza-sympathetic position. Even so, he
feels compelled to stress why Greece sin’t at all like Iceland:
Iceland’s
internal banking system was rebuilt from scratch under state control
with public funds equal to 30pc of GDP, and was shielded by capital
controls. The boards were sacked. Some executives were prosecuted….
Iceland
gradually recovered and has since racked up impressive growth.
Contrary to apocalyptic warnings, a 50pc devaluation proved to be
part of the cure. The krona has since strengthened slightly against
the euro.
However,
Iceland has a very different society and economic structure. Quick
stabilisation was possible only because the IMF and the Nordic
countries stepped in with a $5bn rescue package. Greece has
already exhausted its IMF quota in the two failed rescues of 2010 and
2012, and is now at daggers drawn with the Fund’s team in Athens.
To
put none too fine a point on it, Iceland has a population of a bit
over 300,000. A $5 billion rescue package is massive relative to the
size of the economy. Iceland also had been through a sustained boom
before its bust, so its citizens took a big hit from a starting point
of prosperity and a well functioning government (albeit one that was
lousy at bank supervision). And it already had its own currency, so
it did not face the trauma and disruption of a having to scramble to
implement a new one (we have a post coming up shortly on the
operational issues of a Grexit**).
The
resolution of the Greece/creditor deadlock may also mark Peak
Neoliberalism.
It’s possible, but only remotely so, that Greece and its creditor
overlords will back off from their collision. But as we’ve said for
years, Germany is wedded to incompatible goals, namely running large
trade surpluses but not financing its trade partners. It is destined
to burn them down if it fails to find a new course of action. Greece
is also wedded to incompatible goals, namely getting a real break
from austerity while staying in the Eurozone.
On
the current trajectory, Greece will suffer horribly under a default
or Grexit. The creditors have the incentive and the means to make
either one more painful than continued austerity so as to force Greek
citizens to capitulate and vote in a more compliant government. There
is a bloody-minded faction that includes Finland, Latvia, Spain, as
well as some ECB governors that is eager to punish Greece and sees
that as necessary to preserve the Eurozone. We’ll see soon enough
whether these austerity radicals that we call the ultras persuade
enough key players to put their plans into action.
But
even in a less punitive scenario, a default or Grexit will do very
serious damage to an already fragile and deeply depressed economy.
Those who assert that Greece will bounce back quickly don’t have an
economy this close to being a failed state as a comparable.
Our
view has been that the most likely scenario is a default in the
Eurozone, and that the authorities have likely underestimated the
damage if the impasse ultimately leads to a Grexit. Even if they are
correct that financial contagion is contained, political contagion
over the next few years is another matter entirely.
But
on a bigger frame, no matter how badly things turn out for Greece,
the institutions at the core of the European project will emerge with
their image badly damaged. The dirty secret has long been that the
program of European integration was designed to produce rule by
technocrats. Those technocrats, by being captive to bad ideology,
have failed to deliver on the basic obligation of government: to
provide for the safety and well-being of their populace. In a
capitalist society, that means producing enough decently remunerated
jobs.
However,
even if neoliberalism winds up receding as a result of the brutal
Greek negotiations, it’s naive to assume that the exposure of the
bankruptcy of neoliberalism means a return to the old European model
of more social welfare and (at least in theory) democratic
accountability. Ironically, the train wreck we are seeing now can be
presented as a prime example of the dangers of democratic rule: a
democratically elected government in Greece demanding better
treatment from its jailer/creditors, when the most of the debt is
held by democratically elected governments who are not willing to
give Greece the breaks it wants. And as we’ve stressed from the
outset, the fact that the two sides can’t come to agreement is that
Syriza’s red line of pensions is also a red line to voters in the
states that have provided funding to Greece.
Thus
even if the Greek denouement does represent Peak Neoliberalism, that
does not mean that social democracy will emerge victorious. It simply
means we will grope towards a new political order. Only if citizens
are vigilant and engaged do they have a hope of coming out as
winners.
____
*
Some observers are placing more stock in a blog post by Olivier
Blanchard of the IMF that is warranted,
in which he argued both sides need to make concessions. Blanchard is
head of the research side, which has no role in the “program”
decisions being negotiated with Greece. In fact, for years there has
been a noteworthy disconnect between IMF research, which is often
anti-austerity, and program design and implementation. While
Blanchard does take up the IMF position, that Greece needs more
writedowns, that’s not news since even the program team has been
calling for that since at least April 24 (at the last Eurogroup
meeting). Given a leak in Faz over the weekend, that Lagarde reversed
herself on a proposal by Juncker to let Greece fund pensions for the
poor by cutting military spending by €400 million, it seems that
the IMF is holding fast to its hawkish position. And Blanchard
reinforced the notion that Greece would have to cross red lines to
get a deal done:
….the
Greek government has to offer truly credible measures to reach the
lower target budget surplus, and it has to show its commitment to the
more limited set of reforms. We believe that even the lower new
target cannot be credibly achieved without a comprehensive reform of
the VAT – involving a widening of its base – and a further
adjustment of pensions. Why insist on pensions? Pensions and wages
account for about 75% of primary spending; the other 25% have already
been cut to the bone. Pension expenditures account for over 16% of
GDP, and transfers from the budget to the pension system are close to
10% of GDP. We believe a reduction of pension expenditures of 1% of
GDP (out of 16%) is needed, and that it can be done while protecting
the poorest pensioners.
So
Blanchard is fully in line with the program team’s position. He’s
just trying to put a nicer spin on it.
**
I am sure some readers will point to a Wolfgang Munchau piece
today, Greece
has nothing to lose by saying no to creditors,
in which he advocates a Grexit. Munchau is normally a sound
columnists, but this article is a marked departure. I’ve
pre-debunked some of its assumptions above, such as the notion that
Greece can somehow pay private creditors but not official ones, and
so they will face enormous losses. That’s not going to happen.
Start with the fact that defaulting on the IMF means Greece loses
access to trade finance. There are other implements of enforcement
that official creditors that private ones don’t. And it ignores, as
we and Worstall pointed out, that large losses have alrready been
taken in previous restructurings. Moreover, its claim that Greece is
“relatively closed” is technically accurate but substantively
misleading. Nathan Tankus will discuss the issues regarding trade in
his next post on Greece, but the short version is that Greece has a
low ration of import value in its exports. One of the implications is
that Greece really does use (and by implication, need) its imports in
its domestic economy. Think of pharmaceuticals and machine parts as a
proxy for Greek imports. When those go up radically in price as a
result of a Grexit, it means many already strapped buyers (consumers
and businesses) go without. That has knock-on effects (health risks,
loss of revenues to already fragile business leading to increased
failure rates).
We’ll
have more nitty-gritty detail on the operational issues of a Grexit
on Tuesday or Wednesday. Stay tuned.
This
was not supposed to happen: by now the Greek insolvency "can"
should have been kicked, and the Greek government, realizing the
money has run out for both the government and the banking system,
should have folded to Troika demands, and allow the Troika money to
return repaying obligations to the Troika in exchange for more
spending cuts.
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