Greece is failed again by Europe’s politicians

Whilst I have spent the last couple of days looking at the state of the UK economy and examining some new economic statistics there have been some developments concerning Greece. Firstly there has been no detail at all announced on the (non) plan that Jean-Claude Juncker was proclaiming on Monday. However the German stance has shifted with Chancellor Merkel publically airing the possibility that the International Monetary Fund (IMF) could be involved in a rescue for Greece. This has two main consequences one is that Europe’s politicians have been doing contortions to say that Greece does not need a rescue, but talking about the IMF bursts that bubble on the grounds that why would one even mention the IMF otherwise? The second is this such a move would involve a loss of credibility for the Euro project in world markets as well as being something which Europe’s politicians who are mostly very much in favour of the European Federal project ( if nothing else it provides plenty of tax-free jobs for politicians) would rather avoid. There would also be an implicit downgrade in the status of the European Central Bank. Also if you remember this is a return to the beginning of this crisis as a rescue by the IMF was suggested then. My theme of political incompetence and grandstanding just goes from strength to strength.

Germany

All through this crisis Germany’s politicians have been hamstrung by a vote in the German Constitutional Court from 1993 which restricts her ability to be involved in a bail out of another Euro zone state. Whilst this Court may not be popular with them I would imagine that Germany’s electors and taxpayers are rather grateful for it. This has been what has stopped a Euro zone bail out as whilst a dose of Euro fudge would probably have found a way around the no bail out clause in the Euro’s constitution the prospect of a legal challenge to Germany’s highest court combined with the fact that respected members and ex-members of the Bundesbank council have publically commented that the Court would probably rule no has ended the bail out option. Of course the rest of Europe could go ahead but somehow I always suspected that they wanted Germany to take the strain.

European Central Bank (ECB)

If you go down the shares of ECB membership as published on its website you get

Germany 27.12%

France 20.37%

Italy     17.9%

Spain 11.89%

Netherlands 5.72%

Belgium 3,48%

The other nations are relatively small contributors.

Now take Germany out of the mix and the main contributor is France which gives me a wry smile as it feels like they are always telling everyone what to do and now is their chance to do it, however I suspect that would be met with a “mais non”. Next though we get two possible future recipients of a bail out Italy and Spain…… I think everybody can see the issues here.

Downgrade of the ECB

Let us be in no confusion involving the IMF in a rescue of Greece would go down badly with the ECB and has been called “inappropriate” by the ECB President. It fears two main things from such a rescue. The first is that its own independence would potentially be compromised, and the second is that the Euro zone would experience a loss of control over Greece. An example of this is that the biggest shareholder in the IMF is the United States as opposed of course to Germany in the ECB (remember this is a Frankfurt based institution).

Returning to Germany it was only at the beginning of this month that Chancellor Merkel was briefing the German cabinet that going to the IMF was the least likely option. Just as a reminder loans or using the state bank KfW were the preferred options at the time. So desperate are politicians to retain European involvement that they are talking of an IMF rescue with Euro zone funding. This would in my view be plainly unwise as it would go straight to the German Constitutional Court and so would gain nothing on the funding being provided directly. Frankly with suggestions like that they sound rattled to me.

Just to add to the confusion the French are still persisting with the idea that they can come up with a solution which would allow a bail out to get past the German Constitutional Court. Quite why they think that they are experts in German Constitutional law escapes me. Perhaps they are rattled too.

There has been an excellent chart of this in the Financial Times which is relevant here. Were the subject matter not so serious it would be funny,for the moment it can be put in the category of gallows humour. If it is blank please click on it and it should work.

So Europe is in complete confusion and disarray. Let us not forget Greece where does she stand now?

Greece

Some of the disarray has transmitted itself to Greece as the Greek Prime Minister George Papandreou said IMF involvement was a good idea and he would like the option and the Finance Ministry said that they denied any such thing. In fact Mr.Papandreou is showing signs of being seriously rattled too as yesterday he said that Greece “will not ask for help from EU or IMF”.If he has a plan to get Greece out of this alone and it works then he should  get the Nobel prize for economics this year.

In the markets Greece’s ten-year government bond yields are now 6.28% which is 3.14% above those of Germany’s equivalent bund. Her sovereign credit default spreads are now trading at 315 basis points which was up 26 points on the day. So the impact of the announced (non) rescue plan has gone and we are back pretty much to where we were beforehand. In other words these are crisis levels for Greece.

Comment

This has been an utter failure for the Euro zone so far and does not help Greece at all. In fact the dithering and incompetence being displayed by Europe’s political “elite” is in danger of making the situation worse. I have been counting the main alternative plans and have come up with 5 as I type this. The only one with any remaining credibility would be the IMF taking over. It is sadly predictable therefore that I see European politicians talking of IMF involvement with European funding, there is enough Euro fudge in that to leave Greece thoroughly sick through over-consumption! Somebody perhaps should whisper in their ear that the objective is to make Greece better not worse. It is probably too Germanic even for the Germans to deliberately ruin Greece’s economy as an example for the others isn’t it?

As to my views on the matter I would like to take you back to the 10th February and my view on the requirements for a rescue plan.

“1. That action needs to be quick and decisive. A decent plan operated quickly is preferable to a perfect plan that is dithered about.

2. Such talk will improve markets but like the boy who cried wolf it only has a limited lifespan. So politician’s who feel that talk is sufficient (and I am sure there are plenty of them) must be made to realise that talk without action is only a short-term palliative”

and the IMF?

“I still feel that the IMF’s resources are likely to be under strain and Europe should take care of its own”

The only change is I would add “if it is capable” to the end of the sentence on the IMF.

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15 thoughts on “Greece is failed again by Europe’s politicians

  1. Perhaps someone could clear a confusion up for me?

    As the required austerity measures and reforms in Greece will probably depress GDP further,it appears improbable that Greece can afford to finance its existing liabilities.(at least that’s my opinion)

    If the IMF accepted this as the situation would they provide liquidity to a country with no prospect of a return on their ‘investment’? Can the IMF insist of a haircut/semi default on Greek Debt,such as a series of Coupon passes or forced extension of maturity?

    • Hi Andy

      There are a lot of begged questions around the IMF in my view. I will do a full analysis of them in future as it is another area which deserves debate and a light shone into it.

      As to your question there are issues and my article when I looked at Latvia gives a clue as to how a “vicious circle” can develop with GDP dropping 30% so far over the austerity period. So Latvia is likely to be a forerunner for Greece in many respects (perhaps even if the IMF is not called in). Although it is an extreme example (I hope).

      The IMF has powers but they really only come from the fact that it is backed and owned essentially by the developed nations with the US being the largest. So its powers are implicit as in how the country would be treated in future by borrowers and by the countries who would lose money according to their “shareholding” in the IMF. So any threat it makes would need to be backed by it saying it would no longer support the country which would have follow on effects, again quoting Latvia there was a point at issue and the Nordic nations threatened not to loan money.So its power is often to loan in dribs and drabs which I suppose is implying the recipient is needy (which definitionally they probably are) another is simply threats and their implications. According to its website.

      “Loans are typically disbursed in a number of installments over the life of the program, with each installment conditional on targets being met. Programs typically last up to 3 years, depending on the nature of the country’s problems, but can be followed by another program if needed. The government outlines the details of its economic program in a “letter of intent” to the Managing Director of the IMF. Such letters may be revised if circumstances change.
      For countries in crisis, IMF loans usually provide only a small portion of the resources needed to finance their balance of payments. But IMF loans also signal that a country’s economic policies are on the right track, which reassures investors and the official community, helping countries find additional financing from other sources”

      As to your first question there is a section that could theoretically apply in the IMF Charter but I do not feel that it was intended for a country like Greece

      “Debt relief

      In addition to concessional loans, some low-income countries are also eligible for debts to be written off under two key initiatives.

      The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability;

      It is in a position where over time there have been very few defaults (defined as virtually nil in one analytical paper whatever that means!) and in general borrowers have paid up. A question I have is that this crisis has brought up some firsts will this be another one? This makes the implications behind your questions very valid I think and they go straight to the heart of the IMF…

      • Many thanks. Let’s see what Bono has to say. Seriously,I suspect we all know that the risk of wipespread sovereign default in western nations is simply too much for the IMF to handle (as it’s primary shareholders are likely to be the main customers).

        The obvious solution would be for China to forgive the debts of Western sovereigns. The price for that being a tectonic shift in power and ownership to China.Welcome to the Chinese century.

  2. I read on another blog that in order to provide IMF support to a country, 85% of the IMF’s membership need to agree. Also, the Eurozone counties comprise in excess of 15% of the membership.

    If both these are true, then this would seem to be a case of the rest of Europe trying to help Greece using someone else’s money, and maybe such a device is the only way of circumventing the German Constitutional Court.

  3. Seems Merkel wants the IMF route while Sarko says ‘non’ and wants the ECB route. Stalemate helps nobody, especially Greece, but shows the level of cooperation and integration apparent in the various leaders within the EU. It is more about their own internal politics rather than the needed concerted unilateral decisive action. It was always going to be this case.
    Andy, we have seen vast sums of debt written off to the third world, maybe they will allow Greece to play that card at some point?

    • I agree a write off is a possibility.However who bears the cost of the write off the holder of the bond ,or is it made good by the IMF?

      A neat solution would be for the IMF to launch a once only buy back for greek debt at current market values (implying a 30-40% haircut to the issue price).

      The difficulty for the IMF is the mechanism they employ for Greece would be interpreted by other struggling European nations as the bailout template

  4. For me this is no surprise. As I replied to an earlier article, Dutch parlement has been moving actively from the start to force in the IMF.
    A move cheered on from right to left wing parties. We have no problem with the IMF. Frankly, I believe it is the best solution given the Greek problems. A european IMF sounds great, but it does not exist. We have seen IMF experts commenting that they will absolutely not intervene on the monetary side, since there is no menetary problem. It is a budgetary problem in Greece. Therefore the ECB will remain independend. If this independence it treatend later on in some way or form by the IMF, we might see some other moves. Such as ousting Greece from the Euro.

  5. You cannot oust Greece from the Euro. You can of course wish it like Chancellor Merkel does, but not actually do it. You need to change a treaty for this and this is not easy. Greece could leave voluntarily of course, but this is something different. It is really a pity that the Dutch nation has lost the sense of solidarity within Europe and appear as arrognant as the Germans (this is my opinion at least). I have lived for many years in the Netherlands and I liked both the people and the country.

    • Dear Vassilis.

      one of the main problems is that what the Greeks call “austarity” measurements, is what the Dutch government and responsible Unions have already agreed to many years ago in the Netherlands in an effort to keep the system solvent. To see the Greek unions behave in such an inresponsable manor is just unbelievable. Not to mention the fraudulant previous governments in Greece. If you put those maffia figures in jail, maybe we can talk a bit about it in a different fashion. If Greece was hit by a natural desaster I would have no problem in giving aid on a vast scale. The problem now is that we in the Netherlands have agreed to a pension of 67 and are even talking 70. While at the same time Greek hairdressers can get a pension at 50 because they work with chemincals. That situation is just ridiculous. Don’t the Greek people understand this is simply un affordable? Fantasy politics. The main reason for imminent treat of bankrupty. If those chemicals are so dangerous, just ban them. You cannot expect the Dutch to work till 70, and at the same time sponsor a nation that has fantasy rules in which people can have a pension at 50. The IMF is a good solution, because soft healers make for stinking wounds, as we say in the Netherlands. What all of Greece needs is a reality check.

      • Just to say that what you now say has nothing to do with my comment which was that under the rules and regulations of EU Greece cannot be ousted as you suggested. Thus your comment was emotional and not rational. Many of the issues you mention now are inaccurate and/or exaggerated. In any case even in their real dimension they are appalling to common Greeks and they also want them changed (and are changing now, e.g. I am happy to work till 70 and I have campaigned for years against early retirements). Every society and system has its own problems. I know this very well because I have lived abroad for many years. Crooked politicians should go to the prison indeed, probably 100% of Greeks would agree with this. However, in my own opinion even for them there are laws and procedures to be followed. The line between political and criminal responsibility is very fine in these cases and the rule of law has to prevail. E.g. I am not so sure of the fudged statistcs accusation. I know statistics and it is not a simple issue especially when every other government has done dodgy (but probably legal) deals with the goldman sachs etc. For many of these the unregulated banking system is to be blamed more than anything else. No-one in Greece asked for your money as far as I know. But please avoid bashing other people so easily, because the simple people, the Greek citizens who will pay the price are the victims as they had nothing to do with the decisions that led to this crisis.

    • Hi Vassilis,

      technically you are right. However there is ample talk about changing currency. From leaving the euro ourselves to creating emergency laws to oust Greece on the basis of fraud. A few days ago a Dutch MEP even suggested that it is best for all Nordic nations to split away from the Euro all together and basically create a Euro for the North and leave the Southern nations with a Euro for the South. I am not saying this is likely to happen, but the fact that these ideas are floating and get some traction means that if push really comes to shove it is not entirely an impossibility anymore.
      Furthermore, the Greek government has not made the right moves yet. They simply raised taxes, but did not do anything on the spending side yet. To get out of the debt trap they should slash costs firmly and lower taxes. The workforce on the Government payroll needs to reduce, and taxes need to be lowered and actually get collected. Just like Ireland is doing now. If this is actually implemended help will surely come. If not from EU nations than from lower borrowing costs. For now Greece politicians are actually stalling events in a grotescue way, and are openly gambling on a late rescue. To me it seams like they are hoping to avoid the really tough measurements now, and are hoping they can put the tough measurments of for yet another year, after which the situation will actually be even worse. That is why they are receiving a clear no from Germany and the Netherlands. Parlement voted that their will be no Dutch involvement in any package except for normal IMF rescues. No words but action, is what parlement here is asking from the Greec government. Than there will be solidarity, but not the wrong way round.

  6. Following on from Johan_Heuvel – can the ECB/EBRD issue Euro denominated loans to the IMF to finance restructuring the Breek economy if Greece finds it necessary to call for IMF assistance?

    TIA

    • Hi Mickalus

      If the ECB gave loans I would suspect it would end up in the German Constitutional Court via their 27% shareholding in the ECB. Ordinarily with an IMF loan, the IMF supplies some money but trading partners/ creditors of the country come up with as much or more. Of course this would involve Germany again but by the way Chancellor Merkel is suggesting this it appears that this would get through. So whilst the IMF may loan in dollars the European countries would probably loan in Euros. But it is a tangled web isn’t it?

      • Thanks for that explanation notayesmaneconomics. Sorry I’m not more au fait with this whole area. It’s hugely interesting if it wasn’t such a mess with so many so adversely affected.

  7. I am sure that everyone is as frustrated as me at the lack of progress and political posturing in play but maybe it is time for some honesty from all parties.

    The fact is that Greece needs to borrow. In borrowing, it needs a bailout if you define bailout as being able to borrow at a rate lower than the market has decided is appropriate. The assumption (from Greece) is that if the EU says it will bailout Greece if necessary, then the markets will lower the rate at which they will lend, thus rendering the EU bailout unnecessary. Nowhere have I seen predictions of what this lower rate might actually be.

    In the meantime, the cost of borrowing for Greece continues to rise.

    Whether the reluctance of the EU is due to a lack of faith in Greece’s debt reduction plans, a lack of suitable administrative mechanisms to organise a bailout promise or a fear of the knock on effect of other countries if such guarantees are given, bringing the IMF into play seems an obvious and urgent imperative that can do no harm and may hasten a resolution.

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