The Greek government decides “All we need is somebody to lean on”

Last night saw something extraordinary take place in the Greek bailout saga and let’s face it we are relatively numb to such things after everything which has taken place. It did not surprise me that the Greek government made a proposal to the Euro area authorities but what they put in it did. So let us take a look at what has been offered.

The Greek Proposal

The new Finance Minister opens by implicitly agreeing to further doses of austerity. From Kathimerini.

The new fiscal path is premised on a primary surplus target of (1, 2, 3), and 3.5 percent of GDP in 2015, 2016, 2017 and 2018.

This of course immediately begs the question of how Greece can possibly achieve this – as after all such measures before have led it into a depressionary cycle as austerity shrinks the economy leading to a need for more austerity and repeat – so let us look at the plan.

Adopt legislation to reform the VAT system that will be effective as of July 1, 2015. The reform will target a net revenue gain of 1 percent of GDP on an annual basis from parametric changes.

If we look into the detail we see moves that so far the Syriza government in Greece has rejected.

The new VAT system will: (i) unify the rates at a standard 23 percent rate., which will include restaurants and catering…….. Eliminate discounts on islands, starting with the islands with higher incomes and which are the most popular tourist destinations, except the most remote ones. This will be completed by end-2016,

You might think that Greek businesses have been having a hard enough time especially as they have to sell products at a higher price due to the VAT increase but they too face higher taxes.

raise the corporate tax rate from 26% to 28%;

The other issue that is constantly in the news is the Greek pension system and reforms are planned here too.

Effective from July 1, 2015 the authorities will phase-in reforms that would deliver estimated permanent savings of ¼-½ percent of GDP in 2015 and 1 percent of GDP on a full year basis in 2016 and thereafter…

This includes changes to the retirement age which have become de rigueur pretty much everywhere it feels in the credit crunch era.

a gradual elimination of grandfathering to statutory retirement age and early retirement pathways progressively adapting to the limit of statutory retirement age of 67 years, or 62 and 40 years of contributions by 2022.

Also Greek pensioners will have to pay more for healthcare.

increase the health contributions for pensioners from 4% to 6% on average and extend it to supplementary pensions

One other surprising factor was a promise to cut defence spending. What no more French frigates and German submarines?

reduce the expenditure ceiling for military spending by €100 million in 2015 and by €200 million in 2016 with a targeted set of actions, including a reduction in headcount and procurement;

Also we saw promises of privatisations which may be the most tenuous section of all as the record so far on this subject has been patchy at best.

What about the referendum result and Oxi?

It was only on Monday that I welcomed a flowering of democracy whereas the events of last night have seen that flower wilt. Below is an example of the terms rejected in last weekend’s referendum.

The (VAT) reform will target a net revenue gain of 0.741%

of GDP.

You may note that the new proposal involves more of a tightening of the VAT noose around the neck of the Greek economy than the referendum rejected! Indeed we are left wondering what the point of the referendum was as whilst there are minor differences in essence this is an acceptance of the original plan from the creditors/institutions. Another awkward point is that the offer was withdrawn over a week ago and back then the Greek government was calling the institutions “terrorists” for even suggesting it. How times change!

What about the Greek economy?

We can only fear what the recent turmoil and bank closures have done to the Greek economy but we do get something of a hint from today’s economic data.

The Production Index in Industry (IPI), according to working day adjusted data, in May 2015 compared with May 2014 recorded a decrease of 4.0%……Manufacturing production decreased by 2.7%.

This is a turnaround for manufacturing production as up until May it had been increasing in 2015 so far. We also get an idea of the scale of Greece’s economic depression when we note that the underlying indices set at 100 in 2010 are now 86.2 for industrial production and 90.3 for manufacturing.

Yesterday we also were updated on the way that in this crisis cars are potentially being used as an ersatz type of cash.

The Hellenic Statistical Authority announces that in June 2015, 12.751 road motor cars (both new and used from abroad) were put into circulation for the first time, recording a 21,7% increase compared with the corresponding month of 2014.

What will such a proposal do to the Greek economy?

Back on the 25th of June I pointed out what such an austerity package would do to the Greek economy.

However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!

This is based on the latest IMF estimates of the impact of austerity packages so far on the Greek economy. So we can expect another downwards spiral in an economy which has already seen so many of them.

What will Greece get in return?

In a nutshell more debt. From Bloomberg.

The government of Greek Prime Minister Alexis Tsipras sought a three-year bailout loan of at least 53.5 billion euros ($59.2 billion), in a last-ditch effort to keep the country in the euro.

Also they want funding from the (Jean-Claude) Juncker Plan which even he seemed to regard as a fantasy.

a package of growth measures of 35 billion euros.

Perhaps they were attracted by this from his original statement.

I have a vision of school children in Thessaloniki walking into a brand new classroom, decked out with computers.

Back on the 26th of November last year I pointed out a fundamental problem with this plan.

The EU Commission is only putting up £8 billion of actual cash at which point we have a leverage rate of 39. That is a little different to the implied leverage ratio of 3 is it not? If we include the capital provided by the European Investment Bank or EIB we reduce the leverage ratio to 25.

So we have funding from a fantasy plan and yet more debt piled on top of Greece’s existing burden. I will leave it to readers to decide if more debt over 3 years is better or worse than more debt over 4 months as others are claiming.

That is a counterpoint to the claims that some form of debt restructuring will be provided. It sounds good but what happened last time. Here is the sugar-coated version from Oliver Blanchard of the IMF.

The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen).

In fact it was so good they now owe even more. Oh hang on……!

Comment

As we stand it would appear that the Syriza government is applying the lyrics of Clean Bandit to its membership of the Euro area.

When I am with you, there’s no place I’d rather be, yeah

Along the way it looks as though it has sold out the Greek voters 61% of whom voted against what it has now accepted. So it would appear that even the words No and Yes need to go into my financial lexicon for these times.

We may yet see a type of debt restructuring that Olivier Blanchard of the IMF referred to yesterday.

Look at it this way: Cash interest payments on Greek debt last year amounted to 6 billion euros (3.2% of GDP), compared to 12 billion euros in 2009.

Interest-rates have been cut (after initially imposing penal ones..) and maturities extended along the lines of my original suggestion that eventually the bonds would have a maturity date of infinity.

In essence it would appear that the Greek government has looked at what is perceived as the dark and decided to sing along to the hit of the summer.

Blow a kiss, fire a gun
We need someone to lean on
Blow a kiss, fire a gun
All we need is somebody to lean on

If any of this actually worked we would not be here would we? It also looks like a victory for bullying and intimidation to me. Even worse this was applied by the central bank (ECB) as it closed down the banking sector. Lender of Last Resort anyone?

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26 thoughts on “The Greek government decides “All we need is somebody to lean on”

  1. Hi Shaun, I have to say I couldn’t believe this either. Firstly, have you read Paul Mason’s blog this morning? As you know he’s had the inside track on Syriza these last few months. if anything what he writes is even more unbelievable than the proposal. I can only imagine he’s trying to sell the package because Syriza are his mates, but you have to wonder what he’d say if it was PASOK or ND who were proposing such terms…

    Other than that, what positive economic effects will any debt extension (forgiveness?) have to offset the new austerity? The forgiveness figure I saw being bandied about was 30% of GDP, but you may know better?

    AZ

    • Hi Andy Z

      The forgiveness issue is likely to be complex just as it was when we had the PSI (Haircut) back in 2012. In fact let me correct that as it is official creditors that will be in play this time so it is likely to be even more complex as they will want to do it in such a way that it looks costless. Not such an easy circle to square is it?

      Personally I think that if we estimate that Greece’s debt to GDP ratio is now 180% then 30% would take it back down to 120%. Whilst in interest costs terms that would help what happens if or more likely when the debt to GDP ratio rises again just like it did after 2012?

  2. Three possibilities:
    1) Syriza has capitulated. I find this hard to believe, because of the referendum.
    2) Tsipras has been threatened with coup d’état.
    3) Tsipras knows that it will not be accepted, but it will make blaming him for Grexit impossible.

  3. Shaun, I imagine that officials are, as we discuss this, trying to get that poor battered can hammered back into shape in order to give it one more mighty kick.
    A fantasy plan that will collapse the economy even further and probably lead to political unrest. Don’t give up following Greece once this is approved, much more excitement to come.

    • Hi Pavlaki

      I have no intention of departing the subject of Greece as frankly the plan just put forwards will be a disaster both for the Greek people and the Greek economy. Should it go through what has the Greek government been doing the last 5/6 months as the economy has headed south?

      In a way the most revealing fact is that the Institutions are letting it be known that the new bailout will have to be some 20 billion Euros or so larger, not bad for a development in only 2 day…

      I do hope that someone had the foresight to make the can out of aluminium.

  4. Hi Shaun

    I’m sure you realise that this capitulation by Syriza means nothing, and this is the case even if it passes political muster within Greece. The Greek position and that of the Euro itself is unsustainable and will, at some point, come crashing down.

    As you imply in your last paragraph that assistance appears to have been withheld by the ECB almost beggars belief and a quite appalling abandonment of its mandate as lender of last resort. The argument that it has to consider the Euro area as a whole is, to my mind, mere casuistry, and marks a new low in this whole sorry saga. The EU is getting more debased every day.

    Furthermore the EU is already admitting that Greece needs humanitarian aid whatever happens:http://www.bloomberg.com/news/articles/2015-07-08/eu-floats-humanitarian-aid-as-possible-salve-to-greece-euro-exit.

    A great advert for the EU!

    • The EU establishment are not very keen on the results of democracy are they. One of the routes forwards involves Greece having another election and gaining the opportunity to vote “correctly” this time just like what happened in Ireland over the Maastricht Treaty.

      • Hi Shuan, Both you and I thought Greece should have defaulted & devalued in 2010. And you are correct the Greece finds itself in the same position now but weaker than 2010.

        Greece is unwilling or unable to collect enough taxes to pay for it’s current spending. Private lenders aren’t willing to keep loaning more. The Greek politicians either need to accept the lenders (Troika) austerity demands or default. Both courses will hurt economically. Both are politically painful.

        When I see national a banking shutdown, it says the banks don’t have the cash. I’d suggest that Troika austerity is a walk in the park compared to a 1997 economic meltdown – which is why Syriza is afraid to default.

    • Hi therrawbuzzin

      As of midday today it looks quite a mess. Even the backtracking and abasement that the Greek government has done is not enough with the situation supposedly being as follows below.

      “Pablo Rodríguez ‏@Suanzes 15h15 hours ago
      France, Italy, Cyprus and the European Comission vs Germany, Finland, Holland, Lithuania, Slovakia , Estonia and Slovenia”

  5. So here lies Greece’s Dilemma, either accept the lenders terms or default. And let’s be honest, default could be really painful if we use Bulgaria’s 1997 experience as a guide. This dilemma is an illustration of how excess borrowing can cause severe economic harm.

    The first world countries have been squeezed since 1990. Especially the less educated have seen pressures on their living standards. But we should also remember that many millions of people around the world have become much richer. Here is an academic report backing my words http://www.voxeu.org/article/global-income-distribution-1988

    For example, I recently saw a photo of Soviet Era Sofia, with cold, drabbly dressed poverty stricken citizens queueing for bread in a snowy street and glumly looking on at a lady dressed in posh fur (suitably dressed for Davos or Cortina de Ampezzio) walking away with many times the official ration. Proof that the communist nomenklatura lived like aristocracy. It is a reminder just how much progress has been made in Eastern Europe by the new EU members.

    • Hi ExpatInBG

      Yes Eastern Europe has got richer with the possible exception of Ukraine. However I recall you pointing out before that there is quite a gap between Bulgarian living-standards and Greek ones which is a gap which Greece will be mulling right now.

      Ch-ch changes as David Bowie put it.

      Also it would appear that the Bulgarian Lev has been seeing some extra demand in this period.

      http://www.novinite.com/articles/169796/FT%3A+Cash-Strapped+Greeks+Accepting+Bulgarian+Levs+

      • Indeed. It is unpleasant for politicians to cut the cloth in accordance with living standards – though borrowing is worse, and long term borrowing is immoral. We think badly of those who sell their children into slavery. Creating big state debts for our children and their children to inherit is also immoral.

        The economic expansion of Asia & Eastern Europe is also heavily felt in Spain and Italy. These public debts are a liability that will bite if yields rise. Spain was dirt poor during the Franco regime and only became wealthy as a capitalist democracy.

        Eastern Europe varies widely. Belarus, Moldava, Bosnia-Herzagovina haven’t got richer. Poland and Ukraine had similar resources in 1990. Poland has grown wealthy, a point not missed by Ukrainian voters.

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