The Prodigal Greek

The Greek crisis through a different prism

A trip to Greece

with 14 comments

Another visit to my homeland came to an end in the weekend and as much as I would like to take back with me only memories of family and friends, it is impossible to ignore the broken spirit of many Greeks. Having spoken to people from all types of economic activity – employers, employees, young and much older job seekers, small or larger tourism business owners, self-employed and pensioners – it is evident that the depression the macroeconomic indicators are reporting month in and month out is also reflected in people’s daily lives.

Even for the informed follower of the Greek crisis, the headlines coming out of Greece do not capture the full extent of the economic deterioration the country is experiencing and the complete disconnection between the people and the state, a disconnection that will inevitably test the strength of the social fabric.

Business owners have seen their revenues decrease by 30-40% since last year when the country and the economy were already feeling the impact of a full year of the policies dictated by the troika. The drop in revenues is more than 50% compared to the summer of 2010. My trip also coincided with the clearance of the tax returns for the 2011 tax year. Families that received last year minor tax rebates for their 2010 income, this year have to pay in the region of 2,000 euros extra as a result of the various tax measures the Greek government had to implement in a bid to comply with the program’s targets and secure the disbursement of bailout funds necessary to continue basic state functions. This process is the result of the recession-driven repeated misses in revenues targets.

Greece is heading into yet another tough winter with the economy in a tailspin. Disposable incomes across the board have taken a severe hit and, most worryingly, the public is exhausted from two years of draconian austerity, with no hope in sight. In this environment, Greece’s coalition government – going against the pre-election pledges of the parties and the collective agreement that helped shape the coalition – has spent its first two months in an effort to finalise a new austerity package of approximately 11.5 billion euros in spending cuts in yet another attempt to appease the troika of lenders, secure the next tranche of the program, in hope that in return it may get some leniency from the people holding the purse strings in the form of a two-year extension of the fiscal consolidation effort. This extension has become the cornerstone of the Greek government’s ‘negotiating’ tactic.

This tactic is absolutely flawed and the most probable outcome is that it will undermine the coalition government’s own existence.

As seen in the new program’s documentation, these austerity measures aim to bring Greece to a primary surplus of 4.5% of GDP in 2014 and for the following years until 2020, something that translates to an estimated 9.2 billion euros of surplus in 2014, before the state has to service its debt obligations.

Following the PSI at the beginning of the year, apart from the significant debt reduction, Greece secured favourable terms with regards to the servicing of the debt held by the private sector. Interest payments up to 2015 on privately held debt are only 2% annually and there is no repayment of principal before 2023.

In the near term, Greece’s debt obligations are linked to the official sector, bonds held by the ECB, which were excluded from the PSI, that either mature or have interest payments, bilateral loans with eurozone counties that have regular interest payments and need to be repaid and loans from the EFSF as part of Greece’s new program that was agreed back in March. The 4.5% of GDP primary surplus in the design of the program aims to bring Greece in a position to start meeting these obligations without the financing help of the troika, combined with an unrealistic – in the current economic climate – estimate of privatisation proceeds.

Looking at the schedule of the country’s new program until the end of 2014, a total of 32.3 billion goes towards interest payments; 41.6 billion in maturing bonds and loans – approximately 30 billion of which are for debt held by the ECB – and 9.1 billion for the repayment of the IMF. The vast majority of the combined 83 billion of the troika’s financing, returns to the troika either through interest payments, the payment of bonds held by the ECB or the repayment of IMF loans.

The Second Economic Adjustment Programme for Greece, March 2012

Greece does not need to request a two year extension to the current program, more financing or look for other financing means that will only add to the country’s debt burden. The program is designed in such a manner that the coalition government only has to have an honest discussion with the official sector and request some breathing space before the economy blows up and the political system suffers such instability that it could eventually lead to a complete collapse, a messy default and potential euro exit with severe consequences for Greece and the euro itself.

Even if the ECB refuses to be paid back at the purchase price of the bonds it holds (between 60-70 cents to the euro), a simple re-profiling with extended maturities and reduced interest payments, in line with the PSI, could provide a significant relief to Greece’s near term debt obligations. If eurozone partners have a genuine interest in helping Greece – having repeatedly expressed their sympathy for the sacrifices the Greek people are making – they could extend the maturities of their own loans and even provide a grace period for interest payments until the economy regains its footing and growth returns.

Such simple moves that do not require additional funding can reduce the magnitude of cuts required in order to bring a primary surplus and significantly reduce the impact of the further fiscal consolidation not only on the economy but on people’s lives and standard of living.

The 11.5 billion austerity package that the troika demands has nothing to do with reforms or rationalisation of public spending. Despite the failures in the reforms efforts, Greece has painfully managed to reduce the state’s primary deficit from 24.1 billion euros in 2009 to just over 3 billion as of July this year, with a 2012 target of just over 1 billion. This target will get missed not because of failures to control the public expenditure but due to recession driven misses on the revenue side which lead to continuous accumulation of arrears and effectively a moratorium of payments other than salaries and pensions.

It is because of this moratorium and accumulated arrears that socially insured patients have to pay for their medication and doctors visits out of their own already depressed income as pharmacists refuse sales on credit and doctors have stepped down from their agreement with the Health Social Fund. A pensioner of 600 euros has to pay a quarter of her monthly income for a post cancer treatment medicine that might get refunded by her social security fund after three months. More expensive treatments require families to borrow money from friends or pull together savings so lives don’t get at risk.

The new austerity measures plan to cut 6 billion euros (more than half the total package of reductions) from pensions, social welfare and health. The measures go as far as cutting 10% of annual income from pensioners getting 600 euros monthly, the complete scraping of the seasonal unemployment allowances and cutting disability benefits to just over 200 euros monthly. This is unnecessarily self-inflicted pain that will push Greece deeper into the recession/austerity spiral with unprecedented structural damage to the economy.

The numbers have been reported over and over again but the fact that, by the time this program is implemented as currently designed, Greece would have lost in a period of five years over a quarter of its economy and unemployment will be edging 30% requires an honest re-thinking of the medicine currently supplied. It also urges changes that would give Greece the time it needs to reform, to build a modern and flexible public sector and a competitive economy. This competitiveness will not be achieved with fixed capital formation, the investments that business make, reduced by 40% over the last two years and without a well functioning banking sector that will facilitate the flow of funds in the economy.

For all its admitted shortcomings over the last two years, Greece cannot continue to be made an example of due to its lenders reservations about appearing to show leniency and the implications this might have for other existing or future programs, as has often been stated by European officials, in particular from Germany. This is not a case of leniency but one of common sense and genuine partnership, the kind of partnership for which the European Union was born in the first place. It is about a nation that has been ridiculed extensively over the last two years and does not deserve to be punished any further for the repeated failures of its political establishment over the last three decades.

As American economist Robert Solow wrote, clinging to rigid beliefs in the face of disconcerting evidence is one of the more dangerous forms of irrationality, especially when it is practiced by those in charge.



Written by Yiannis Mouzakis

September 4, 2012 at 11:02 am

14 Responses

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  1. Great article and well written..Agree with everything said


    September 4, 2012 at 11:51 am

  2. As said before ALL fiscal measures should be put on hold (with the possible exception of Public sector layoffs) and all effort be put on TRUE structural reforms Let’s hope the new government has a plan to show some compliance and, with the reconstitution of credibility and some slack from lenders, will not implement the package in 13-14. Fingers crossed!
    Excellent work once more Yianni. Keep it up:-)

    Peter Lazos

    September 4, 2012 at 11:52 am

  3. […] Mouzakis, who blogs as The Prodigal Greek, has written a post today about Greece’s economic slump following a visit to the […]

  4. […] […]

  5. “repeated failures of its political establishment over the last three decades.”……………..the common denominator….at just about every country….

    J St. Clair

    September 4, 2012 at 4:22 pm

  6. First a question from someone who is not an economist: business declines in 2-digit percentages for 2 or 3 years now; shrinking economy in 2-digit percentages. Why is it that, according to the March IMF-Memorandum, GDP is shown as declining “only” from 231,6 BEUR in 2009 to 215,2 BEUR in 2011, that is a decline of “only” 7%?

    Regarding the general tone of this excellent article that Greece does not deserve to be punished more: to me, it is a testimony to the incompetence of the political leaders involved on both sides of the case that, from the beginning, one has talked about the issue in terms of crime & punishment. I have been involved in many restructurings. There were cases where my gut was longing so send the debtor to jail for having pulled fast ones on creditors. BUT: in a financial restructuring, there is simply no place for such – sometimes objectively very justified – emotions. Both sides are in trouble: the creditor because he might lose his money and the debtor because he might lose his existence. The only objective has to be how BOTH sides come out of it as little harmed as possible. A realization of that has been terribly missing in the case of Greece so far.

    Let me just list a couple of instruments which are the most typical instruments applied in a financial restructuring and which have been terribly ignored in the case of Greece: variable interest rates tailored to the cash flow of the borrower; capitalization of interest when interest nominally due exceeds the borrower’s cash flow; a maturity schedule which makes sure that repayments do not need to be made until the restructuring is successfully completed (any “repayment” during a period of restructuring is a farce because, typically, the borrower needs to be lent new money in order to be able to make the repayment).

    Some of the most natural instruments in a restructuring like a debt rescheduling with existing creditors or an Evergreen (or 99-year) Bond have been ignored. Even a default is nothing new in a debt restructuring and it is nothing bad as long as it is a consensual default. As the Chief Economist of Citibank said about a year ago: “The Europeans did not know that, outside Europe, debt reschedulings of sovereign debt with existing creditors have come a dime a dozen in recent decades” (remember that Russia was “bankrupt” as recently as 1998?).

    Last but not least, a haircut was made when that is exactly the instrument which should NEVER be used in the case of sovereign debt after only a few years of crisis! If one had wanted to turn the general rules of a debt restructuring upside down, one couldn’t have done a better job!

    It is totally wrong for Greece as the borrower to travel to Berlin/Paris with hat in hand and essentially beg for an extension of terms. In a restructuring, borrower and debtor have to operate at eye level; period! Greece would first have to do its homework (which the present government apparently has done), then work out a proposal which it deems acceptable to creditors and then present the proposal. And then Greece would have to say: “We have worked the numbers upside down. This is the most sensible solution we have come up with. It has advantages for us and advantages for you, and it has disadvantages for us and disadvantages for you. We need to agree on a compromise because neither you or us want something to hit the fan. And something will hit the fan if we don’t reach a compromise!”

    It wouldn’t hurt at all if, when Greek political leaders make that case, they would surround themselves with some highly respectable experts in the field of sovereign debt restructurings.

    One NEVER requests a “renegotiation” of an agreement only a few months old. One simply asks for a “minor amendment which has become necessary in light of recent events”. The creditors must never be put into a situation where they appear weak. The borrower must never be put into a situation where it has no choice.

    The first thing to accomplish would be to lower the interest expense for Greece. A rate cut? No way! That would be perceived as another hardly defensible give-away on the part of the creditors (apart from the fact that Greece’s interest rate is already quite low). The solution is a capitalization of interest for a certain period of time (say 2 years initially). The creditors can say that they have not given in on the interest rate. The borrower has the advantage that no interest expense flows through the budget for at least 2 years.

    Everyone seems to be expecting an OSI in the near future. Wrong! There would be a political uproar in the lending countries when tax payers are informed that they have to forgive Greece debt. Alternative? Well, take a sizeable chunk of Greece’s debt owed to public institutions, say 150 BEUR, which would be considered as unsustainable debt. Instead of forgiving it, convert it into a 99-year bond (see Mexico). The lending countries could tell their tax payers that “we have not forgiven Greece a single cent of their debt”. In practice, Greece would not have to pay any of that debt during the lifetime of today’s negotiators. Whether the ECB holds a 5-year Greek bond which cannot be paid or a 99-year Greek bond is a moot point (and perhaps an accounting issue, but the ECB does not do its accounting like a normal bank). The 99-year bond would initially trade at close to zero but, if Greece were to really make it in the next decades, its value could increase substantially. Probably never to 100% but certainly far above zero. And — the ECB would not forgive any legal claim against Greece which is a very important leverage.

    I could go on and on. Instead, I enclose a post which I recently wrote about this subject.

    Klaus Kastner

    September 4, 2012 at 7:19 pm

    • Words of wisdom Mr Kastner.

      Peter Lazos

      September 5, 2012 at 1:12 am

  7. A sad tale. The Euro destroys, and continues to. Maybe it will end in a European war. $$

    David Merkel (@AlephBlog)

    September 4, 2012 at 8:41 pm

  8. “…and does not deserve to be punished any further for the repeated failures of its political establishment over the last three decades.” – and yet the greeks keep voting for the same establishment. Every country has leaders it deserves, it has never been more true than in this case.


    September 4, 2012 at 10:44 pm

    • It’s not quite so simple because a democracy has downsides, too. Austria had 2 major parties dominating politics since WWII (Red and Black). Similar to Greece, during the first decades they garnered about 80% of the vote. Contrary to Greece, the parties were smart: instead of fighting one another, they teamed up and formed Grand Coalitions. They brainwashed Austrians that this was the only way to preserve social peace and economic prosperity and, in the meantime, they could peacefully and fairly divide the country up between themselves.

      The voters always knew that, after the election, they would have the same Grand Coalition. The only question was which of the two parties would pose the Chancellor. Yes, the voters got what they deserved but how could they have changed it?

      The only good thing about such a system is that, over time, it leads to so much popular frustration that if a talented politician/populist comes along, the system starts cracking. Austria had its Jörg Haider from the right and Greece has its Alexis Tsipras from the left. One of the reasons why such politicians become so popular is that they give voters for the first time the feeling that they can change something with their vote. An exhilerating experience…

      I think the much more important factor for the proper functioning of democracy is critical opposition. If that opposition does not take place within the parliamentary process because the political elites have arranged their lives well, then it has to come from elsewhere. I think the media as a Fourth Power must play a very important role in that.

      As an outsider, I get the impression that in Greece ALL elites (political and otherwise) have arranged their country for themselves similar to how the Grand Coalition in Austria had arranged politics for themselves. They may criticize the system but they will always remember that they are beneficiaries of it at the same time. And no one voluntarily ever opts for self-amputation.

      Klaus Kastner

      September 5, 2012 at 2:14 pm

  9. I had read penions below euro14,000 would not be affected by any cuts. Please give me the source if possible so I can confirm. For ref. the state pension in the UK is Euro 12,000 pm.
    Many thanks, excellent blog.


    September 7, 2012 at 4:10 pm

  10. […] mood during my trip last summer is captured in this post. The coalition government led by Samaras was in the middle of negotiations with the troika, which […]

  11. […] mood during my trip last summer is captured in this post. The coalition government led by Samaras was in the middle of negotiations with the troika, which […]

  12. […] mood during my trip last summer is captured in this post. The coalition government led by Samaras was in the middle of negotiations with the troika, which […]

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