As noted more fully here the first instinct is for creditors and debtors alike to bury their heads in the sand and talk rather than act…effectively to kick the debt can down the road as they did over much of the last few years helped more recently by rate cuts and the introduction of QE.Comment:Image is snapped from the article.
Now come Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: "They always run out of other people's money."
... In January, Greek voters gave power to the left-wing Syriza party, one third of which, the Economist reports, consists of "Maoists, Marxists and supporters of Che Guevara." Prime Minister Alexis Tsipras, 40, a retired student radical, immediately denounced a European Union declaration criticizing Russia's dismemberment of Ukraine. He chose only one cabinet member with prior government experience — a former leader of Greece's Stalinist Communist Party. Tsipras's minister for culture and education says Greek education"should not be governed by the principle of excellence . . . it is a warped ambition." Practicing what he preaches, he proposes abolishing university entrance exams. Voters chose Syriza because it promised to reverse reforms, particularly of pensions and labor laws, demanded by creditors, and to resist new demands for rationality. Tsipras immediately vowed to rehire 12,000 government employees. His shrillness increasing as his options contract, he says the European Union, the European Central Bank and the International Monetary Fund are trying to "humiliate" Greece. How could one humiliate a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras's approach to mollifying those who hold his nation's fate in their hands is to say they must respect his "mandate" to resist them. He thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them. Tsipras, who says the creditors are "pillaging" Greece, is trying to pillage his local governments, which are resisting his extralegal demands that they send him their cash reserves.Comment: Image capture from www.syriza.gr. The Wiki article on Tsipras is revealing: an atheist. "[his] youngest son's middle name is Ernesto, a tribute to Che Guevara."
The first thing to know about the Greece story is that it's not really about Greece. Not, at least, in the big financial picture, where the country's measly $242 billion economy is only a shade larger than Connecticut's, and where its debt, the equivalent of $360 billion, would be a rounding error of the nearly $18 trillion in U.S. obligations. Why Greece and its likely debt default and possible exit from the euro zone matters is as a symbol—of how far the global community will go towards rescuing Greece from its debts, and ultimately, perhaps, for whether similarly debt-laden weak sisters in the euro zone should simply leave the union, go back to their original currencies, and inflate their way out of trouble.
... Default is the simplest way out of the crisis from a financial standpoint, but the ramifications could be substantial. "If Greece were a company and it had creditors, there would be a default," Krosby said. "But it's not a company, it's a country, and even though as a country that's very small ... the fact of the matter is geopolitically it plays an important role."
... Never mind that the long-term prospects for the state to satisfy its creditors remain dubious, the markets are willing to buy into the extend-and-pretend scenario.
... "A failed outcome in Greece would also have negative implications for the rest of the euro area," Credit Suisse added. "For us, the risk of contagion would be more prevalent through the banking system than through sovereign debt. But it's important to be humble: there may be unanticipated or underappreciated channels of contagion and risk that could prove surprisingly powerful." Consider, then, the ensuing period of deals and nondeals, news of breakdowns and rumors of break-ups, to be more of the financial kabuki theater that has permeated the euro debt crisis.Comment: Per Wiki the estimated 2015 GDP is $ 294 Billion. Image source (snap from article)
Comment: Image source. My take:
- 'Grexit' could be disastrous for Greece
- Whatever the outcome, it will have a knock-on effect in other countries
- The US is worried
- If Greece goes, others could follow
- The global economy won't like it
... the European Commission, the IMF and the ECB are unwilling to unlock bailout funds until Greece agrees to reforms. They want Greece to implement a series of economic changes in areas such as pensions, VAT and on the budget surplus before releasing €7.2bn of funds, which have been delayed since February.Comment: Image capture from article. An analogy to this at a familial level would be parent to child: "your allowance will stop if you don't clean up your room"
European Union officials blamed the collapse on Athens, saying it had failed to offer anything new to secure the funding it needs to repay 1.6 billion euros ($1.8 billion) to the International Monetary Fund by the end of this month. Greece retorted it was still ready to talk, but that EU and IMF officials had said they were not authorized to negotiate further. Athens insists it will never give in to demands for more pension and wage cuts. "This is very disappointing and sad. It was a last attempt to bridge our differences but the gap is too large. One can discuss a gap, but this is an ocean," said a person who was close to the talks. Both sides acknowledged the talks had lasted less than an hour, although even here accounts differed: Greece put the length at 45 minutes, EU officials at half an hour. Following what it called this "last attempt" at a solution, the EU's executive Commission said euro zone finance ministers would now tackle the issue when they meet on Thursday. With no technical deal apparently possible, the ministers are likely to have to make difficult political decisions on Greece's membership of the currency bloc. Failure to keep Greece in the euro, after years of arduous negotiations and two emergency bailouts totaling 240 billion euros, would send it lurching into the unknown and mark a historic blow to the EU's most ambitious project.Comment: Getting interesting.
The first Greek problem is that a huge percentage of its able-bodied population is not working and simply collecting state pensions. It goes without saying that Greece’s economy is in recession, and its official unemployment rate is 26.6%, something the U.S., for example, hasn’t seen since the Great Depression. But fully four fifths of Greece’s budget goes to pensions and state wages, and 10 percent of the nation’s entire economic output comprises pensions alone.
... The second problem is that Greek taxes are sky-high, killing incentives for hard work, enterprise, and industry. It seems likely that so few people are bothering to work because so much of their income is sacrificed to other people’s pensions and government wages. The IMF’s Rice pointed out that "[t]he policy of increasing already-high rates on a low tax base again is not sustainable. It is critical to significantly broaden the tax base." Rice did not point out that the tax base is broadened only by more people working in the private sector, which itself can be accomplished only by lowering the tax rates.Comment: Image source and license information. See also: Greece struggles to address its tax evasion problem
The new government of Greece, led by Alexis Tsipras, has promised to tackle tax evasion. It hopes this strategy will yield €3bn ($3.4bn) in the coming months in order to cover part of the cost of its €12bn Thessaloniki anti-austerity programme. This would entail various measures – a gradual increase in the minimum wage to reach €750, an extra month’s income for pensioners receiving less than €700 a month, and various welfare benefits – to help the most vulnerable members of the community. “If this government thinks it can change the system in a few weeks it is underestimating how complicated it is to collect tax in Greece,” says Haris Theoharis, narrowly elected to parliament for the centrist To Potami party. Between January 2013 and June 2014 he was secretary general for public revenue, a job imposed on the then conservative New Democracy government by the country’s creditors, increasingly irritated by slow progress against fraud and tax dodging. “In Greece more than two-thirds of the population – private- and public-sector employees – pay tax in the normal way, because it is deducted at source,” Theoharis explains. “The problem is that it’s still too easy for contractors, people in the professions and some big companies not to declare all or part of their earnings.” He claims the state misses out on between €10bn and €20bn in revenue. Direct and indirect taxation should bring in an average of €50bn a year.
Greece and the other countries in the eurozone are once again at an impasse days ahead of a crucial deadline. If the two sides do not reach an agreement on how to extend a 240 billion euro ($270 billion) loan program beyond June 30, Greece will most likely default on its debts and would probably be forced to abandon the euro. ... Whether Greece will have to go on in this zombie financial condition will also depend on the International Monetary Fund and the European Central Bank, both of which have lent money to Greece. I.M.F. officials have been privately pressing the eurozone for debt relief for Greece, but the fund’s managing director, Christine Lagarde, should do more to convince European leaders that the country cannot succeed unless there are major changes to the loan program. The president of the E.C.B., Mario Draghi, recently said “growth with social fairness and fiscal sustainability” had to be a part of any deal between the eurozone and Greece. More than five years have passed since European officials reached the first loan agreement with Greece. Yet instead of moving toward recovery, the country has been trapped in an economic calamity with no end in sight.Comment: Image source Night of the Living Dead. Instead of brains, Greece wants bailouts. Some nice Zombie sound effects
European officials are preparing for the worst as Prime Minister Alexis Tsipras’s brinkmanship pushes Greece’s finances to the limit. Chancellor Angela Merkel urged Tsipras to accept the framework for financial aid as the German public turns against supporting Greece and euro-area officials demanded a proposal for stabilizing the country’s debt by the end of Friday. The International Monetary Fund team left Brussels earlier this week, despairing of Tsipras’s tactics. In response, Greece ruled out cutting pensions and demanded a debt restructuring. Bank stocks plunged. “People are really fed up with this,” UniCredit SpA Chief Global Economist Erik Nielsen said in a television interview. “They’ve never seen anything so completely ridiculous, frankly speaking, from a debtor country.”Comment: To use a Poker analogy, Alexis Tsipras has a "handful of nothing"
Spain, Greece, Portugal and Ireland all entered the crisis with huge current account deficits—the balance on all exports, imports and income between a country and its partners. Such deficits are typically corrected via currency devaluation, which boosts exports and curbs imports. But membership in the euro makes devaluation impossible. Instead, prices and wages must decline, a painful process called “internal devaluation.”Comment: Kρίση σύλλογος = Crisis Club. Image source
Economist Holger Schmieding at Berenberg Bank in London predicts a period of "disorientation" while investors figure out what the impact will be. The first word of an impending departure would likely roil markets, especially in Europe. Stocks and the euro might fall. And borrowing costs for other eurozone governments with shaky public finances, such as Italy and Portugal, might rise, at least temporarily. Yet Schmieding foresees no serious long-term damage and dismisses talk of a comparison to Lehman's collapse. The risk for Europe as a whole, he says, "is very, very small — virtually zero."
'Haven of waste': Cash-strapped Greece pulls plug on state broadcaster
Excerpt:
Athens promised its creditors this week to dismiss 4,000 civil servants this year, including 2,000 by the end of the summer and 15,000 by the end of 2014.
That may not sound daunting in a public work force of around 650,000. Yet, through more than three years of drastic budget cuts and a rapidly shrinking economy, the debt-ridden country has yet to fire a single government employee.
To understand what the government is up against, consider the case of Georgia Tsiounis and more than 10,000 other “temporary” workers.
Eight years after landing a four-month contract with the municipality of Athens to water flowers and trim trees while other workers were on vacation, she was told recently that her services would be eliminated after her latest contract ends.
Rather than meekly accepting her fate, she turned to the well-worn tactic of filing a restraining order seeking to make the job permanent. While she may well lose in court, legal analysts say, she cannot be fired while the case is pending.
Given the glacial pace of Greece’s overburdened and inefficient court system, her case and thousands more like it will not be heard for nearly two years.Comment: Messy
Eight years after the Athens Olympics, many venues have been left to rot
Excerpt:
The Greek embassy estimated that it cost Greece €8.954 billion to host the Summer Olympic Games in 2004, including the construction of the Olympic Village and several shiny new athletic venues. Since then, though, many of those venues have been abandoned, making one Olympic legacy a set of decaying structures.
Some of the venues have gotten a bit more love than others. In the last two years, the Olympic Stadium has been used by a local soccer club (although it has been set on fire during football riots). The athlete's village has been converted into worker housing, and the hockey venue hosted the Special Olympics last year, although debris from those games is still lying around. Otherwise, many venues are used infrequently or have been abandoned entirely, pools given over to frogs, the taekwondo and handball arena used rarely for non-sporting events. Sport-specific venues, like the softball venue (a sport not played in Greece) and the beach volleyball stadium (usually played on one of Greece's actual beaches), have found little use beyond the occasional concert. For many in Greece, these venues serve as an unpleasant reminder of the country's previous excess spending in light of its current financial woes.Comment: More here. See previous post.
When it comes to overspending, Greece gets the gold medal.
Governments in the Greek capital of Athens haven't balanced a budget in nearly 40 years, and the country narrowly averted bankruptcy in May before panicky European partners grudgingly put up massive rescue loans.
While many factors are behind the crippling debt crisis, the 2004 Summer Olympics in Athens has drawn particular attention.
If not the sole reason for this nation's financial mess, some point to the games as at least an illustration of what's gone wrong in Greece.
Their argument starts with more than a dozen Olympic venues – now vacant, fenced off and patrolled by private security guards. Stella Alfieri, an outspoken anti-Games campaigner, says they marked the start of Greece's irresponsible spending binge.
"I feel vindicated, but it's tragic for the country ... They exploited feelings of pride in the Greek people, and people profited from that," said Alfieri, a former member of parliament from a small left-wing party. "Money was totally squandered in a thoughtless way."
The 2004 Athens Olympics cost nearly $11 billion by current exchange rates, double the initial budget. And that figure that does not include major infrastructure projects rushed to completion at inflated costs. In the months before the games, construction crews worked around the clock, using floodlights to keep the work going at night.
In addition, the tab for security alone was more than $1.2 billion.
Six years later, more than half of Athens' Olympic sites are barely used or empty. The long list of mothballed facilities includes a baseball diamond, a massive man-made canoe and kayak course, and arenas built for unglamorous sports such as table tennis, field hockey and judo.
It is time to ponder the once unthinkable: that Greece might end its 10-year use of the euro and return to its former currency, the drachma.
Such a move is still officially anathema in Athens. But a growing body of economists argues that it would be the best course, whatever the near-term financial and economic implications. And now, with a referendum on the European-led bailout facing Greek voters, a vocal minority that has long called for a return to the drachma might find itself with a growing group of listeners.
A return to the drachma is unlikely to offer a quick cure for Greece’s ills. Default on the nation’s $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.
But drachma defenders contend that these worst fears are overdone. Yes, there would be disruption and panic initially. But, they say, pointing to Argentina’s case when it broke its peg with the dollar in 2002, the export boom ignited by a cheaper currency and the ability to control the drachma would eventually work in Greece’s favor.
“The real problem is that we are operating under a foreign currency,” Vasilis Serafeimakis, a senior executive at Avinoil, one of Greece’s largest oil and gas distribution companies, said of the euro. In the last year, he has been banging the bring-back-the-drachma drum.
“If we had our own currency, we could at least print money,” Mr. Serafeimakis said, referring to the ability to revalue the drachma. “And what is the worst thing that happens if we do this? I don’t get a Christmas gift from one of my bankers.”
I say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma.
If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.
At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership.
The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro.
...
Greeks - even those fiercely opposed to Pasok from the left and right - are resigned to the fact that the country faces years of painful restructuring. The real question at issue is a) under whose control and b) in whose interest?
It is for this reason that, while the Greek CP wants out of the euro, the growingly influential far left parliamentary group SYRIZA does not, and neither does the hard-right religious party LAOS. Everybody can see that an external devaluation will be chaotic, painful and cause its own kind of social unrest, just as the attempted internal devaluation is doing.
But events are moving fast. Even as the Greek centre-left toys with the concept of repudiating "odious" debt, as per Latin America in the 1990s, the debt is being concentrated into the hands of other sovereigns - the European Central Bank (ECB), the International Monetary Fund (IMF), other governments…
The reason the markets are scared is not just because of the difference between 50% and 90% default, it is because in the old scenario (AKA the one we agreed on last Thursday morning!) this sovereign-held debt was out of the reckoning. An "Oxi" vote (it means "No" and was scrawled on thousands of banners hung from balconies last Thursday) would signal default across the whole range of debt, causing new turmoil for European states.
What caused Mr Papandreou's sudden move? Even some of the MPs closest to him had no idea it was going to happen.
Many of my Twitter correspondents suggest it was the vehemence of "Oxi Day" last week, leading to clashes between parading soldiers and protesters and local Pasok politicians getting hounded off the parades.
European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.
The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.
“Overall the outcome is better than we anticipated one week ago,” Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, said in an interview. “There are several issues left open, but I do believe that getting a more necessary debt relief for Greece is a pretty important step.”
Last-ditch talks with bank representatives led to the debt- relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc. Greek Prime Minister George Papandreou will address the nation at 8 p.m. in Athens to outline the summit’s ramifications for the country at the eye of the two-year sovereign debt crisis.
Private owners of Greek bonds will accept a 50 percent writedown on their investment, enabling both a 100 billion euro cut in Greece's sovereign debts and allowing a new Greek programme of aid of 100 billion euros, German Chancellor Angela Merkel said on Thursday.
"Our goal is that the debt of Greece by 2020 is 120 percent (of GDP)," Merkel told journalists after a meeting of euro zone leaders.
"A nominal haircut of 50 percent has been agreed. On the basis of this, we will have a new programme for Greece with a value of 100 billion euros."
She said the public sector would make a further 30 billion euro contribution towards private sector participation.
America has good reason to worry about Greece
Excerpt:
At the end of last week, the US looked hard at Greece and was scared. So tiny an economy should not be bringing all of Europe low and even threatening to explode the euro, but it is. What started as a US financial crisis plunged Europe into recession; was Europe about to return the compliment? What, Americans began to wonder, did Europe’s problems tell them about their own?
The cause of the present turmoil, Greek public debt, has aroused fears of a wider sovereign-debt crisis and heightened concern about US government borrowing. More immediately, investors are asking, what if the European Union keeps making a hash of the problem? Will there be a second European banking crisis, and would it infect the US financial system? Even if the answer is no, the US recovery is still fragile. The economy would not be immune to another slump in EU demand.
These fears can be exaggerated, but none is unfounded. In any event, fears do not have to be well-reasoned to make a bad situation worse and justify themselves.
The least substantial line of alarm is Greece as fiscal harbinger. The US might not be Greece, say pessimists, but California could be. Here is a state so strapped for cash that it recently resorted to paying its workers with IOUs rather than money. (If that is not default, it is the next best thing.) Could California do for the US what Greece is doing for the EU?
£95bn bailout for the Greeks agreed in largest ever financial bailout of a country
Excerpt:
He unveiled austerity measures and tax rises worth 30billion euros (£26billion) including:
* ˜An increase in the retirement age from an average age of 53 to 67;
* ˜Government workers to lose annual bonuses worth an extra two months' pay;
* ˜Ten per cent tax rise on alcohol, cigarettes and petrol;
* ˜Three-year wage freeze in the public sector;
* ˜Early retirement will be limited or abolished altogether;
* ˜VAT increase from 21 per cent to 23 per cent.
Greek Wealth Is Everywhere, Just Not on Tax Forms
Excerpts:
Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion — a figure that would have gone a long way to solving its debt problems.
“We need to grow up,” said Ioannis Plakopoulos, who like all owners of newspaper stands will have to give receipts and start using a cash register under the new tax laws passed last month. “We need to learn not to cheat or to let others cheat.”
...
Experts point out that ducking taxes is part of a broader culture of bribery and corruption that is deeply entrenched.
Mr. Plakopoulos, who supports most of the government’s new efforts, admits that he and his friends used to chuckle over the best ways to avoid taxes.
To get more attentive care in the country’s national health system, Greeks routinely pay doctors cash on the side, a practice known as “fakelaki,” the Greek word for little envelope. And bribing government officials to grease the wheels of bureaucracy is so standard that people know the rates. They say, for instance, that 300 euros, about $400, will get you an emission inspection sticker.
Some of the most aggressive tax evaders, experts say, are the self-employed, a huge pool of people in this country of small businesses. It includes not just taxi drivers, restaurant owners and electricians, but engineers, architects, lawyers and doctors.
The cheating is often quite bold. When tax authorities recently surveyed the returns of 150 doctors with offices in the trendy Athens neighborhood of Kolonaki, where Prada and Chanel stores can be found, more than half had claimed an income of less than $40,000. Thirty-four of them claimed less than $13,300, a figure that exempted them from paying any taxes at all.
Such incomes defy belief, said Ilias Plaskovitis, the general secretary of the Finance Ministry, who has been in charge of revamping the country’s tax laws. “You need more than that to pay your rent in that neighborhood,” he said.
He said there were only a few thousand citizens in this country of 11 million who last year declared an income of more than $132,000. Yet signs of wealth abound.
“There are many people with a house, with a cottage in the country, with two cars and maybe a small boat who claim they are earning 12,000 euros a year,” Mr. Plaskovitis said, which is about $15,900. “You cannot heat this house or buy the gas for the car with that kind of income.”
