By Neville Bennett*
There is nothing more certain than a Greek default.
Its creditors are imposing too high-a-price.
They dole out enough to keep a government just alive but take back the bulk of their advances to pay off bond-holders.
The idea that Greece is being bailed out is rhetoric, the reality is that the bond-holders are being bailed out.
The Greek technocrats that have been brought in to manage the crisis will try desperately hard to meet the terms that Europe and the IMF impose, but despite unheard-of sacrifices Greece will nominally still owe the equivalent of 120% of its GDP in debt in 2020 - even if the bailout goes to plan, which it will not because the creditors economists live in a cloud-cuckoo land which imagines that private enterprise will raise activity in the economy as the public sector shrinks.
Cameron in the UK got similar advice: cut the size of the public sector and the private sector will expand because it is being crowded-out by government spending now. It was stupid advice.
The private sector has not expanded to take up the slack, so the UK is in recession. Its current recession is now longer than the horrible depression of the 1930’s.
I have little doubt that should the technocrats retain power that Greece’s debt will be greater than 120% of GDP in 2020. I think GDP will be lower than expected, but the debt will be constant at best, but more probably larger because administrators will have to borrow more to keep Greece on life support.
As GDP shrinks, revenue falls too, so merely treading water requires some borrowing. If I am right Greece’s debt may be closer to 150% of GDP in 2020. That is close to its present estimated 160% debt to GDP.
So Greece is going to go through hell but there is no light in the tunnel.
Politicians, and notoriously Margaret Thatcher, liked to say “There is no other way ...”. Does this mean Greece has no choice but to accept austerity?
Theoretically, it could repudiate its debts or default on servicing them.
This is not an easy solution, partly because Europe never envisaged anyone leaving the union and did not include exit clauses. If Greece defaulted today it would not be able to pay its civil service or pensions, and it could not borrow from anyone in the short-term. It might get emergency loans from the IMF but the terms might be prohibitive. There has not been time to reintroduce the drachma.
Default would bring great misery, but adhering to the IMF/Europe bailout conditions will also bring great misery.
I do not think foreigners should advise the Greeks on their options, but I think the misery of default might be slightly preferable, as countries like Argentina which have been relatively recently been down that road have recovered prosperity. Iceland seemed to reach the nadir in 2008 but is now in recovery, and getting favourable credit-ratings.
I imagine that the political leaders of Greece are in touch with the bureaucratic, financial and business elites who might tend to share the same cultures as their European counterparts, and in their view a default would be unthinkable. It will take time for them to count the costs of austerity as the elite are not in the army of unemployed. Their “weltanshauung” is perhaps sympathetic to the ideal that austerity is necessary to pay for past excesses.
The Greek elite might therefore understand the philosophy of demanding wage cuts, cutting the civil service, cutting pensions and selling anything possible.
The IMF has always been big on “conditionality’ and it tends to apply a right-wing libertarian philosophy on its clients.
It demands privatisation, the sale of state assets (it wants to sell 50% of the Greek coastline), it demands the end of subsidies, high real interest rates, and a free labour market.
It detests unions and minimum wages. It likes low rates of income tax, has never been enthusiastic about dividends or capital gains taxes, but invariably presses an increase in regressive consumption taxes (GST, VAT etc).
The creditors have demanded the lowering of tax thresholds and an increase in VAT.
30,000 state workers are to be dismissed and most pensions cut by 20%.
The IMF/German agenda naturally involves an attempt to turn the Greek economy into an export economy, and the primitive instrument used is to ban wage bargaining, eliminate the minimum wage, and ban the customary annual wage bonus. The annual bonus is part of Greek life, as it is in Japanese workers or New York’s finance sector, and its loss is a ferocious attack on custom.
Germany is cutting up really rough. This “rescuer” does not trust the Greek government; it demands that the bailout tranche should go into a special account “for use only for international bond-holders ... available to the Greek Government only under advisement”. The Germans also want to bind Greece to any agreement; they will not be allowed to change their mind after the April elections.
The Greek economy is in a death spiral. The unemployed rate was 21% in November (latest data) with youth unemployment at 48%. In the period Nov 2010-Nov 2011 jobs fell by 9.4%. Production was down 11 % and manufacturing production a huge 15.5%. Consumer confidence precludes extra spending in the foreseeable future. The IMF has sacrificed the Greek economy on an alta of orthodoxy.
If I examine my conscience, I think I would admit that Greece has to some extent had it coming and if I was in power, would be taking a fairly tough line. Greek prices are inflated, there is massive tax evasion, starting a business is difficult. But the Greek person in the street has little responsibility for the state’s excesses. But they will be expected to bear the brunt of the readjustments.
I doubt that any elected regime will be able to maintain this level of austerity. The centre parties will disappear, leaving a terrible conflict between extreme left and right.
Greece has had civil war before, and (I fear) will fall again under the thrall of a right-wing strong man who will deliver wage destruction.
I must state a bias. Many years ago as an economics student I won a boat trip to Athens. I had little money but a well-worn copy of Thusydides’s History of the Peloponnesian War (still my recommended read) and hitched around Greece. There were few tourists then and the Greek people were as hospitable as they were to allied personnel evading Germans. They were amazingly generous. My bias is simple: Greeks are a great people who deserve a better hand than they have been dealt.
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* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.
nevillebennett@clear.net.nz
www.bennetteconomics.com
49 Comments
Totally. If they were to have a big messy default, clear out all the debts, they would have the strongest balance sheet in the EZ. They can stay in the EZ and still default if they can secure new lending. If they reduced their debt/GDP to zero, (had a debt jubilee) then I'm confident the stupid market would happily lend to Greece considering they would have the strongest balance sheet in the world. For a time at least, but the way I see the market, there is no focus on the long term, so who cares today if Greece will have to default again in 20 years.
It's so cruel keeping the victim on life support, just to keep slowly bleeding them. In reality, Greece is the Troika's Gimp. And like an abused houswife keeps going back for more, crying to herself "he loves me" "who else would want me", and getting a smashed face every time.
Greece has not called the shots for going on a year now. To characterize the country as making decisions ignores the hand holding up the puppet. Like any other IMF bailout, the first thing to go is sovereignty.
Greece is not allowed to default because doing so would trigger trillions of credit default swap payouts. And BTW, since when has there been an International Swaps and Derivatives Association (ISDA)?
Agreed. Even if the misery of the troika's bailout is less than the misery of default, at least the Greeks can 'own' the misery of their default, come to terms with it and, eventually, move on.
If they stick with the bailout my fear is that they will see themselves as the victims of forces outside Greek control, fail to implement genuine growth promoting reforms, and become seduced by the political lunatic fringe, be it left or right.
Let's face facts, Greece deserves everything that is currently happening to the country. With the assistance of Goldman Sachs it cheated and lied in order to gain entry into the EU. It's now payback time.
I remember reading an article, shortly after its entry into the EU, wherby Greek olive growers were claimimg subsidy for more than the entire olive crop of the EU, of which it was only the 3rd largest grower. Fraud seems to be an endemic Greek trait.
As I said previously fraudulent behaviour seems to be endemic throughout the Greek population and Government. The Greek population voted for the politicians that gave them generous welfare benefits that could only be paid for via increasing debt.. The party had to stop at some stage and that is now.
I would have to question the reason you believe this? Are you just making racist statements about the general personality of all Greeks? All the Greeks I have ever met seemed very down to earth, open and honest people. In fact the most dis-honest conversation I ever had with a Greek was, with a guy who described his people were pirates who never pay tax, his toungue was firmly in his cheek.
I would also have to question how claiming a fraudlently large subsidy (and getting away with it) could possibly have a negative impact on the Greek economy. Are you really trying to imply that the Greek people have secretly got all their Euro's piled up somewhere (obviously not in a bank) and because of this they are holding out, not paying tax (not spending their secret stash either by the way), and defaulting on purpose? and that the apparant depression is all just a big hoax? That seems rather unlikely, and I suspect the government debt actually can't be paid by the government because the economy is not able to produce a large enough government financial surplus to pay the government debt without the Greek population working like effective slave labour.
It would be unjust to try and convict 'the Greeks' of corruption, based on a personality charicature, and so to mandate that their society (or some groups in it) pay for this by actually working like slaves. In fact even if 'the Greeks' are inherently corrupt it would be wrong to make their society (or some groups in it) pay for this by actually working like slaves, because having a personality is not in any way criminal, only actions are criminal. Maybe you should form a less racist argument about Greek problems.
Maybe he would not consider his underlying motivations racist, but that is a racist statement with racist consequences. You can't just say 'those guys' deserve it, and then force them into a compromise on that basis without acting in a bigoted manner. There are definitely many many many Greeks who pay all their tax, and work hard as there are many many people who don't conform to any stereotype. Anyway slavery is wrong, milder slavery mildly so and no group of people can ever deserve it.
It's not a racist statement anymore than saying 'the Jones family down the road are irresponsible - they lost their house to repo and now the kids are whining about not having proper meals' - is racist.
Sure it's derogatory and unfair towards the kids to initimate blame towards them - to label the whole lot as spendthrifts, but it's not racist.
NZ is lowering its own lifeboat as we speak. Successive NZ govts have been fiscally irresponsible, to the point that they have encouraged the citizenry to expect instant gratification and invest in and be propped up in non-productive assets, and now they have to sell off national wealth-making assets to avoid bankruptcy.
I'm a kiwi - does that make me an auto-racist?
I also think this concept that the 'interest burden is the crux of the problem' is mistaken. It seems to me that if this simple model was correct then as the debt burden increased we should have seen the global economy get gradually and gradually worse. What we saw instead was that the global economy got suddenly very bad around 2008. Also if you look at the total debt burden on the US and UK economies (and yes their central banks do tell the truth about this) it has in fact been reducing since the crisis. That should not be possible, but there it is, its happening.
In NZ the effects have been more mild, but they are clearly still there.
http://www.rbnz.govt.nz/keygraphs/Fig5.html
In the middle of this is a better chart (debt to GDP) for Australia and the US.
http://www.debtdeflation.com/blogs/2012/02/10/rba-rates-decision-roy-morgan-unemployment/
(Notice the scale for the US is different as well).
I have seen much more detailed critiques of this idea which I also agree with, but I think that its an incorrect concept and leads to incorrect conclusions and blaming some of the wrong people for problems.
For example the idea that the central bank can control the total money supply used by the economy (via fractional reserve banking) is only an idea which has ever been believed by economists to be true. Its certainly never been achieved in practise, you can see Alan Greenspan denying that the Fed has achieved this in congressional testimony here. That is because they can't, it's impossible in the banking system used today.
http://www.youtube.com/watch?v=i2AqGQirW1Y
Having a good proxy for money would mean being able to control the total or at least forecast where it was going. Stupid idea, can't be done in practise. No nudge nudge wink wink necessary, if a commercial bank wants to lend they do, if they don't want to lend they don't.
You paint a bleak picture Neville on Greek default and I'm not sure why because as soon as bad money is taken out of a system it leaves opportunity for good investment — look how well Iceland is doing in just a short period of time and compare this to Japan's 20 lost years.
To put your comments into perspective the "bond holders" who you say "are being bailed out", are largely Germans - these people seem to want Greek blood for their personal bad investments.
To this I would just mention that you should read your history books and look to 1953 when all of Europe including Greece accepted losses on Germany loans/bonds, because they were unable to service their debts.
Just a pet peeve Neville but why do you always put an apostrophe before an 'and' this seems like bad grammar on your part.
It would be helpful if someone like Neville could set out just what would happen if Greece abandoned the Euro and defaulted to some extent.
I presume most Greek debt is denominated in Euros. I cant really see what is wrong with them walking away from the Treaty ( Maastricht? ) and telling everyone that 1 Euro is worth 1 Drachma from tomorrow morning. They can also tell everyone that they are now owed Drachma's instead of Euro's. If the borrowings are governed by Greek law as we are told and you can put in a haircut clause after the event you could just as easily change the currency on the debt instruments .
The Greeks could then let the Drachma float and if it went to 50 Euro cents to the Drachma the effective haircut to bond holders would be less than just agreed to . It would of course catch the ECB as well but that would be their problem.
They could pay their civil servants by printing some money the same way the UK and US are and they could meet their debt and interest payments by printing some more. They wont be able to borrow offshore but they cant now anyway without selling their souls and or their coastline. Whats the diff?
With the Drachma at 50 Euro cents every german would take their holidays in Greece and probably buy vast amounts of Olive Oil and Ouzo. That should provide enough hard currency to pay for oil and Honda's ( wont be able to afford BMWs ) . There would be short term chaos and a few European banks would fail which could ripple any old where maybe including here but the Greek economy might stabilise quite quickly. Little problems like a civil war and a fascist dictatorship would be avoided,
It all sounds so simple and attractive there must be a huge fish hook somewhere. Can someone explain where it is please?
I doubt Neville has thought about it Waripori...the default will happen...just a matter of time...then you get a 'Leeman' style domino collapse...heaps lost....many banks in strife...more money lost...
The real issue is not Greece....it's Italy and Spain....they will follow the default line because they will see that Greece can emerge from the hole if it has it's own currency..."They" being the voters not the pollies.....plenty of bloodshed to come.
Do not be surprised to see pollies executed in some of the piigs states.
It would trigger a writedown of asset values and the payout of trillions of credit default swaps, in the us I believe, which are too big to make good on.
http://www.huffingtonpost.com/ellen-brown/greece-default_b_1287970.html
So.... is it a giant conspiracy? The elites, banking cabal or whatever or whoever need to keep the proles knuckled down to their respective national debts to protect themselves. If the peoples of the debtor nations realised how easy it is to repudiate debts incurred on their behalf or at least in their name the dominoes would never stop falling.
Is that what is going on? This is actually a genuine question this time. Is there not some fearsome retribution that would be launched against the citizens of countries that decide to default? Can whole countries just play jingle mail without even having to send back the keys to the kingdom?
It cant be that easy can it?
I guess you have to look at Iceland, and watch what happens there going forward to see. Teh country is still there, and in fact going forward again currently!
But yes, if by conspiracy you mean, theft of a country via a network of banks working together in front of a private central banking network, buying off politicians, committing accounting fraud, and placing their own people inside governments at all levels, including the PM role..YES, that is what it is!
Here's an account of how Ireland has managed to turn itself around so quickly. Something about putting the needs of its people ahead of its bankers. Who would have thought.
http://www.businessweek.com/news/2012-02-22/icelandic-anger-brings-debt…
Iceland was a bit different wasn't it? Was it not a case of the Brits trying to get their money back because they paid out depositors of failed Icelandic banks with operations in the UK. I seem to recall the Icelandic Govt agreeing to cover the losses and then they or a new Government gving the Poms the fingers instead.
That is not quite the same as a Government walking away from its own debts.
Still like to know what actual recourse a creditor has with a Sovereign debtor. They cant actually send the boys around with baseball bats can they?
You are technically challenged. The reserve bank issues cash in the form of Government bonds to the banks — this is a state backed bond and possibly secured against the Governments assets though it doesn't have to be as it is a promissory note.
When the bank has the asset (bonds) on board they can lend that money at a ratio of 6 to 1 to the general public — this money is generally lent secured against assets such as property though it doesn't also have to be.
The problem is as in Greece when a bank the size of JP Morgan pumps $b's of dollars in to the economy they create an exponential risk curve where the risk is held by the local people while any rewards are banked.
In NZ the risk is also with the people as when the underlying value of the assets (property), is undermined then the banks will try to get the people to pay for the banks own bad bets.
Back to Greece where the dollars that JP Morgan put into the country where never enjoyed by the people, Greece was used by a big banks as a dumping ground for their toxic losses in Europe.
Some people call this financial terrorism and it would be interesting if banks did this here in NZ as to your view of hanging terrorists Iain.
I like the newly coined term "bankocracy" ;
http://www.zerohedge.com/news/europes-cash-trash-ltro-scam-and-indentured-servitude-citizenry
Where Greece is concerned - I suspect the bankocracy will cut them loose once all the asset titles to the natural and physical resources are successfully transferred.
When people wake up Iain, there will be another round of 'Nuremburg Trials' and many of those responsible will hang. Files have and are being prepared for years and there are people dedicating their lives to such. It just a matter of time until whats happening in Greece will spread across Europe and to the US...
The nazis were not in fact convicted for 'ruling' they were convicted for aggression (meaning invasion and war), and genocide. These crimes were clearly attributable to the people who were convicted. However if you were in say Ben Bernanke's job and followed ineffective economics policies across the US you would soon find a lynch mob coming after you, which will help nobody.
Because Wall Street and the City of London financed Hilter, yes I know that Iain.
My reference to Nuremburg was only in a general sense in regard to crimes against humanity, being brought to trial, convicted, punished, ....nothing more. At the end of the day most people don't need to understand what is going on and why, that will all come out in the trials anyway.
Iain and all
Let's avoid jumping to the use of the 'nazi' word and calling for physical acts of violence against people.
A warning to all to avoid nationalistic or ethnic stereotyping. The moment I see people descending down that path I will be deleting comments and removing commenters.
kind regards
Bernard
BH - Seems to me you referenced Iains name incorrectly for a start, which is poor of you! Then taken the use of a word out of context, when it was used inline with the posts, as they related to the threads flow..
I'm not for threats of violence or out of context comparisons, but given the thread, there seemed to be none of that happening.
Instead you have singled out Iains name incorrectly, and made a song and dance of it, unnessessarily, IMO.
Perhaps if you were concerned about where it could lead, you could have issued a more generalist statement, otherwise it reads like you take issue against Iain with bias! ..Any particular reason for that?
"Let's avoid jumping to the use of the 'nazi' word and calling for physical acts of violence against people" good stuff Bernard...no need to fan the flames and throw petrol on too.
Afterall, we have enough physical acts of violence against the mortgaged on an every day basis by the parasites and their legal right to take back what credit they created regardless of the damage they do to ordinary people whom they encouraged to borrow the credit in the first place.
Nobody forced the ordinary people to take out a mortage. They had a choice to remain debt free, but chose not to. And thus placed themselves at the mercy of the banks, should circumtances change. If they were prepared to live within thier means and not borrow, then a Bank simply becomes a place to store excess money.
You know better than that moa man. Take small children into a supermart and try to prevent them from getting at the chocolate..the cakes...the lollies...fat cance right!
The economy has been manipulated into a position where today the media, the RE mob, the govt liars, the RBNZ and the parasites know that the average Kiwi peasant either rents or goes cap in hand to a bank for credit to be able to pay the bubble bloated price for a box to 'own'
This is not relevant, because payments are being extracted from the economy through tax. They are not being extracted as private debt payments. In fact the private debt payments clearly get made before the government gets its tax payments so they take priority.
Also this argument makes zero sense on any collective scale (given that the argument was valid) because you are effectively making many well behaved Greek citizens responsible for the behaviour of others who were less 'responsible'.
Also incidentally you are setting an expection for these citizens to correctly anticipate the global financial crisis. Something which was forecast by about as many economists as you can count on two hands.
Pivotal members of the economics profession are suppost to have thought about the likelyhood of a massive international financial crisis, but he didn't do any better. In fact in many ways they did much worse because they had much more information to go on,
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all
There is a section titled "Nobody could have predicted...".
The Greeks are not lazy. They have the longest workhours in Europe http://www.bbc.co.uk/news/magazine-17155304
My view of the Euro is that you have many different economies all pulling in their own direction. With the likes of Greece, Portugal etc pulling the value in one direction (down) and the likes of Germany pushing the value up - you end with a currency somewhere in the middle. This benefits Germany more than it would Greece as Germany can continue exporting at a relatively lower exchange rate than they would have had if the deutsche mark still existed, where Greece has a stronger currency in the euro that is hampering their economy in the form of exports.
My advice to Greece would be to abandon the Euro - return to the drachma at whatever exchange - printing money and repaying the bonds in drachma (effectively defaulting) and ignoring the IMF. From previous articles I've read - countries following IMF advice end up screwed anyway. The bail-out is anyway yjere as safeguard to bond holders - not the Greek govt.
The benefits that I see in this arguement is an improved tourism industry - cheaper holidays for other Europeans due to strong euro/ drachma exchange rate. Greeks having previously invested offshore can re-invest into Greece at higher interest rates, cheaper housing (in euro terms) etc. The domestic investments in Greece will have lost Euro value but the purchasing power in Greece should remain equal (to some extent). The Greek government can also support the banks with domestic funding.
Once the economy is working again and employment / public services restored, the country can start fighting inflation at its own pace.
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