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Greece: heading for the exit?

posted 7 May 2012, 14:21 by Ian Ilett   [ updated 18 May 2012, 02:25 by Admin uk ]

 By Michael Roberts

  May 17, 2012

 The Greeks are having another election on 17 June.  The 6 May election was a disaster for the Troika.  An anti-austerity party, Syriza, gained the balance of power and ensured that no pro-Troika government could be formed. Now Greece is in a limbo for another month under a surprised premier, Panagiotis Pikrammenos, the president of Supreme Court.

But the Greek economy is not standing still.  On the contrary, the economy is beginning to melt down.  First, the austerity measures are collapsing.  In June, Greece should have improved tax collection by 1.5 percent of GDP, reduced social spending by 1% of GDP and implemented another pay cut and reduced public sector jobs by 12%.   It has not done so.  Also, unpaid debts owed by the government to third parties for over 90 days now stand at €6.3bn euros, or 3.1% of projected GDP this year.  Athens is supposed to shrink its budget hole to 6.7% of GDP this year based on a supplementary budget approved by parliament earlier in the year.  The EU Commission’s spring forecast sees the deficit at 7.3%.

More immediately, the Greek president announced during coalition negotiations last weekend that deposits in Greek banks are falling by up to €1bn a day.  At that rate, the banks will be under water before we get to the election result.  The banks will have to rely on emergency lending assistance (ELA) from the Greek central bank.  But that requires collateral and Greek banks are running out of those too.

Worse, the ECB is not willing now to take collateral from some Greek banks because they have not yet restructured their balance sheets since private sector involvement (PSI) bond swap, which required them to recapitalise.  Recap funds from the EFSF have been delayed because of the political impasse and the ECB wants to wait for that funding.  So, in the meantime, the banks must again rely on ELA from the central bank.  All these demands for ELA will drive up the central bank’s liabilities to the Eurosystem (already at €125bn) to new heights.  So a financial crisis is brewing in Greece while its politicians start an election campaign.  I

It seems that Mrs Merkel and other Euro leaders still do not get it.  A Greek default is seen as a ‘one-off’ without serious consequences for the rest of the Eurozone.  But that’s wishful thinking.  I have estimated the exposure of other Eurozone states (and their taxpayers) to a disorderly Greek sovereign debt default.  Adding up what the Greek government owes to other EU governments from the two bailouts, what the central bank debts are to the Eurosystem and how much the ECB has already lent to Greek banks and holds in Greek government debt, we find that the Eurozone is exposed to around €500bn of potential losses, or near 5% of Eurozone GDP.

Germany and France alone are exposed to around €150bn each.  And this is just exposure to sovereign debt.  If the Greek private sector should also default on its loans.  French and German banks will take a sizeable hit (French banks have about €25bn lent to Greek companies.  When you add all this in, the total exposure is closer to €750bn.

The Germans and other Euro leaders seem unwilling to renegotiate the bailout package to reduce Greek public debt and reverse the austerity measures as any Syriza-led government will demand.  That poses the likelihood that the Euro leaders will force Greece out of the euro by cutting off funding to the government and to the banks from the ECB.  The Greek government only has cash to last until the end of June to pay for public sector salaries and services.  With the ending of Troika money, it will default on its debt obligations.  Then the Euro leaders can expel it from the euro system, even if the Greeks go on using the euro for money.  The IMF reckons that this will cause a 10% contraction in Greek real GDP over the next year and with a 50% devaluation in any new Greek currency, inflation would jump to 35%.  Credit for companies and households would disappear, so bankruptcies will mushroom.  The Greek government would have to act to nationalise the banks, impose capital controls on any flight of money out of Greece and also take over major companies.

The rest of the Eurozone and Europe will not escape from the consequences of a Greek exit. The whole of Europe would be plunged into a deeper recession, probably contracting the European economy by up to 5% in one year, while inflation would rise too.  So the Germans and the other Euro leaders will have to decide what to do or the euro itself could head towards break-up before the year is out.  The firewalls against ‘contagion’ are not adequate.  The new European Stability Mechanism (ESM) is still not in place and its effective functioning could be delayed until the autumn while the German parliament gets round to ratifying it.  The ECB does not appear willing to consider any more extraordinary measures for liquidity support to the PIIGS.  And the Euro leaders are bickering about austerity or growth.

And austerity is not working.  The irony is that before the crisis, fiscally-prudent Germany saw public spending rise at a much faster rate than in Greece or Spain, but since the crisis, it is Greece that is taking a truly humungous hit to public services and conditions.

There is a way out of this. But it’s not on the basis of the pro-banking, pro-capitalist policies of the Euro leaders. Greek state finances would be fine if the richest Greeks paid taxes and did not spirit their money offshore to buy property in Kensington, London or Monaco, with the connivance of Greek banks and politicians granting their wealthy friends and multinationals all kinds of tax advantages and favours that have diluted tax revenues to the point where there is not enough in the kitty to maintain public services.  According to the Tax Justice Network, over a trillion dollars lie in offshore banks and companies in tax havens (not all Greek money of course).  Recover this money and governments could not only reduce their debts but pave the way for a lowering of taxes across the board to encourage investment and growth and increase spending power for the majority.

Capital controls, public ownership of the banks and major corporate sectors to organise a plan for investment and growth: this is not just an alternative programme for Greece but for all of Europe.

 by Michael Roberts, 7 May 2012

  The two collaborationist parties in Greece have lost the election.  Together they have polled only 32% of the vote with the leading party, the conservative New Democracy, getting under 19% and the Blairite PASOK just 13%.  So, even with the boost of 50 extra seats in parliament, the two parties will have only 149 seats, two short of a majority.

The anti-austerity parties that managed to cross the threshold of 3% for seats in parliament did well, polling over 46% of the vote.  But the anti-austerity vote is hopelessly divided between the outright fascists and nationalists on the right, polling about 17% between them; and the left including SYRIZA (which finished second), the stalinist Communists and pro-Euro moderate left, polling just under 29% combined.

The collaborationist parties’ votes were mainly from the better-off and middle-class professionals in the private sector.  The anti-austerity parties were backed by the pensioners, the poor, the unemployed and the youth, but their alternative to austerity was confused by nationalists and fascists who want to blame the Eurozone leaders and immigrants from Turkey and Eastern Europe for unemployment.  On the left, the Communists’ main demand was to leave the Eurozone and a refusal to join any anti-austerity coalition.

The result is a bad defeat for the Troika and the policies of austerity.  The argument of the collaborationist parties was that there is no alternative to the bailout agreement and austerity.  Of course, there is an alternative.  I have outlined this in previous posts (An alternative programme for Europe, 11 September 2011) and it has been presented to some extent by the leaders of SYRIZA.  It would mean reversing the austerity measures without leaving the euro.  How?  The first measure of an anti-austerity government would be to write off the debt burden with the banks and the Eurozone governments.  The now defeated collaborationist government already agreed to a version of debt restructuring imposed by the Troika.  But this  restructuring was a joke.  The Greek government and its people are still left with a huge debt burden through the rest of this decade that will mean its debt ratio will still be larger than that of Italy now even if all goes well on austerity, which it won’t.

The Troika’s restructuring just replaced part of the government debt owed to foreign banks with new debt backed by European governments and imposed a full recapitalisation of Greek banks without any allowing move towards public ownership.  Now Greek government debt will owed not to banks, but mainly to other European governments.  The IMF leaders were desperate to ensure that this package was sustained by the new government.  They secretly invited Greek pro-austerity leaders to meetings to discuss policy just before the election.  In these private discussions, the IMF argued in favor of those parties that accept the necessity of the austerity package. The ultra neo-liberal Drasi candidate Miranda Xafa, a former Greek representative to the IMF, attended the IMF’s spring session of the fund.  Fortunately, the IMF and the Troika have failed – for now.

Look at how the IMF and the Troika doled out their money.  Less than 10% of the new funding is going to help the Greek government fund its deficit or get the economy going.  Over 90% has gone to fund foreign and Greek banks. Instead, if Greek government debt had been written off and new money lent directly to the Greek government to recapitalise the banks through public ownership and launch a programme of public works to revive the Greek economy, there would have been no need to condemn millions of Greeks to a generation of austerity.  But of course that cannot be allowed to happen because it would mean the curbing of the failed and corrupt Greek capitalist business sector and would pose a real threat to Europe’s banking sector and multinationals.

It may be that the New Democracy can find one of the opposition parties to agree to join a coalition.  But to do so, would probably mean having to try and renegotiate the bailout deal with the Troika anyway.  Alternatively, the Greek president may call another election in June.  If the Greek people have not reached the right decision this time, then they must do it again until they do!

Any attempt to meet Troika demands is hopeless, anyway.  The Greeks cannot deliver what the Troika wants.  With the Greek economy contracting by 6% this year, the fiscal targets cannot be met.  Indeed, next month the new government must find another €11bn in austerity measures to keep to Troika targets for 2012 and 2013.  How are such measures going to be greeted by the Greek people and the new parliament?  At some point, either later this year or early next, the Troika will have to announce that the Greek government is failing in its commitments.  Then the Euro leaders will have to decide whether to provide yet more funding with yet more austerity measures to tide Greece over, or not.  That will be a decision for German Chancellor Merkel and new French socialist President Hollande.