Homepage
PR Newswire
04-07-2015, 09:36 AM
Greek crisis: people suffer as economy teeters on brink of collapse
THE AUSTRALIAN JULY 04, 2015 12:00AM
Adam Creighton
Economics Correspondent
Sydney
Source: TheAustralian < PrevNext >
••
“The Greek Ministry for Tourism does not anticipate any disruptions in visitors’ holiday experiences, neither on the islands nor in mainland Greece.”
The Greek government was at pains this week to reassure its annual throng of summer visitors that their credit and debit cards would be fully functional.
“Greeks have become second-class citizens in their own country; people are waiting at five minutes to midnight to get their next day’s maximum €60 withdrawal,” says Angelos Frangopoulos, chief executive of Sky News, in Athens on a family holiday.
“ATMs have become social gathering places, places where queues of 30 people are furiously talking politics.”
Greece is in the throes of a humiliating and devastating depression, its banks on the brink of collapse and its population shrinking while its government is on the verge of printing a new currency, unable to meet its obligations.
Greek unemployment has soared to more than 25 per cent since 2010, and double that rate for young people. Over the same period its economy has shrunk by a quarter as its public debts have swelled from 110 per cent of GDP to almost 180 per cent.
This weekend’s referendum is being heralded as a circuit-breaker, a vote for or against membership of the euro area, whatever the fine print of the actual question. But ongoing Greek suffering is tragically inevitable. A vote in favour of the agreement negotiated in Brussels last week — which Greece’s own left-wing government has disavowed — will ensure further budget cuts and tax increases, bolstering for some time at least the monetary straitjacket that has throttled Greece’s economy for years.
A ‘‘no’’ vote could usher in a more competitive new currency, but would be a risky leap into the unknown for a country with military dictatorship in its recent past, a potential recipe for destabilising inflation and wholesale debt default that could cripple any reform efforts and banish Greece from international relations for a generation.
No nation has ever failed to repay the IMF. Greece owes it €21 billion, and €400bn is owed by its government and central bank to various European institutions.
“It is hard to see how the Greek state has any option but to announce a redenomination into a newly launched currency, and to nationalise the banks in this scenario,” said JP Morgan analyst Malcolm Barr this week.
“From talking to people there’s a strong sense of ‘no’ on the islands, but in central Athens at least people tend toward ‘yes’,” notes Frangopoulos, reflecting the ambivalent polling this week.
Greece — with an economy smaller than Victoria’s — has captivated the world for a week, but financial markets, or the broader euro bloc, should have little to fear. Greece’s economy is barely 3 per cent of the euro area. Its creditors are largely sovereign governments, the IMF and the European Central Bank, meaning any losses won’t hurt the banking system. And the yields on Spanish and Italian 10-year government bonds have stayed under 2.4 per cent, a manageable level and one suggesting the ECB is successfully burning any short-selling with its unlimited money pump.
Greece’s predicament stems from at least three very poor decisions, made by people who don’t have to bear the consequences. The first was joining the euro area in 2002. “Greece stood out as a poor candidate as its structure doesn’t fit well with Europe. There needs to be similarity in the rate of productivity growth, in the exportable growth in exportable commodities,” says Charles Calomiris, a former adviser to the European Commission and economics professor at Columbia.
Greece’s economy was an aberration within the emerging euro area. Output per hour worked in Spain and Italy, among the euro bloc’s less productive nations, was more than 40 per cent higher than in Greece.
Banks such as Goldman Sachs had helped Greece present its financial accounts in a more favourable light so it could join, but the lack of fit should have been clear.
The Greek government had consistently run budget deficits of about 6 per cent of GDP in the lead-up to the financial crisis, pouring borrowed money into public sector salaries, pensions and enriching favoured constituencies. Private and public consumption combined had soared to 90 per cent of GDP by the time the crisis hit in 2009, the highest in the advanced world.
In such circumstances economics argues for separate currencies, so prices and wages — which are notoriously sluggish, especially in the downward direction — do not have to adjust to reflect the differences in productivity.
Greek productivity levels might have caught up had the country shown some inclination to reform. Immediately after the financial crisis former eastern bloc countries Latvia and Estonia drastically slashed spending and took steps to liberalise their economies.
“And that sort of reform would need to include labour and competition laws, getting rid of corruption (another form of tax), and court reform, not only fiscal reforms,” Calomiris says.
As Henry Ergas chronicles in this week’s Inquirer, Greece has dragged the reform chain pretty much ever since it became a democracy in 1975. State spending surged from a relatively lithe 35 per cent of national income in 1980 to a ludicrous 50 per cent in 2008. With little concrete to show for it, the country’s public debt as a share of national income rose from 22 per cent (around Australia’s level today) to 110 per cent by the time of the financial crisis.
By way of example, in 2012 Greeks on average wages could expect a guaranteed government-funded retirement pension equivalent to 110 per cent of their final salary, the highest replacement rate in the 34 advanced nations in the OECD, and around double the average replacement rate. That sort of luxury could never be sustainable.
The final and most recent error was European authorities’ decision throughout 2011 and 2012 to take on practically all the debt. This emphasised the political dimension of what should and could have been an economic problem. Greece had defaulted numerous times since the early 19th century, and could have defaulted on swathes of the loans again.
The multinational banks (largely French, German and Wall Street) that shovelled money at Greece at ludicrously low interest rates (Greece’s borrowing costs collapsed from 20 per cent before joining the euro to about 3.5 per cent after) managed to foist all their loans on to European institutions. The banks foreshadowed a financial meltdown if they had to endure the losses on their already fragile balance sheets (there was no offer to repay the prior profits on the loans, however, which in any case had already been paid out in bonuses and dividends before the GFC).
“By bailing out the banks through the Greek bailouts, the public was not aware of what was going on and everyone avoided having to face any questions about why the banks were so weak, and why there was zero risk weight for lending to the Greek government and thus no skin in the game,” says Anat Admati, a professor of finance at Stanford University.
Admati is referring to financial regulations that assumed lending to governments, even one with the track record of Greece, was in effect riskless and required no capital provision.
Since 2012 European institutions have held around 80 per cent of Greece’s sovereign debt. More of Greece’s debts should have been written down earlier. European governments have used taxpayers’ money to bail out the banks that imprudently made the loans, and now they want their money back. A Greek default has massive ramifications for the political fortunes of ruling parties of France and Germany in particular, which directly and indirectly funded the bulk of Greece’s bailout.
Calomiris reckons Greece still has a chance to stay in the euro area, if it immediately balanced its budget (which is still in deficit). “They would also need to pass laws that all contracts and prices — wages, loans, pensions, everything — are reduced by say 30 per cent,” he says.
For Calomiris, Greece’s debt saga is a minor prelude to potentially more damaging ruptures in the euro area. “Italy and Spain aren’t the real issue; France is the country of greatest concern,” he says. As for Greece in 2008, French public spending is 50 per cent of GDP. Some banks might be too big to fail; countries such as France, owing more than €2 trillion, are too big to save.
THE AUSTRALIAN JULY 04, 2015 12:00AM
Adam Creighton
Economics Correspondent
Sydney
Source: TheAustralian < PrevNext >
••
“The Greek Ministry for Tourism does not anticipate any disruptions in visitors’ holiday experiences, neither on the islands nor in mainland Greece.”
The Greek government was at pains this week to reassure its annual throng of summer visitors that their credit and debit cards would be fully functional.
“Greeks have become second-class citizens in their own country; people are waiting at five minutes to midnight to get their next day’s maximum €60 withdrawal,” says Angelos Frangopoulos, chief executive of Sky News, in Athens on a family holiday.
“ATMs have become social gathering places, places where queues of 30 people are furiously talking politics.”
Greece is in the throes of a humiliating and devastating depression, its banks on the brink of collapse and its population shrinking while its government is on the verge of printing a new currency, unable to meet its obligations.
Greek unemployment has soared to more than 25 per cent since 2010, and double that rate for young people. Over the same period its economy has shrunk by a quarter as its public debts have swelled from 110 per cent of GDP to almost 180 per cent.
This weekend’s referendum is being heralded as a circuit-breaker, a vote for or against membership of the euro area, whatever the fine print of the actual question. But ongoing Greek suffering is tragically inevitable. A vote in favour of the agreement negotiated in Brussels last week — which Greece’s own left-wing government has disavowed — will ensure further budget cuts and tax increases, bolstering for some time at least the monetary straitjacket that has throttled Greece’s economy for years.
A ‘‘no’’ vote could usher in a more competitive new currency, but would be a risky leap into the unknown for a country with military dictatorship in its recent past, a potential recipe for destabilising inflation and wholesale debt default that could cripple any reform efforts and banish Greece from international relations for a generation.
No nation has ever failed to repay the IMF. Greece owes it €21 billion, and €400bn is owed by its government and central bank to various European institutions.
“It is hard to see how the Greek state has any option but to announce a redenomination into a newly launched currency, and to nationalise the banks in this scenario,” said JP Morgan analyst Malcolm Barr this week.
“From talking to people there’s a strong sense of ‘no’ on the islands, but in central Athens at least people tend toward ‘yes’,” notes Frangopoulos, reflecting the ambivalent polling this week.
Greece — with an economy smaller than Victoria’s — has captivated the world for a week, but financial markets, or the broader euro bloc, should have little to fear. Greece’s economy is barely 3 per cent of the euro area. Its creditors are largely sovereign governments, the IMF and the European Central Bank, meaning any losses won’t hurt the banking system. And the yields on Spanish and Italian 10-year government bonds have stayed under 2.4 per cent, a manageable level and one suggesting the ECB is successfully burning any short-selling with its unlimited money pump.
Greece’s predicament stems from at least three very poor decisions, made by people who don’t have to bear the consequences. The first was joining the euro area in 2002. “Greece stood out as a poor candidate as its structure doesn’t fit well with Europe. There needs to be similarity in the rate of productivity growth, in the exportable growth in exportable commodities,” says Charles Calomiris, a former adviser to the European Commission and economics professor at Columbia.
Greece’s economy was an aberration within the emerging euro area. Output per hour worked in Spain and Italy, among the euro bloc’s less productive nations, was more than 40 per cent higher than in Greece.
Banks such as Goldman Sachs had helped Greece present its financial accounts in a more favourable light so it could join, but the lack of fit should have been clear.
The Greek government had consistently run budget deficits of about 6 per cent of GDP in the lead-up to the financial crisis, pouring borrowed money into public sector salaries, pensions and enriching favoured constituencies. Private and public consumption combined had soared to 90 per cent of GDP by the time the crisis hit in 2009, the highest in the advanced world.
In such circumstances economics argues for separate currencies, so prices and wages — which are notoriously sluggish, especially in the downward direction — do not have to adjust to reflect the differences in productivity.
Greek productivity levels might have caught up had the country shown some inclination to reform. Immediately after the financial crisis former eastern bloc countries Latvia and Estonia drastically slashed spending and took steps to liberalise their economies.
“And that sort of reform would need to include labour and competition laws, getting rid of corruption (another form of tax), and court reform, not only fiscal reforms,” Calomiris says.
As Henry Ergas chronicles in this week’s Inquirer, Greece has dragged the reform chain pretty much ever since it became a democracy in 1975. State spending surged from a relatively lithe 35 per cent of national income in 1980 to a ludicrous 50 per cent in 2008. With little concrete to show for it, the country’s public debt as a share of national income rose from 22 per cent (around Australia’s level today) to 110 per cent by the time of the financial crisis.
By way of example, in 2012 Greeks on average wages could expect a guaranteed government-funded retirement pension equivalent to 110 per cent of their final salary, the highest replacement rate in the 34 advanced nations in the OECD, and around double the average replacement rate. That sort of luxury could never be sustainable.
The final and most recent error was European authorities’ decision throughout 2011 and 2012 to take on practically all the debt. This emphasised the political dimension of what should and could have been an economic problem. Greece had defaulted numerous times since the early 19th century, and could have defaulted on swathes of the loans again.
The multinational banks (largely French, German and Wall Street) that shovelled money at Greece at ludicrously low interest rates (Greece’s borrowing costs collapsed from 20 per cent before joining the euro to about 3.5 per cent after) managed to foist all their loans on to European institutions. The banks foreshadowed a financial meltdown if they had to endure the losses on their already fragile balance sheets (there was no offer to repay the prior profits on the loans, however, which in any case had already been paid out in bonuses and dividends before the GFC).
“By bailing out the banks through the Greek bailouts, the public was not aware of what was going on and everyone avoided having to face any questions about why the banks were so weak, and why there was zero risk weight for lending to the Greek government and thus no skin in the game,” says Anat Admati, a professor of finance at Stanford University.
Admati is referring to financial regulations that assumed lending to governments, even one with the track record of Greece, was in effect riskless and required no capital provision.
Since 2012 European institutions have held around 80 per cent of Greece’s sovereign debt. More of Greece’s debts should have been written down earlier. European governments have used taxpayers’ money to bail out the banks that imprudently made the loans, and now they want their money back. A Greek default has massive ramifications for the political fortunes of ruling parties of France and Germany in particular, which directly and indirectly funded the bulk of Greece’s bailout.
Calomiris reckons Greece still has a chance to stay in the euro area, if it immediately balanced its budget (which is still in deficit). “They would also need to pass laws that all contracts and prices — wages, loans, pensions, everything — are reduced by say 30 per cent,” he says.
For Calomiris, Greece’s debt saga is a minor prelude to potentially more damaging ruptures in the euro area. “Italy and Spain aren’t the real issue; France is the country of greatest concern,” he says. As for Greece in 2008, French public spending is 50 per cent of GDP. Some banks might be too big to fail; countries such as France, owing more than €2 trillion, are too big to save.