A brief interlude

They were hardly dancing in the streets of Athens at the news of the debt deal reached in Brussels but a busker was playing his violin at Monastiraki metro station on Thursday. It was a reminder that despite some 100 billion euros being quarried from Greece’s debt mountain, Athens still has the begging bowl out and remains ensconced deep inside a long tunnel.

The biggest positive from the haircut agreed by eurozone leaders and the banks that hold Greek bonds is that it removes some of the uncertainty surrounding Greece’s present and immediate future. The incessant speculation since the July 21 agreement, which was dead in the water, had a corrosive effect on any attempts both in Greece and the eurozone to tackle the debt crisis. Removing this uncertainty means that at least temporarily the mist has lifted and we all know where we stand.

The reduction of Greece’s debt is also a welcome development as it’s the first real indication that the previous packages were detached from the reality of the country’s dire fiscal situation and its catastrophic debt dynamics. The first step to addressing any crisis must be a healthy dose of self-knowledge.

Striking some 100 billion euros of debt from Greece’s balance sheet will provide some relief. Finance Minister Evangelos Venizelos says it will lead to Greece paying out 5 billion euros less each year to its lenders. If this means that the government can hold back on tax ambushes like the ones it has sprung over the last few months, then that would provide some respite for over-burdened Greeks.

However, some questions about the agreement remain. For instance, there is the issue of the 30 billion euros that foreign banks are reportedly going to receive as “credit enhancements” or incentives to take part in the haircut voluntarily. Of the 100 billion euros being discounted, international lenders account for roughly 60 percent. If they are to receive 30 billion euros in sweeteners, this would mean a total haircut of only 30 billion euros, which is hardly the grand gesture it seems at first sight. There is also the question of where this 30 billion euros in incentives will come from and what it would cost Greece.

Similarly, Prime Minister George Papandreou revealed that the 50 percent haircut means that Greek banks, which own some 70 billion euros in national bonds along with Cypriot lenders, will have to be nationalized. The injection of capital that will come from the effectively bankrupt Greek state will also lead to further borrowing. Then, there is the question of the Greek pension funds, who also hold 26 billion euros in debt, and how they will be prevented from going bust.

So, in effect, we have swapped one major uncertainty for several smaller uncertainties. But it doesn’t end there.

For all his talk about the debt deal hopefully signalling a “new dawn” for Greece, Papandreou knows that it could be the death knell for his government. PASOK has been running out of runway over the last few months, laden with the baggage of the past, divided by internal neuroses and battered by the series of unpopular austerity measures it has adopted. The Brussels agreement will only buy this government a little time to lift the country out of depression.

To achieve this, it must find a way to halt the seemingly endless slide of the Greek economy, which is closing out its third year of debilitating recession. Papandreou said in his Brussels press conference that his government is committed to achieving a primary budget surplus next year. How it will do this when tax revenues are nosediving as thousands of businesses shut down, jobs are lost and wages are cut, is an impenetrable conundrum. It will have to convince its eurozone partners that either the fiscal targets have to be relaxed or that there needs to be more investment in Greece. Structural reforms will also help but we cannot expect these to happen quickly at a time when the wheels are coming off the state apparatus.

The deal struck in the early hours of Thursday morning means that it will be easy for the government to try to bend EU officials’ ears, as they will be based permanently in Athens to monitor Greece’s progress in meeting its targets. However, the Europeans setting up a permanent base camp presents another problem, which is that it rekindles the debate about national sovereignty and how much of it Papandreou and his ministers are surrendering to the EU and the IMF.

The discussion threatens to descend into puerile nationalist nonsense as seen by the recent references to the head of the European Commission’s task force in Greece, Horst Reichenbach, as a “gauleiter”. The opposition parties have already raised the issue but it’s worrying to see that New Democracy leader Antonis Samaras could not resist the temptation to make it a key theme of his response to the Brussels deal. While there is a serious debate to be had about how much ground Greece is willing to cede to its lenders, there is also a lot of hypocrisy in the claims of sovereignty being infringed. Like other eurozone members, Greece signed away a lot of its sovereign rights when it joined the single currency and ND should remember that during its previous term in government, it sold stakes in strategic public assets — OTE telecoms and Piraeus port — to foreign investors. Greece cannot live in isolation and will not survive without working with others, so this debate needs maturity.

Unfortunately, this is one of the characteristics painfully absent from Greece’s political system and public life. And this is where the country’s greatest uncertainty lies. Its politicians and leading public figures cannot unite behind common ideas and policies. The political system is fragmented and voters are bewildered. PASOK cannot win a general election, but there are serious doubts whether ND could either. None of the other parties have shown any great willingness to work with each other. So, if as seems quite likely, the government is forced to call elections over the next few months, the country will enter a political no man’s land that could be littered with mines.

There doesn’t seem to be anyone willing or capable of lifting the huge burden that remains on the country’s shoulders despite the planned haircut. That’s why the uncertainty seems greater than it ever was. Like the music from the metro busker, Thursday’s debt deal is likely to be just a brief interlude in Greece’s troubled existence.

Nick Malkoutzis

One response to “A brief interlude

  1. Greece should return to growth in 2014, Mr. Reichenbach (Head of the EU Task Force in Greece) said. Perhaps that made some people feel good. Excuse me; feel good?

    Another at least 2 years of economic decline? Put differently: another at least 24 months of a development which has already tested social peace quite noticeably every month? By the way, growth after 5 years of decline is not growth; it is only the beginning of getting back to where one already was before.

    Now if that is not a final call that something needs to be done urgently to revive a dead economy, then I don’t know what is. Or does anyone really believe that social peace can survive another 24 months the experiences of the last 24 months?

    A well-known international consulting firm published a report which suggests how 500.000 new jobs could be created over the next 10 years. Over 100 specific projects are identified. What should be done?

    Well, first of all – read the report! Secondly, take the first 10 projects, implement them in 2012 and create 50.000 new jobs next year. Any further questions?

    Yes; who should finance this? Well, certainly not the government because government money tends to end up in the wrong pockets (and the government has no money anyway). Private money should finance it! But who would invest in Greece these days?

    Any investor will invest in Greece if he is offered an interesting project, a security for his investment and a competitive business framework. Can this be done quickly in the whole country?

    No, it cannot! But it could be done very quickly in selected parts of the country. The Chinese didn’t want to throw out communism but they also saw that without some capitalism they would never get their feet on the ground. So they started with selected Free Trade Zones. Why not learn a bit from the Chinese?

    So the recipe is quite simple: take the first 10 projects for 2012; structure them professionally and invite bids from investors; define zones where investors are offered all the security, economic framework and profit potential which they desire — and get started!


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