No debate please, we’re European

On the eve of Greece agreeing its first EU-IMF bailout in May 2010, the CEO of investment firm PIMCO, Mohamed El-Erian, expressed doubts about the package,  what it demanded of Greece and whether the Europeans would be able to manage the  process. “This is a daunting challenge,” he wrote in the Financial
Times. “The numbers involved are large and getting larger; the  sociopolitical stakes are high and getting higher; and the official sector has  yet to prove itself effective at crisis management.”

El-Erian raised the  issue of private sector involvement, or PSI, almost two years before it happened  and warned the eurozone that it was walking into a potential disaster. “What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for  Europe,” he wrote.

This week, Bloomberg revealed that PIMCO has been selling the Dutch bonds it was holding. Until now a financial, AAA-rated safe-haven in the eurozone crisis, the Netherlands’ bond yields are edging upward, its coalition is under pressure and “austerity fatigue” is apparently setting in. El-Erian’s warning in May 2010 that the Greek debt crisis would “morph into something much broader” has been proved correct.

Greece and the IMF: Three years of not understanding each other

Illustration by Manos Symeonakis http://xpresspapier.blogspot.gr/

Three years ago, then Prime Minister George Papandreou stood on Kastelorizo’s harbor as the Aegean glistened in the background and children yelped with joy. The ensuing period has proved anything but sun-kissed child’s play for Greece. The appeal made by Papandreou to the eurozone and the International Monetary Fund that day has set the tone for almost everything that has happened in Greece over the past three years. Where it will lead is far from clear.

Even though the European Commission, the European Central Bank and the IMF make up the troika of lenders that have provided Greece with some 200 billion euros in bailout funding during the last 36 months, the Washington-based organization’s role has grabbed the attention of most Greeks. Even now, April 23, 2010 is referred to by many as the day Papandreou “sent Greece to the IMF.” Even though the Fund has provided only a fraction of the loans disbursed so far, its actions often come under the greatest scrutiny. Although there has been a growing realization that some of Greece’s partners in the eurozone and the ECB have been behind some of the troika’s toughest demands, the IMF continues to be a regular target for critics.

The problem is that these often indiscriminate attacks, dismissing the IMF as a Trojan horse for neoliberalism, mean that proper analysis of the troika’s three elements is pushed aside. In this fog, it has become difficult to work out where there are grounds for genuine criticism of the IMF. In this respect, an op-ed by Mohamed El-Erian, the CEO of PIMCO investment firm, on the Fund’s shortcomings is timely and extremely useful.

Confidence or confidence trick in the eurozone?

Illustration by Manos Symeonakis http://xpresspapier.blogspot.gr/

At a meeting of eurozone finance ministers in February, Greece’s Yannis Stournaras asked a fairly straightforward question: Could the troika explain what, if any, impact the International Monetary Fund’s miscalculation of fiscal multipliers had on the Greek adjustment program?

The question came in the wake of the IMF admitting a few weeks earlier that it had underestimated the recessionary impact that rapid fiscal adjustment would have in the current negative economic climate. The IMF assumed the fiscal multiplier of spending cuts and tax hikes was around 0.5 percent of gross domestic product – in other words, austerity measures equivalent to 1 percent of GDP would produce a 0.5 percent decline in economic activity. Its economists, however, discovered that the real fiscal multiplier was between 0.9 and 1.7 percent of GDP.

In Greece, critics of the bailout saw this as evidence that its austerity formula should be consigned to the rubbish bin. They put considerable pressure on the government to respond to the IMF’s revelation. Fearful of what implications an admission that the program had been built on unsound foundations might have on public opinion, the coalition played down the Fund’s findings.

Bearing this in mind, Stournaras put a rather tame question to Greece’s lenders after admitting to journalists that he could draw no reliable conclusions from the new analysis on the fiscal multipliers provided by the IMF’s chief economist Olivier Blanchard.

The response to Stournaras’s low-key request was a full-on blast from European Economics and Monetary Affairs Commissioner Olli Rehn. So forceful was the response, in fact, that one had to wonder whether the level of protest suggested that Greece might have a serious case.

Cyprus: It’s not about the numbers

The Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax. Instead of imposing a levy of 6.75 percent on savings under 100,000 and 9.9 percent on those above 100,000 – as agreed in Brussels in the early hours of Saturday – Nicosia can play around with the numbers, just as long as it raises the arranged amount of 5.8 billion euros.

Cyprus’s new but already beleaguered President Nicos Anastasiades is proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. Cypriot MPs have already shown a reluctance to approve the tax, mindful of the impact on depositors but also the long-term damage it could do to the island’s banking system and economy.

However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if a financial meltdown is averted in Cyprus this week, the decision to tax depositors there in order to reduce the eurozone and International Monetary Fund contribution to the island’s bailout has sown the seeds for a future eruption.

Greece and the troika, dancing in the dark

Finance Minister Yannis Stournaras felt compelled last week to call into a TV news show to deny rumors about imminent property tax hikes for Greeks. He argued there had been a lot of “scaremongering” by the media and politicians relating to the creation of a new property tax, which would unify several levies on real estate that currently exist.

Tax has become an increasingly sensitive issue in Greece. As wages shrink and jobs disappear, nobody is looking forward to the prospect of paying more into public coffers. But anxiety has been spurred by the voting of a new tax bill in January, which increased income and corporate tax and scrapped the tax-free threshold with the aim of raising 2.3 billion euros.

Furthermore, a recent international study by KPMG showed that Greeks pay the second-highest effective income tax and social security contributions at 46.5 percent of their income. Given this burden and the slow progress on ensuring that a sizable minority does not consistently get away without paying its share, it is no surprise that the issue of tax raises hackles in Greece each time it enters the public debate.