Tag Archives: Recession

Greece: A reality check

Petros Giannakouris/Associated Press

Petros Giannakouris/Associated Press

And like that… poof, the crisis is gone. More bailout loans approved by the Eurogroup, a sovereign rating upgrade from Fitch, economic sentiment at the highest it’s been for the last 40 months, the Athens Stock Exchange becoming the best-performing stock market in the European Union and Greek bond yields dropping below 9 percent for the first time since 2010 have helped give the impression Greece has overcome the worst of its problems and that recovery is within touching distance.

This is certainly the story that the government will, understandably, run with. The three parties in the coalition have taken on considerable political cost in sticking with the EU-IMF fiscal adjustment program and their only hope of survival is to convince a large enough section of the Greek population that the chosen path leads from economic catastrophe to stability and then prosperity.

In Athens, there is also a belief, which seems to be shared by decision makers in Brussels, Berlin and elsewhere, that a change in mood alone will make a significant contribution toward overcoming the crisis. This rising tide to lift Greece’s boat will not only make the program more acceptable to the public, it will also make investors more buoyant, the thinking goes.

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Talking with the taxi driver about economics

taxi_harry“Good evening and thank you in advance for the generous tip you’re going to leave me.” As welcomes from Athenian taxi drivers go, it was a fairly original and disarming one. I’m not a regular cab customer but have used them enough over the last couple of years to see a change in their attitude. Where they were surly, they now seem resigned. Passengers were once taken for granted; now they’re a rarity.

Take a look at any taxi rank and you will see the yellow-colored cars lining up around the block. At Athens International Airport, where I caught my ride, things are even more dramatic. “I waited seven hours in the queue,” the driver tells me.

Greek taxi drivers say their takings have dropped by more than 50 percent since the crisis began. In the meantime, their costs have skyrocketed: The cost of gasoline has risen, as has the consumption tax on fuel, while social security contributions also shot up. A cabbie needs to make about 15 euros a day profit just to pay for his healthcare and pension cover. This is far from a given in Athens and other cities.
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Greece and the troika, dancing in the dark

IMFmics_350Finance 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.

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Goodbye uncertainty, hello uncertainty

For Greece, the underlying theme of this crisis has been swapping one set of uncertainties for another. In fact, sometimes the uncertainties have been exactly the same, simply repackaged and rebranded. From George Papaconstantinou’s “loaded gun on the table,” to the first bailout in May 2010, from the mid-term fiscal plan in the summer of 2011 to the October 27 haircut agreement last year, from the PSI and second bailout early this year to the European assurances ahead of this summer’s elections: each development has promised stability, continued membership of the euro and better days ahead; each has crumbled into an empire of dust.

Now, hopes are being pinned to the Brussels debt deal agreed in the early hours of Tuesday morning. The immense relief at an agreement being reached is both understandable and justified. The prospect of the eurozone and International Monetary Fund failing to find any common ground on how to make Greek debt sustainable would have led to potentially devastating economic and existential implications for the single currency area and Greece. However, as this relief subsides, it becomes more evident that this deal takes a stab at providing a definitive solution to Greece’s debt problem but falls short, leaving the sword of Damocles dangling over the country. Even if the debt reduction program goes according to plan – and there are doubts whether it will, especially due to questions over the bond buyback scheme – Greece will still have to contend with a debt of 124 percent of GDP in 2020. It is also doubtful whether enough has been done to remove the niggling doubts about Greece’s future in the minds of investors, who are so necessary to helping change the course of the Greek economy. JP Morgan referred to the Brussels pact as a moment of “creative ambiguity.”

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Giving Greece a chance, not just a tranche

It is a sad indictment of the manner in which the Greek crisis has been handled by all sides that for probably the first time since the economic unravelling began about three years ago, moderates in Athens as well as other eurozone capitals looked at each other in the wake of another inconclusive Eurogroup meeting on Wednesday and wondered: “Why did we ever get involved with these guys?”

The rest of the eurozone’s grievances with Greece – many justified, some the product of stereotyping – have been well documented but the inconclusive 11 hours of discussions between eurozone finance ministers in Brussels this week tipped the balance the other way. It was the turn of level-headed Greeks, fully aware of their own country’s shortcomings, to fume about their euro partners’ footdragging and failings.

Yet, just as it has been unfair for Europeans to have undue expectations of Greece, so it is excessive for Greeks to expect 16 eurozone countries to each easily overcome their national concerns and promptly agree a strategy that would make Greek debt sustainable.

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Midnight at the oasis

It’s a measure of the absurd situation that Greece and its lenders have got themselves into that it’s highly doubtful whether there is a single Greek MP or European official that believes the austerity package due to be voted through Parliament around midnight on Wednesday will contribute towards the country’s recovery.

Apart from the dewy-eyed optimists (it would be a shock if there are any of those left), there is unlikely to be anyone who has confidence that the 13.5 billion euros of spending cuts and tax hikes over the next two years will play a part in halting Greece’s incessant decline.

The 2013 budget foresees a primary surplus – the first in over a decade – of 0.4 percent of GDP on the back of the latest measures. While achieving this surplus is one of the milestones on the road to stability, there are serious questions about how it should be achieved. With approximately 9.5 billion euros of measures (equivalent to 4.5 percent of GDP) to be implemented next year, the program of cuts demanded by the troika makes a mockery of assertions by leading economists and even the International Monetary Fund managing director Christine Lagarde that frontloading will end up being destructive, not just counterproductive.

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The Greek patient

“I hope and want Greece to remain in the eurozone,” German Chancellor Angela Merkel said during her visit to Athens last week, before suggesting that everything – from the next bailout instalment to any possible initiatives to pull the country out of its economic tailspin – were dependant on the content of the soon-to-be published report by the troika.

It was hardly an unqualified endorsement of Greece but was absolutely in keeping with the piecemeal approach Europe’s key decision makers have adopted during this crisis. They’ve hooked Greece up to the IV while they try to find a cure for the illness ailing the whole of the eurozone. As the days roll on, the next drip – the troika review – takes on paramount importance. It has become a matter of life and death. So, it should be of urgent concern to all those involved that at this crucial juncture, the troika’s medical credentials are in serious doubt.

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