Greek talks descend into finger-pointing

By Felix Salmon
February 6, 2012
This isn't good; the Greece talks have now moved past their clear deadline and have reached the finger-pointing stage.

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This isn’t good; the Greece talks have now moved past their clear deadline and have reached the finger-pointing stage. The broad outline of the dynamics here is now very clear: you need three different parties to agree on a deal for the whole thing to have a chance of success. Private-sector bondholders need to agree to a very deep cut in the value of their bonds; the Greek government needs to agree to enormous spending cuts over and above the 1.5% of GDP that they’ve already offered; and the Troika of the EU, ECB, and IMF needs to agree to pony up extra bailout money to cover the larger-than-expected deficits that Greece is running.

Of the three, the bondholders are the least of anybody’s problems. In fact, almost everything they’ve done in recent months can be viewed as a way of showing that if and when everything goes pear-shaped, it’s not their fault. They will talk to anybody, agree to pretty much anything, and be perfectly reasonable all along; it’s the various governments, here, which are finding it impossible to come to terms.

And it’s easy to see why. The Greek economy is in a very severe recession, exacerbated by the spending cuts already imposed. Every extra euro cut will only serve to shrink the economy even further — and no country in the history of finance has ever achieved a sustainable debt level by reducing its GDP. It almost doesn’t matter whether government spending on things like unemployment benefits is too high on an absolute level: if you cut it now, you doom the Greek economy to perpetual recession, and Greek society to ever-greater levels of political unrest.

On the other hand, you can see why German taxpayers — or anybody else in the rest of Europe, for that matter — have no particular inclination to continue to pay for Greece’s high benefits, especially when the Greek government seems incapable of raising the taxes needed to pay for those benefits itself, and when, as Euro Group president Jean-Claude Juncker says, “there are elements of corruption at all levels of the public administration”.

The result is an impasse which, the longer it goes on, the harder it becomes to break; the Troika won’t even let the Greeks do a bilateral deal with bondholders unless and until there’s a much bigger agreement between Greece and Europe. Which means, in turn, that the bondholders are staring down a worst-case scenario — a default outside the context of any kind of negotiated exchange offer — through no fault of their own at all.

The Troika doesn’t want that — banks across Europe would suffer much-greater-than-necessary losses as a result, both on their Greek holdings and on their holdings of newly-endangered debt from Portugal and other countries on Europe’s periphery. But at this point, it’s probably easier for France and Germany to bail out their domestic banks directly for their sovereign-debt losses than it is for them to shovel any more cash in Greece’s direction.

If the Troika fails to save Greece, the past 66 years of ever-increasing European unity will come to a sudden and drastic halt, and all eyes will turn to Portugal, asking if it will be next. (The Europeans will say no, and indeed already the ECB seems to be pre-emptively shoring up Portuguese bond prices; the bond markets will say yes.) There will also be a second sovereign default, sooner rather than later, in Cyprus, and at that point the European and international communities will have essentially no credibility in terms of its ability to prevent dominoes from falling.

But I’ve never seen less appetite, at the European level, for a policy of continuing to kick the can down the road. Which means that there’s a very good chance that the long-awaited and long-feared crunch might soon be upon us. Greece and the Troika might not be able to agree on whether the latest deadline has been missed, but there’s one deadline no one can move: March 20, when Greece’s big €14 billion bond issue comes due. Either there’s an exchange offer in place by that point — or else the European project will have failed.


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“no country in the history of finance has ever achieved a sustainable debt level by reducing its GDP”

Hi Felix,

You’re making a sweeping, ambiguous, and possibly irresponsible statement here. Do you have a reference to support it?

Plenty of countries have in fact seen reductions in their GDP and maintained sustainable debt levels, such as the U.S. following the recent financial crisis. A decline in GDP does not mean a country’s debt position is suddenly unsustainable.

What do you mean by ‘sustainable debt’? Is default of any kind, such as ones where 88% of creditors agree to a haircut, equate to sustainability? Or is any kind of haircut or rescheduling in violation of the concept of sustainability? If haircuts are ruled out then it really doesn’t matter what happens to Greece’s GDP.



Posted by Polycapitalist | Report as abusive

Polycapitalist, I believe what he meant is that you cannot ACHIEVE a sustainable debt level THROUGH reducing budget cutting. If the debt level was already sustainable (whatever that means), then a GDP reduction won’t necessarily change that.

No clue whether it is a true or a false statement. :)

Posted by TFF | Report as abusive

I’m siding with the Troika on this one. The latest round in the Greek crisis in not about cutting Greek spending, it’s about making Greece sustainable and competitive. The Troika have forced massive haircuts down the throat of the private sector along with ludicrously low coupon rates (under 4%). This makes Greek debt manageable.

Now the Troika has turned its attention to Greece and is demanding that Greece take the structural reforms needed to become competitive again. This includes a reduction of the minimum wage to Portugese levels, reduction of pension commitments from unsustainable levels, and further bloodletting in the bloated public sector. Yes the cuts are draconian, but the fact of the matter is that Greece’s economy is not competitive in Europe, and unless Greece makes massive structural changes, the country will slide back into insolvency.

At this point, the Greeks should not be complaining. After all, their alternative is to leave the Euro and devalue the New Drachma which will lead to a reduction in the minimum wage, a reduction in the real value of pension commitments and a bloodletting in the public sector — the same end result, but with the added cost of having left the Euro probably forever and dealing with much higher financing costs going forward.

Rather than fighting the inevitable (which is a reduction in wages, pensions and the public sector), Greece should start focusing on guarantees from Europe that if they go forward with these reforms, that Europe will continue to bail the country out until the reforms bear fruit.

Posted by Kosta0101 | Report as abusive

“Plenty of countries have in fact seen reductions in their GDP and maintained sustainable debt levels, such as the U.S. following the recent financial crisis.”

the U.S. is able to maintain “sustainable” debt levels because it a) can print its own money, and b) its currency is the reserve currency for the world. If we had to pay our debt in euros or renminbi, I’m not sure it would be sustainable.

Budget cutting will only work if the government spending is replaced by private spending. So if Greece decides to cut spending 10%, what is the probability that decrease in economic activity will be replaced by the private sector? I’m guessing the probability is low, and when they cut spending, the economy will decline further, and generate less tax revenues, basically making a mockery of their austerity budget.

I’m not advocating free spending for Greece, but cutting spending without a replacement for that source of economic activity will just lead to other problems. They need to raise tax revenues, or find a way to get people with money to invest it in businesses in Greece. Kind of like the problem we face here, except they don’t have the luxury of printing money until they figure it out.

Posted by KenG_CA | Report as abusive

Well, the mask has dropped here.

Merkel, and the rest of the pain caucus, want to make little people hurt, because it makes them feel good.

The real solution is for GERMANY to leave the Euro, which will allow for a rebalancing of trade across the EU, as the new deutschmark appreciates.

Right now, the Euro is essentiually the Reichsmark of (sorry Godwon) the late `1930s and early 1940s, where economic (and political) policies treated other nation states as colonies.

As to the myth of German probity, what actually happened is that they managed to strong arm the Euro into A subsidy for German exports.

Germany is a mercantilist predator, China writ slightly smaller, at the heart of the EU.

Posted by Matthew_Saroff | Report as abusive

@ Kosta0101 – exactly

The Greek population is burdened by cockroach-calibre political candidates, forever kissing crosses and spouting grand hellenic oratory, while guzzling at the trough of an easy lifestyle on the backs of suffering citizens. Thieves and Liars.

Posted by scyth3 | Report as abusive

Felix, what you have been advocating all along is continuing public sector spending at existing or higher levels until the economy turns around, then reforming and cutting public spending to a budget surplus that can better pay debts. I find that all very reasonable and rational.

Except that politicians and governments are neither. At least here in the US, both are at their best (and by that I mean barely adequate) when they have no other choice. It has been my ongoing impression at Federal and other levels of government that once the immediate problem is no longer a burning issue, it can be safely ignored. So we spend until we have growth, then we can ignore the fact that we defaulted on 100B ($ or Euros) or more of debt, and then there is no longer any need to reform.

The EC powers-that-be are demanding that Greece take its fiscal medicine all at once. All very well and good, except that the ‘all at once’ has turned into about three years, with no end in sight. So Greece is looking at the worst of both worlds, where it has muddled through, yet ultimately must reform without growth.

I have little sympathy for this whole tragedy, yet there is a cautionary tale here for any nation of the world that funds its short-term budget through long-term debt (sound familiar?).

Posted by Curmudgeon | Report as abusive

@scyth3 — Liars and Thieves — that sums it up perfectly!

Posted by Kosta0101 | Report as abusive

Curmudgeon, the Greeks could also collect some of their outstanding tax, which from recollection is around 40bn Eur.

Like Jefferson County that has 100m in unprocessed tax cheques but apparently “can’t afford” to process them – but can afford to pay for lawyers….

Posted by Danny_Black | Report as abusive

Same arguments were trotted out in the early 1930′s regarding various countries’ exiting the gold standard, except that the hysteria surrounding the gold standard and its “benefits” was probably 10x the hysteria about the “benefits” of the Euro.

Greece will eventually leave the Euro as otherwise the entire country will just slowly strangle.

Posted by johnhhaskell | Report as abusive

Greece needs to improve its competitiveness and sustainability. Leaving the Euro is an option. Staying in the Euro and undergoing internal devaluation is another option. Staying in the Euro and not reforming is NOT an option.

Posted by Kosta0101 | Report as abusive

The big elephant in the room is the huge tax evasion. The last two months alone around 60 billion Euro vanished from the Greek bank accounts. The majority ended up in Britain and Switzerland, the rest is in safes and under mattresses.
No money is moving within the Greek economy,black or clean.
The official list of known tax evaders is a mile long.
Those are the people the Troika should be after.You’re asking the rest of Greece to live on 750 Euro a month.
Right now Greek neurosurgeons earn no more then 1700 Euro
a month. These are the people that will be migrating in masses to the rest of Europe and we know how many countries would gladly put a welcome mat out for them

Posted by h.harris | Report as abusive

Re: “Right now Greek neurosurgeons earn no more then 1700 Euro a month.” Where did come up with that? What a joke. Every single doctor in Greece probably makes this much every single day from their patients, just for the privilege to have a appointment. A fifty Euro note is not uncommon, whether it is stuffed in an envelope or not. But let’s talk about the real issue. Greek politicians have done a disservice to their country. It’s they who have to change their whole way of life first before we see a changed Greece.

Posted by Serreos1950 | Report as abusive