Archive for the ‘In English’ Category

Default and Exit Seem Inevitable

grexitUnfortunately, it looks like we are heading towards default and exit. The Syriza government is seeking a political solution. Yet, given that the IMF and the ECB are involved, I do not think there can be a political solution. What is particularly troubling is that in order to avoid crossing “red lines” Greece will end up crossing a lot more serious red lines after default and exit… Fighting against austerity is a noble cause, but you need to know when to call it quits. This is not a game of chicken.

Categories: In English

Greece’s Debt Obligations April to September 2015


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Grexit No Thanks

I just hope that Grexit does not become the hidden agenda of the Tsipras government. And the reason I worry that this may be the case stems from the rhetoric we heard this week on Greece vs. Germany. This rhetoric could be setting the tone for a Grexit.

Quite possibly Greece joined the Euro prematurely. But exiting the Euro now would be suicidal. You cannot correct a mistake with a fatal mistake. Exiting the Euro in order to make payroll, hire more public workers and build a bigger government is a monumental error. Think of it this way. If Greece had stayed in the Drachma, the Drachma would have slowly been devalued to an equilibrium level. If Greece goes back to the Drachma now, similar depreciation will occur but quite rapidly, with serious consequences and without much gain.

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First Comprehensive List of Reforms

February 24, 2015 Leave a comment

Check list here.

Categories: In English

Timeline of Key Risk Events from Morgan Stanley Research

February 23, 2015 Leave a comment


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Greece’s Debt Due: What Greece Owes When

February 23, 2015 Leave a comment
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Grexit Nein Danke

February 20, 2015 Leave a comment

imagesSyriza and the other Europeans have not come to an agreement yet, but by now I am sure they agree on the following statements:

(i) there is no free lunch;

(ii) the Syriza “bargaining” might have been more successful had they simply declared early on that they are not taking any unilateral measures and they are fighting against austerity, which would have found many sympathetic listeners especially in the South (read Syriza’s scattergun on the Economist);

(iii) the applicable model here is not the Nash bargaining game but, instead, a repeated, dynamic, game;

(iv) the Greeks voted for change because they are fed up with austerity and they did not authorize taking Greece out of the Eurozone;

(v) Grexit and return to the drachma not only will be followed by eventual default on the Greek debt held in Euros mostly by Eurozone countries, due to the inevitable drachma devaluation, but it can also cause a domino effect.

In all, therefore, the Europeans don’t want Greece out of the Eurozone because they will make a negative return on their investment, and the Greeks don’t want to exit any way, and lose their allies. So what are the choices of Syriza? The possibilities are:

(a) bend over backwards (i.e., make a “kolotoumpa”; note that “anadiplosi” would be a better word in Greek) and follow on what the New Democracy and PASOK coalition was doing;

(b) return to the drachma hoping to deliver the promises made;

(c) call for a referendum and ask the people to vote between bending over backwards or exiting the Euro;

(d) blame the Germans and resign.

I believe Tsipras is a driven man of serious convictions fighting for a noble cause who would rather resign (d) than bend over backwards, which eliminates (a). Given statement (iv) above, he would rather call for a referendum (c) than do (b) without consulting with the Greek people, which will end up being extremely painful to them at least initially for several years despite Syriza’s utopian hopes. Choice (c) supercedes (a) and (b) anyway. Hence, we are left with the referendum (c) or the resignation (d). Assuming that the government wants to maximize the probability of staying in power, the referendum (c) appears as the likely outcome but I would not bet the farm on it. All bets are off, allowing for accidents too.

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Is Pandora’s Box about to be Opened?

The current situation or standoff can only be described as a dire situation. I suspect that no economist in his right mind would ever argue that austerity is the proper way to exit a recession. Of course, there are other reasons for austerity, including political reasons, which I outlined here: The Political Economics of Europe’s Resurrection. But a collision course with Europe can lead to default, Argentinization and a return to the drachma. My take on that remains what I argued before, on September 22, 2011:

“If Greece exits the Euro either on its own accord, in order to return to the drachma and devalue it, or due to eventual pressure from its partners, the Greek debt that was issued in Euros will cost multiple times in drachmas. Greece will then default with a bang. The impact on the Greek banks holding Greek debt and their access to capital is also quite uncertain then. Not to mention that a return to the drachma would be political suicide for any government. Entry into the Euro zone was sold as one of Greece’s biggest achievements that, unlike the drachma, offered stability and membership to an elite club of economically advanced countries.

The second part of the answer has to do with Greece’s longer-term prospects within the Euro zone, once default (to any degree of severity) has occurred and enough time has passed so that Greece has regained access to credit markets. Is it to the net benefit of Greece to be in the Euro zone in the long run? Well, did Greece benefit from being in the zone before the crisis erupted? Greece arguably enjoyed lower interest rates for its sovereign debt and more access to credit than it would have faced otherwise. This affluence of credit in fact led to Greece’s current troubles. On the down side, entering a currency union in which the joint currency appreciated about 40% because of the strength of Greece’s Northern European partners did have a significant effect on Greek exports…In all, if market forces drive the Euro down in the long run, which should happen once the US economy really turns around, I am inclined to vote for Greece staying in the Euro zone.”

Finally, there is a more imminent problem we all worry about immensely, that we may not want to raise publicly…

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The Political Economics of Europe’s Resurrection

EurFeatured imageope has died and resurrected itself several times in the past but more recently during the first and second world wars. Understandably the European Union’s inception is rooted in the dismay against these wars. Many Europeans now proudly place Euros on the graves of their ancestors who died during the second world war; ironically they succeeded where their ancestors failed.

Greece suffered from political turmoil and a weak currency in the past. Economically premature ascension to the European Union and to the Eurozone, possibly fueled to a small extent by creative accounting arguably done by other countries as well, was the means to secure political stability and a stable currency. For a country that relies on imported consumption and investment goods, the constantly needed Drachma depreciation caused imported inflation and instability. The added benefit of joining the Euro was easy access to credit at terms near those for Germany. But when in recession, you cannot bail yourself out by depreciating your currency, since the value of your currency is now controlled by a group of other countries. And so the problem is born.

Germany, in particular, knows well that a depreciated Euro effectively reduces the prices of European goods. But Germany does not need this because it can still move its Mercedeses, BMWs and Porsches at higher prices. Plus their accumulated wealth and purchasing power is in Euros. Germany also argued that they were operating near capacity and had no room for productive expansion. Yet their output gap was negative, with room for expansion. Some people argued that if Germany exited the Eurozone it would be a win-win situation (the Deutsche Mark would appreciate and the Euro would depreciate). But Germany has now reluctantly accepted ECBs quantitative easing, so there may be no scope for that. And Germany, the engine of Europe, is a net contributor of funds.

Most economists probably agree that once the public debt-to-GDP ratio exceeds 90% or so the debt cannot be serviced. The Maastricht criteria in Europe stipulate a limit of 60%, perhaps so that even with miscalculations or misfortunes the real debt-to-GDP ratio will be reasonable. There is more market leniency with countries whose debt is held internally to a large extend (e.g., Italy) or have a strong industrial base (e.g., Japan). Private debt is typically ignored when the country is developed enough so that such debt is collateralized (e.g., Ireland).

The Greek governments tantalized by easy credit, and while experiencing economic euphoria and high growth rates, before the crisis erupted, thought they could get away with a high debt-to-GDP ratio because the heavyweights, Germany, France and Italy, exceeded the 60% threshold, and second, a favorable GDP expansion would restore the ratio. But the market dice were cast against them.

Whereas the Fed has an inflation and unemployment mandate, the ECB only has an inflation mandate which is exacerbated by German excessive fears of inflation (traced back to hyperinflation in the Weimar Republic). So while the Dollar was correctly being depreciated through quantitative easing policies in the U.S., the Euro was kept strong yielding unnecessary high pride to the Europeans. And high were kept the interest rates to ease fears of inflation. And a problem which could have been solved in short time through expansionary monetary policies blew itself into gargantuan proportions. Many people speculate that if the current ECB President were not Italian, we might have not seen the quantitative easing policies recently announced. But are they a little too late?

And we come to the “troika” (i.e., European Commission, ECB and IMF) prescribed, well-intentioned but bitter, medicine: austerity coupled with structural reforms. Why austerity? To pay back the loans and regain access to credit markets as soon as possible. And to penalize the Greeks for not playing by the rules. After all, if you tolerate moral hazard and reward it with forgiveness, it is bound to happen again. Why reforms? To stimulate growth and economic development. But structural reforms will primarily bear fruit in the long-run. And austerity jeopardizes short and long-term growth prospects during a recession. In other words, a well-intentioned, albeit ill-conceived plan. Some people may argue that the surgery was successful, as pre-election economic data for Greece connoted, but the patient has certainly died. It does not take much to see this, just drive around Athens and see the pawn shops (almost unheard of in Greece before the crisis) and the people searching the garbage dumpsters for items to pick up and sell. Are they given a death sentence for electing inadequate politicians? It may be a more efficient use of resources to let unproductive companies default and dissolve. But can this be done to a whole country, indiscriminately to all its citizens, when this country happens to rightfully be the cradle of western civilization?

And so we got polarization. New Democracy and PASOK, the culprits behind the economic failure and the undersigners of the hated (by the people) Memorandum of Understanding that brought about the austerity and reforms, fail tragically in the recent elections. Why did Samaras rush into trying to elect a President prematurely? Because he had lost public support and presumably had warned the troika that the latest demands would make the government fall anyway. Self-fulfilling prophecies perhaps? And here we are, a few steps before the finish line, back on the hills below the mountain, like Sisyphus. The Greek tragedy is not an uncommon tragedy.

Is Tsipras’ new government on a collision course with the troika? It certainly wanted the Greek public and the troika to think so. But default as a threat point is not credible here. The promised default cannot be delivered now. Debt restructuring should have happened before Greece sought IMF and European help. There is no default premium on IMF and ECB loans, and it is imperative that they are not defaulted on. But a large chunk of debt is held by Greece’s Eurozone partners. It would be national suicide to default on these loans. Granted, the virtually dead have nothing to lose. But they do. All it takes is a few wrong steps to lose European political support and be outcasted, having to resort to the dreaded Drachma in order to pay the abundant governmental employees. And then what? Immediate serious devaluation and Argentinization (in Greek, Αργεντινοποίηση). The good case scenario is an agreement on further extending the maturity of the loans with slight improvements in the interest rate terms. If Syriza also follows up with fighting corruption (a promise which at least initially has already been followed through the appointment of a proven anti-corruption czar, secretary Nikoloudis), this is a good start. Will the Greek public swallow a simple extension of the loan maturity instead of the promised haircut and abolishment of the “Memorandum”? Maybe yes, maybe not. It will be up to Tsipras’ rhetoric to convince them; and he is good at that. If not, the new government will collapse in the near future. And then Samaras will take the reins again.

So what’s needed for resurrection? Quantitative easing is a good start, albeit late in the game. Europe needs a Pan-European growth vision, needs more money directed towards R&D, education, innovations and entrepreneurship, especially in the South. Europe has now exhibited solidarity, but if they cannot handle the Greek problem convincingly, they certainly cannot handle the much bigger Italian problem. And Italy is too big to save. Either the EU is dissolved, or there is more integration. In the first case, the Euros on the European graves will be meaningless. In the second case, Europe can go back to its root principles of social egalitarian democracy and avoid the Sisyphus vicious cycle. Only full stakeholders should remain in an integrated Europe. You cannot be enjoying the benefits of a customs union and a common market without willingness to share the risks. And for God’s sake, change the ECB mandate.

Roadmap for Growth

GreekFlagThe coalition government of Samaras and Venizelos lost the elections because the purchasing power of consumers has declined substantially due to lower wages, higher taxes and less employment. But we cannot attribute this entirely to austerity. Prices in Greece have historically exhibited downward rigidity. One important reason for this is regulatory barriers to enhancing competition. OECD has been working with Greece, and Syriza requested their guidance as well. Read Greece: Structural reforms under way but more progress needed in boosting market dynamism and OECD Competition Assessment Reviews: Greece.

In addition to necessary and long overdue structural overhauls, Greece needs a smaller and more efficient government, effective tax collection through an independent IRS-type tax agency, and substantial anti-corruption measures. Greece also needs to become much less bureaucratic and cut red tape, invest in education and R&D, embrace entrepreneurship and orient itself into becoming an exporting economy. Greece can set up research parks focusing on technological innovation, similar to US research parks, and provide incentives to major corporations to invest in Greece. Privatizations need to continue. The mentality of a large monolithic governmental employer needs to be gone. Forever!