Friday, 16 June 2017

Eurogroup grants the beginnings of long-term debt relief for Greece

This article was published by Al Jazeera International. 

Greece came away from Thursday’s Eurogroup meeting with a $9.5bn (€8.5bn) loan instalment and the beginnings of a commitment to longer-term debt relief – the Syriza government’s key demand since it came to power in 2015.

The six hour-long meeting of Eurozone finance ministers effectively brought the International Monetary Fund on board with Greece’s third bailout loan, currently held only by European institutions, because the IMF insisted on debt relief as a precondition.

“Nobody claims that this is the best solution,” said IMF chief Christine Lagarde, who attended the Eurogroup session. “That would have been a final approval on debt relief so that there would be clarity. This is second best.”

Eurogroup Chairman Jeroen Dijsselbloem called the agreement “a major step forward” which prepared Greece for graduation from its programme in 2018.

The Eurogroup praised Greece for legislating all 140 prior actions required to pass its second review under the programme – specifically in terms of tax reform, pension reform and labour market reform, all of which aim to make its economy more competitive.

In terms of debt relief, the Eurozone made two concrete concessions. First, it promises to link Greece’s rate of debt repayment to its rate of growth. The better the economy does in a given year, the more Greece will pay back. The corollary is that if Greece has little or no growth, it ought to receive a reprieve from creditors. This was a key demand of former finance minister Yanis Varoufakis in 2015, who claimed that a depressed economy could not reasonably be squeezed for debt repayment.

As if to underline this point, Greece is being asked to spend about two percent of its economy on debt repayment after 2023. It has committed to spend 3.5 percent until then.

Second, the Eurogroup agreed to defer and extend repayment of Greece’s second bailout loan by up to 15 years. This loan, which ran from 2012 to 2015, was Greece’s largest and $145bn (€130bn) of it is still outstanding. That amounts to almost half of the entire debt.

These two measures will be put into effect between now and the end of the programme, but the Eurogroup will specify further debt relief measures to take effect after the summer of 2018. It has to specify these by July 27, in order for the IMF to become a participant in the third bailout. The extension of Greece’s second bailout loan is something the IMF had recommended in late 2015, and the implication is that it expects the Eurozone to follow its other recommendations as well – such as an extension of Greece’s first (2010) bailout loan, now worth $59bn (€53bn) and a fixed, low interest rate of not more than 1.5 percent until 2060.

“The Greek side got what it wanted,” said a statement from the prime minister’s office. “The most important part of today’s decision is that for the first time there is a clear Eurogroup commitment to help Greece graduate from its programme and return to markets.”

Another reason for announcing debt relief a year before the end of the programme is to encourage investors to return to the country. As of Thursday night, it was still unclear whether the Eurogroup’s statements were going to achieve those goals.

A new period of friendship?

European politics are also divided on the issue of debt relief, because of the fear of encouraging other fiscal laggards to expect similar treatment. The lead-up to this agreement has been acrimonious, and it is still unclear whether Greece will convince Eurozone hardliners, led by Germany, to give it the full debt relief the IMF has outlined.

On Wednesday Greek economy minister Dimitris Papadimitriou took aim at the powerful German finance minister Wolfgang Scheauble in an interview with Die Welt. “For eight years we have been following the creditors’ demands, but the progress is slowed down by the fact that new conditions are constantly being raised,” he said. “Wolfgang Schäuble also said that we had met the requirements. But then he changed his mind. You ask yourself what is behind it. I have not yet met Schäuble, and I do not want to be rude, but his behavior seems to me dishonest.”

Prime Minister Alexis Tsipras published an op/ed in Die Welt and Le Monde on the same day. “For the French, the Germans or the Italians, the Greek debt is just a newspaper headline. For my fellow-citizens it is a source of daily concern as they try to change their country, to stand on their feet, to create businesses that will bring back jobs and growth.” 

“The answer to the question of Greek debt sustainability is growth,” he said. “For that to happen, the debt has to be rescheduled so the economy can breathe and markets can restore their confidence.”

Pensioners marched in protest on parliament in Athens on Thursday morning. “They’re legislating to cut our pensions in 2019, even after this government’s term in office is over,” said Vasilis Epikaridis, a retired aircraft mechanic. “That will take another 30 percent out of our pensions, and they’re reducing tax exemptions. Pensioners who have paid in for so many years will be poorer.” Epikaridis says his pension was meant to be €2,800 a month, but has been cut to €1,250.

The Greek economy was forecast to grow by 2.7 percent this year, but the Hellenic Statistical Authority reports that it Grew by just 0.4 percent in the first quarter. The Federation of Greek Industry today reports 53.6 unemployed people for every job vacancy.

Greece came away disappointed from the May 22 Eurogroup, where it had hoped to win the debt restructuring the International Monetary Fund says it needs. That meeting produced no communiqué, because the 19 countries couldn’t agree a common position on the IMF’s recommendations, Tsakalotos told reporters in Athens.

“There was one line in the Eurogroup statement that made it impossible for us to accept,” Tsakalotos said. “That line said, ‘We the Eurogroup understand that the above measures on debt are not enough for the IMF to consider the debt sustainable.’ That statement essentially is a signal to markets – ‘don’t invest in Greece’.”

Thursday, 15 June 2017

Eurogroup grants the beginnings of long-term debt relief for Greece

This article was published by Al Jazeera International. 

Greece came away from Thursday’s Eurogroup meeting with a $9.5bn (€8.5bn) loan instalment and the beginnings of a commitment to longer-term debt relief – the Syriza government’s key demand since it came to power in 2015.

The six hour-long meeting of Eurozone finance ministers effectively brought the International Monetary Fund on board with Greece’s third bailout loan, currently held only by European institutions, because the IMF insisted on debt relief as a precondition.

“Nobody claims that this is the best solution,” said IMF chief Christine Lagarde, who attended the Eurogroup session. “That would have been a final approval on debt relief so that there would be clarity. This is second best.”

Eurogroup Chairman Jeroen Dijsselbloem called the agreement “a major step forward” which prepared Greece for graduation from its programme in 2018.

The Eurogroup praised Greece for legislating all 140 prior actions required to pass its second review under the programme – specifically in terms of tax reform, pension reform and labour market reform, all of which aim to make its economy more competitive.

In terms of debt relief, the Eurozone made two concrete concessions. First, it promises to link Greece’s rate of debt repayment to its rate of growth. The better the economy does in a given year, the more Greece will pay back. The corollary is that if Greece has little or no growth, it ought to receive a reprieve from creditors. This was a key demand of former finance minister Yanis Varoufakis in 2015, who claimed that a depressed economy could not reasonably be squeezed for debt repayment.

As if to underline this point, Greece is being asked to spend about two percent of its economy on debt repayment after 2023. It has committed to spend 3.5 percent until then.

Second, the Eurogroup agreed to defer and extend repayment of Greece’s second bailout loan by up to 15 years. This loan, which ran from 2012 to 2015, was Greece’s largest and $145bn (€130bn) of it is still outstanding. That amounts to almost half of the entire debt.

These two measures will be put into effect between now and the end of the programme, but the Eurogroup will specify further debt relief measures to take effect after the summer of 2018. It has to specify these by July 27, in order for the IMF to become a participant in the third bailout. The extension of Greece’s second bailout loan is something the IMF had recommended in late 2015, and the implication is that it expects the Eurozone to follow its other recommendations as well – such as an extension of Greece’s first (2010) bailout loan, now worth $59bn (€53bn) and a fixed, low interest rate of not more than 1.5 percent until 2060.

“The Greek side got what it wanted,” said a statement from the prime minister’s office. “The most important part of today’s decision is that for the first time there is a clear Eurogroup commitment to help Greece graduate from its programme and return to markets.”

Another reason for announcing debt relief a year before the end of the programme is to encourage investors to return to the country. As of Thursday night, it was still unclear whether the Eurogroup’s statements were going to achieve those goals.

A new period of friendship?

European politics are also divided on the issue of debt relief, because of the fear of encouraging other fiscal laggards to expect similar treatment. The lead-up to this agreement has been acrimonious, and it is still unclear whether Greece will convince Eurozone hardliners, led by Germany, to give it the full debt relief the IMF has outlined.

On Wednesday Greek economy minister Dimitris Papadimitriou took aim at the powerful German finance minister Wolfgang Scheauble in an interview with Die Welt. “For eight years we have been following the creditors’ demands, but the progress is slowed down by the fact that new conditions are constantly being raised,” he said. “Wolfgang Schäuble also said that we had met the requirements. But then he changed his mind. You ask yourself what is behind it. I have not yet met Schäuble, and I do not want to be rude, but his behavior seems to me dishonest.”

Prime Minister Alexis Tsipras published an op/ed in Die Welt and Le Monde on the same day. “For the French, the Germans or the Italians, the Greek debt is just a newspaper headline. For my fellow-citizens it is a source of daily concern as they try to change their country, to stand on their feet, to create businesses that will bring back jobs and growth.” 

“The answer to the question of Greek debt sustainability is growth,” he said. “For that to happen, the debt has to be rescheduled so the economy can breathe and markets can restore their confidence.”

Pensioners marched in protest on parliament in Athens on Thursday morning. “They’re legislating to cut our pensions in 2019, even after this government’s term in office is over,” said Vasilis Epikaridis, a retired aircraft mechanic. “That will take another 30 percent out of our pensions, and they’re reducing tax exemptions. Pensioners who have paid in for so many years will be poorer.” Epikaridis says his pension was meant to be €2,800 a month, but has been cut to €1,250.

The Greek economy was forecast to grow by 2.7 percent this year, but the Hellenic Statistical Authority reports that it Grew by just 0.4 percent in the first quarter. The Federation of Greek Industry today reports 53.6 unemployed people for every job vacancy.

Greece came away disappointed from the May 22 Eurogroup, where it had hoped to win the debt restructuring the International Monetary Fund says it needs. That meeting produced no communiqué, because the 19 countries couldn’t agree a common position on the IMF’s recommendations, Tsakalotos told reporters in Athens.

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“There was one line in the Eurogroup statement that made it impossible for us to accept,” Tsakalotos said. “That line said, ‘We the Eurogroup understand that the above measures on debt are not enough for the IMF to consider the debt sustainable.’ That statement essentially is a signal to markets – ‘don’t invest in Greece’.”

Tuesday, 6 June 2017

Banks to liquidate €11.5bn of property


Attention is focused on whether Greece will receive a rescheduling of its public debt at the June 15 Eurogroup. Less attention is lavished on private Greek debt. 

The Bank of Greece on Tuesday published its targets for the reduction of non-performing exposures (loans that haven’t been serviced for at least 90 days), which have reached a staggering €105.2bn, or 60 percent of GDP.[1]

The banking system plans to reduce these to €98.2bn by the end of the year, €83.3bn by the end of next year and €66.7bn by the end of 2019 (see table). The targets are back-loaded, which means €7bn in this year, €15bn next year and €17.5bn in 2019, an election year.

Source: Bank of Greece, 7 June 2017

The Bank says this will happen mainly through rescheduling and write-offs, and to a lesser extent through liquidation (property repossessions), loan sales and collection.

This total of €40.2bn of loans to be adjusted breaks into the following main categories:
Collections:  €6bn
Liquidations: €11.5bn
Sales: €7.4bn
Write-offs: €13.9bn

Source: Bank of Greece, 7 June 2017

The assumption, therefore, is that banks have the financial health to absorb €13.9bn in write-offs over three years.

Liquidation is also a major political issue. Ever since Greece’s third bailout loan of 2015, primary residences are no longer protected, so families could be turfed out for the first time in the eight-year depression.

It is also a legal issue. Bankers do not feel entirely comfortable making €11.5bn in property repossessions and sales over three years, because they don’t feel the law protects them from accusations of fraud should the entire operation sour politically on the government. There has been a precedent. Last September, notaries-public recused themselves from home auctions saying that the legal framework contained too many grey areas, leaving them to draw people’s ire. Auctions drew to a halt. 



[1] Non-performance is high across all categories: 42.2 percent in residential, 54.2 in consumer and 45 percent in business loans.

IMF chief offers Eurozone time on Greek debt relief

Christine Lagarde

International Monetary Fund chief Christine Lagarde is offering to wait a little longer before Germany and other Eurozone countries come around to the IMF’s analysis on the Greek debt.

“If the creditors are not yet at that stage where they can agree on and respect our assumptions, if it takes them more time to get there, we can acknowledge that and give them a bit more time,” she told Handelsblatt on Tuesday.

The IMF and Germany are in a spat over Greece’s ability to repay its debt. Germany believes Greece can spend 1.5 percent of its GDP over the next 40 years on debt servicing. The IMF believes the figure is closer to one percent.

The difference between the two assumptions leads to wildly divergent conclusions over such a long time period.

A recent analysis carried out by the European Stability Mechanism, presently Greece’s biggest creditor, shows that depending on which of two growth scenarios one accepts, the Greek debt could amount to anything between 49 percent and 226 percent of GDP in 2060. The first scenario, based on the more optimistic assumptions of European institutions, forecasts average growth of 1.3 percent and a primary surplus of 2.2 to 2.6 percent. The second, favoured by the IMF, forecasts growth of one percent and a primary surplus closer to 1.5 percent.

The Eurogroup is scheduled to meet on June 15 to make another attempt at finding a compromise solution for Greece. Lagarde articulated the IMF’s position in favour of a debt package now, which would be implemented after Greece emerges from its current programme in August next year: “Our conclusion with total intellectual integrity is that the debt relief is needed - without implying a haircut, but with significant extensions of maturity and deferral of interest payments. That’s our preference and for that to be credible for the markets, for the investors, it needs to be articulated now. It doesn’t have to be delivered upon by the creditors until the end of the program, but it needs to be articulated very clearly now to be a game changer. So that markets can say: “That country’s debt is sustainable – therefore we can invest. We can buy their bonds, we can put our money in the country.”

Should the IMF’s scenario prevail and Greece be given until 2080 to repay its loans to its Eurozone partners, they would lose €123bn by some estimates. It is unlikely that German finance minister Wolfgang Schaeuble will agree to ask his parliament for such an arrangement before German elections in September. His party has promised taxpayers that Greece will repay its creditors in full. 

Greek finance minister Euclid Tsakalotos agrees with the IMF on the necessity of the debt rescheduling, and with Germany on the more optimistic growth scenario. Last week he ramped up pressure on the Eurogroup to agree with the IMF on a package that included approval of Greece’s second review and debt relief.

Friday, 2 June 2017

Greece raises pressure on Eurogroup for deal


Greece ramped up pressure on its creditors this week to deliver a policy package that renders its debt sustainable.

“The Greek government feels it has done its part of what it promised,” finance minister Euclid Tsakalotos told journalists in Athens on Monday. “We feel that the ball is very much on the side of our creditors and the IMF [International Monetary Fund]. There are no excuses for not getting this overall deal that the Greek economy so desperately needs to access the markets and be able to leave the programme as planned in the summer of 2018.”

The Syriza government was humiliated at the May 22 Eurogroup, four days after it passed $5bn in measures over and above the requirements of the programme it agreed to in July 2015. It had fully expected a deal at that Eurogroup meeting. The office of prime minister Alexis Tsipras had issued a statement on May 17 saying he had spoken with German Chancellor Angela Merkel. “The two leaders agreed that a solution [to the debt] is both necessary and feasible at the upcoming Eurogroup,” the statement said.

Greece’s creditors, the Eurozone and the IMF, have already agreed on short-term measures that allow the country to pay its debts until 2022. Tsakalotos says the government now wants them to “specify the medium-term debt with what would happen if Greece successfully left the programme in the summer of 2018… and finally to reaffirm the nature of the long-term measures considered as part of the contingency mechanism should also be specified.”

The IMF has said that Greece’s debt is not sustainable, and recommends extending its repayment period to about 2080. Germany and some other Eurozone members say there will be no debt deal until Greece successfully completes its programme in August next year.

Tsakalotos says the measures could take effect then, but should be agreed now, “so an investor knows a the structure of gr debt, knows the likelihood of Greece being able to pay back its debt, and therefore can invest with increased certainty.” Greece’s economy was forecast to grow by 2.7 percent this year. Figures released by Elstat on Friday showed growth of just 0.4 percent for the first quarter.

Tsakalotos said the Eurogroup had agreed that Greece had passed its second review and was prepared to continue disbursements of its loan. That removes the possibility of a default next month, when Greece must pay the European Central Bank €7bn. But, he said, the meeting debated debt measures for five hours fruitlessly, making it impossible to issue a joint statement.

“There was one line in the Eurogroup statement that made it impossible for us to accept. That line said, ‘We the Eurogroup understand that the above measures on debt are not enough for the IMF to consider the debt sustainable.’ That statement essentially is a signal to markets – ‘don’t invest in Greece’.”

He refused to say whether Greece would abandon its adjustment programme if it does not receive satisfaction on the 15th. “I don’t think any player wants us to go to that situation… they understand after the 22nd of May that what was on the table was not a solution,” he said

“How can the European partners, the IMF, defend a position where Greece does its part of the bargain, and we say that ‘we’re not going to provide the clarity that the Greek government wants, the financial community wants, to be able to return Greece to growth’?” he said.

Tsakalotos said the root of the disagreement was that the IMF and Germany could not agree on how Greece’s growth and tax revenues would evolve after 2018. German finance minister Wolfgang Schaeuble confirmed this in an interview with Handelsblatt on Wednesday. We’re arguing with the IMF about what is the right growth assumption for Greece for the next 40 to 50 years,” he said. The IMF is reportedly forecasting 1 percent growth for Greece over 40 years.

He was quoted by Greek Reporter as saying, “We disagree with the IMF about what it predicts for growth in Greece in the next 40 to 50 years. The Fund is not ready to forecast growth of more than 1% over the next 40 years… With 1% growth, Greece would not be able to close the gap with the other members of the eurozone. That is why all the country’s adjustment programs are in vain.”
Greece has received support from northern European officials since the May 22 Eurogroup. European Central Bank board member Bernard Couere supported Greece’s quest for a rapid solution on Tuesday, saying that an agreement ought to be reached at the June 15 Eurogroup. Last week Germany’s foreign minister, Sigmar Gabriel, declared that it was time to make good on promises of debt relief to Greece. As a Social Democrat, he was upholding his party’s anti-austerity line against the Christian Democrats ahead of a September election (the two parties are coalition allies but election adversaries). But other European officials told Bloomberg on Thursday that a deal this month was unlikely.

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Saturday, 27 May 2017

China sees opportunity in the West’s loss of confidence

This review was published in the Weekly Standard under the title Tigers at Bay. 


There is little doubt among economic forecasters that over the medium term Asia’s emerging economies, China and India foremost among them, are expected to drive global economic growth. Taken as one, the region from India to Japan is not only the biggest market for raw materials, energy and the shipping industry that carries them; it is both the European Union’s and the United States’ biggest trading partner.

As a region, it is also more robust than either the EU or the US, where the International Monetary Fund forecasts that growth will rise from 1.6 percent last year to two percent next year. In contrast, ASEAN will grow by more than double that rate - 5.2 percent in 2018 - and even though growth is forecast to slow in China, it will still stand at an enviable six percent next year. In India, it will be 7.7 percent.

The sustainability of this growth is an object of study for obvious reasons. In China, the key trading partner on whom much of the region’s and the globe’s prosperity rests, concerns currently focus on finance and the state.

First, there are concerns that state owned enterprises, with all their attendant nepotism and inefficiency, still dominate. While they are only a fifth of the economy by size, state players tend to distort legislation and deprive the private sector of growth opportunity in key industries such as transport and energy. 

The lingering hand of the state affects finance. The OECD estimates that corporate debt has soared from 120 percent of GDP five years ago to over 160 percent today. In most emerging markets it stands closer to 60 percent. Two thirds of that debt belong to state-owned enterprises, and much of it may be subject to write-downs.

Nonperforming loans have risen fourfold in the last three years, particularly ‘special mention loans’, offered on lenient terms. Chinese banking statistics are opaque by Western standards and nonperformance is thought to be under-reported. Given that China’s banking system is now the biggest in the world, and that even less accurate reporting exists of a shadow banking industry living off the largesse of state investments, the potential effects of a Chinese financial meltdown can only be imagined. The “regulatory windstorm” recently unleashed by China’s banking regulator must be taken as a sign that Chinese authorities, too, are concerned about the systemic risk of defaults.

A final element of concern over China’s financial system is that its capital controls are creating too high a surplus inside the economy (last year alone, Chinese households saved five trillion dollars) instead of allowing that money to be invested overseas. This not only deprives other economies of growth; it puts all of China’s eggs in one basket.

Second, there are fears of a housing bubble. House prices have surged by a staggering 10 percent of GDP in two years, yet entire cities’ worth of real estate goes unsold and uninhabited because of overcapacity. A housing bubble would further undermine financial stability.

Third, the rising level of inequality goes unaddressed. Wealth discrepancy, recently measured by the IMF, rose from a Gini coefficient of 0.71 in 1995 to 0.81 in 2002. Given that China is (at least nominally) a socialist country, this is unacceptably close to the US wealth discrepancy of 0.78. The communists can claim an enormous victory against poverty in the countryside, which has fallen by a stunning 90 percent over the past 35 years, but this has happened thanks to China’s growth rather than redistribution. The IMF study reveals that what applies in capitalist economies largely applies under socialism: Less educated, older and non-state workers have been those most hurt most by the transition from a low-skilled, rural economy to a manufacturing economy.

Fourth, Premier Xi Jinping has chosen to uphold the Chinese standard policy of resisting any political liberalisation. Freedom House, the civil society watchdog, has tracked a sharp uptick in authoritarianism and a move away from civil freedoms. In the last year the government has imposed strict supervision standards for NGOs, increased surveillance of people through the Internet, and imprisoned human rights lawyers and their clients for months or (in older cases) years without charging them.

Given all this, there are justifiable concerns about whether the Chinese Communist Party can competently manage a transition to slower growth and an ageing population, as well as address risks such as corporate over-indebtedness, a looming real estate bubble and environmental degradation.

In The End of the Asian Century, Michael R. Auslin undertakes the ambitious task of displaying the potential for disruption in Asia by assessing the political, economic, demographic and defence risks of not just China, but also India, Japan, Korea (north and south), Indochina and the large archipelagic states of the eastern Pacific. This is an analytical carousel on the potential for armed conflict sparked by North Korea; the appalling poverty of India, where a third of the population still lacks electricity and literacy; gender inequality throughout southeast Asia, which leaves the talents of half the population outside the economy; the combination of reform gridlock and demographic decrepitude in Japan; and the general resistance to transparency, accountability, meritocracy and democracy through much of the region, values which in the West have underpinned sustained economic and social development for two centuries.

The End of the Asian Century brings a great deal of knowledge and two decades of experience to the layreader. For the non-expert on Asia it is equivalent to a concentration of lectures complete with references. For that alone, anyone interested in the geopolitical risks of the region and the global economy will find it worthy of their time.

Its quality of an Asian Panopticon is both its strength and weakness, however. The problems of Vietnam, the Philippines and Indonesia simply don’t measure up to the magnitude of the risks in China. This lack of focus means there is no over-arching conclusion (for what conclusion can one draw from so disparate a set of nations?) and means that the book amounts to no more than the sum of its parts.

More importantly, The End of the Asian Century does not prioritise its political preoccupations over the economic. The competitiveness of Asia, based as narrowly as it is on explosive population growth (followed by precipitous population drop), cheap labour and willing buyers abroad, might truly be at risk in purely economic terms, but that is not what makes such a book such as this important to a Western reader. The real cause for concern is that the Chinese Communist Party can apparently proceed unreformed, and in the process attempt to rewrite the rules of the global economy.  

The fact that despite the industry of its people China’s growth “remains driven by the state and private business sectors and not yet by consumers,” or that “since the Tiananmen Square massacre of 1989, the party has become ever more isolated from the citizenry and is seen as corrupt, inefficient and often brutal… distrusted and disliked by the vast majority of the population,” means that individual rights are set at naught for a large proportion of the world’s population. Other dictators in the region and as far away as Iran and Sudan receive material and diplomatic succour from China’s stance – people who “threaten their neighbours, oppress their people, or seek to destabilise the international order,” as Auslin puts it.

This means that China, more potently than Russia, challenges the American and European worldview and international order. Even in Europe, China has launched the “16+1” forum of former Warsaw Pact countries in a direct challenge to the EU. Not surprisingly, US influence in the Far East is now weighed against China’s, where “smaller nations feel pressured to pick sides, when their greatest desire is to antagonize neither.”

China’s direct challenge to American power in the Pacific, now taking the tangible form of military runways on once insignificant atolls, means that the US will be called upon to shore up its security mantle.

Auslin omits to mention that China is flexing its soft power, too. Under the One Belt One Road initiative launched in 2013, the Chinese government is to spend almost a trillion dollars building infrastructure around the world to extend the reach of its exports. It is perhaps the largest such spending programme ever conceived, dwarfing even the Marshall Plan after the Second World War. Like the Marshall Plan, it will have political ramifications, cultivating markets and fostering loyalties.

There is a further effect of China’s strident defiance of the Western order. The fall of communism in Europe was oversold as final victory for capitalism, which would in theory sow a middle class demanding democracy in former communist states. This has not yet happened, and social scientists are divided about whether it will. The open society and the international trade system America built after World War Two appear to be insufficient to overthrow what Ronald Reagan referred to as Evil Empires. Even worse, since the 2008 financial crisis they appear unable to provide quality of life to this generation and equal opportunity to the next. As a result, the US is transitioning from the land of greatest economic and social opportunity to a country of increasingly entrenched privilege, growing inequality and a falling labour force participation rate.

The sensible remedies Auslin suggests for building leverage over authoritarian regimes in Asia are precisely the ones America cannot enact because of its growing self-doubt: using the Trans-Pacific Partnership to create a swirling vortex of trade among democracies, eventually, perhaps, luring China and other illiberal regimes into greater accountability and rule of law; raising the cap on H1B visas for skilled workers to pre-9/11 levels and cultivating Western political values; and expanding exchanges run by the State Department’s Bureau of Educational and Cultural Affairs, targeting future business and political elites.

Unfortunately, these are precisely the extrovert, patient policies the Trump administration has declared void. TPP has gone by the board and State Department budgets are earmarked for slaughter. Many Americans seem to have forgotten that what made America great was its willingness to spend time and money building multilateral alliances that strengthened democracy and free trade.

Herein lies the far greater threat: not that the combined pressures of Russia, China and other illiberal regimes which find that US-EU hegemony has grown long in the tooth will overthrow it by force; but that American and European societies are losing confidence in the qualities that make them enviably different from China and Russia. Western societies are lured by the nationalist sirensong that their liberal systems will not stand up to state capitalism and its alleged ability to make up for their waning qualities. This loss of confidence is now evident in the fact that press freedom in the West has been falling for over a decade, while authoritarian leadership and nationalism are gaining currency, boosting partisanship and straining political systems to the point of distorting them. The economic threats to Western capitalism from lack of reform in Asia are indeed real; but the political problems are home grown.  
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Wednesday, 3 May 2017

Greece and creditors reach a compromise of two conflicting working hypotheses


After four months of talks, Syriza reached an agreement in the small hours of Tuesday with its creditors, the Eurozone and International Monetary Fund, that allows the government to keep receiving bailout funds.

On the austerity side, Greece agrees to cut pensions by one percent of GDP in 2019, and raise personal income tax by one percent of GDP in 2020. Total savings: €3.5bn.  

On the expansionary side, the treasury gets to spend the same amount of money on a social spending programme that includes such things as school lunches, rent subsidies for the poor and job creation schemes (see full list below). The Eurogroup still has to approve the deal on May 22. 

This is how government spokesman Dimitris Tzanakopoulos described the agreement: 

“The Greek government believes that despite the delays caused by lenders’ unreasonable demands throughout the talks, the final agreement is balanced and sustainable. Despite the IMF’s initial insistence on measures worth 4.5 billion euros, we succeeded in a deal that has no fiscal impact. There will be austerity measures worth two percent of GDP, and expansionary measures worth two percent of GDP.”

Why the symmetry? Partly because Greece and the IMF appraise the economy entirely differently. The government says these latest measures are not strictly necessary. From the IMF's point of view, they are to ensure that Greece continues to produce a primary surplus of 3.5 percent of GDP beyond next year - that money going to pay off the debt. But Greece already produced a surplus of 3.9 percent last year on existing measures. Creditors simply aren’t convinced that that is sustainable. 

So the compromise is partly to pass contingency measures for the bad case scenario. The austerity measures are also designed to pay for the spending measures if the government's more optimistic view of tax revenues holds up. This, too, stems from the different views between Syriza and the IMF on what is good for the economy. Syriza believes in Keynesian pump-priming as the key to growth; the IMF believes the austerity measures to be necessary simply to maintain treasury savings, which it says will ultimately be undermined by creeping pensions spending. 

This compromise of two conflicting hypotheses demonstrates not only how different are the perspectives of Syriza and the IMF; it shows how difficult forecasting Greece has become.

The conservative New Democracy opposition points out that in December 2014, when Syriza led an expose of the conservative government’s commitment to a billion euros’ worth of cuts, the price tag for remaining in the eurozone was far smaller. It refuses to vote for the new package, allowing it to pass on the slim ruling majority of 153 seats in the 300-seat legislature.

This will expose it to criticism that it is playing politics as usual. The deal at least unlocks bailout funds Greece needs to keep receiving if it is to service ECB bonds in July. 

ND's stance will also come under fire for not supporting two important riders of this agreement: one, that the government won a return, in principle, of collective bargaining after 2018. This in theory means better working conditions and improved wages. And two, the deal clears the way to have a discussion on rescheduling the Greek debt over a longer repayment period to make it sustainable – something Syriza unsuccessfully fought for in 2015.

As finance minister Euclid Tsakalotos put it, “I am sure that there will now be the discussions on the debt because there is no longer any excuse that we don't have an agreement on the measures.”

Measure for measure: 
The austerity measures and counter-measures agreed for 2019-2020 

1. Austerity: €3.5bn

Greece will cut pensions to the tune of one percent of GDP. In practical terms, one third of pensioners will lose an average of nine percent of their income. 

The treasury will raise the equivalent of one percent of GDP by lowering the tax exemption salaried employees enjoy, from €6,836 to €5,681, or 17 percent. This is an effective personal income tax hike of about 3.5 percent.

Source: Eurogroup of 7 April and Greek government 

2. Expansion: €3.5bn

-       Greece won’t allow unlimited mass layoffs. These will remain capped at five percent of payroll per month.
-       Sectoral wage agreements will come back into force after next year.
-       Free preschools nationwide
-       50 percent of primary/secondary schools will serve free lunches
-       Increased rent subsidy of 100 dollars month on average for 600,000 households
-       €260mn on higher child subsidy for 3rd and 4th child  
-       Co-payments for medicine will go down or be eliminated for people earning under €1200 a month.
-       €250mn in labour expenditures (job creation)
-       €250mn in public works expenditures (again, job creation)
  
Source: Labour ministry - unofficial information