Monday, 20 February 2012

The Noose Tightens

Greece’s fate hangs in the balance of today’s crucial Eurogroup meeting. A green light will pave the way for a debt forgiveness of about 100 billion euro ($130bn), and a second bailout worth 130 billion euro ($170bn). A further delay could push the mechanics of Greece’s debt reduction past a March 20 deadline, when 14.5 billion euro ($19bn) in bonds mature. At that point, Greece would have to declare a payment freeze to creditors and be declared bankrupt.

Despite the staggering sums being spent to prevent a Greek default, it is decreasingly meaningful to present the bailout and the prospect of default on opposing scales. One reason is that with up to 70 percent of debt in private hands due to be wiped off the books and Greece’s commercial borrowing rate close to 30 percent, markets will consider Greece as being effectively in default. The second reason is that austerity measures designed to cut the deficit are already steeping blue-collar society in living standards simulating default. Call it a social default. An opinion poll released yesterday by the Sunday newspaper Proto Thema revealed that 60 percent of voters believe the country will default anyway, with or without a second bailout. Last Sunday’s poll in another paper, To Paron, recorded 48 percent of voters saying they would rather default than have another round of austerity measures. But in the eyes of most Greeks, it is no longer on either-or situation.

It is, perhaps, less a question of whether Greece will default, as what kind of default will befall it. About sixty percent of Greeks still poll as preferring to remain within the euro, and keeping Greece in remains, officially, the European position. If this is to happen, Greece needs to service what remains of its debt after the so-called haircut to private lenders. The eurozone bailout is designed to assure precisely this – that regardless of the pain in the eurozone’s sovereign interior, it will meet its external obligations to markets and lenders.

Still, for reasons both technical and political, it is possible that Greece will enter a period of default in March.

The technical reasons have to do with the process of enacting the 130 billion euro bailout from Greece’s euro area partners and the International Monetary Fund. The approval of that bailout has now been repeatedly delayed, most recently by the Eurogroup itself, which twice in the past two weeks was unsatisfied with how Greeks propose to cut 3.3 billion euro ($4.4bn) from this year’s budget.

Assuming all went well in Monday’s Eurogroup and the bailout received a green light, the Greek finance ministry would be able to invite private bondholders to participate in a bond exchange. The so-called Letter of Invitation would be dated February 21, and ask banks and funds to swap existing Greek bonds in their portfolios, whose tradeable value has fallen to a fraction of their face value, with new, longer-dated bonds bearing lower interest rates.

Greece must give lenders at least a fortnight to consider the offer, and needs another fortnight to process and collate the responses. That takes the process to late March, when, assuming it has attracted a voluntary participation of at least two thirds of lenders, Greece can vote a collective action clause in parliament forcing the remaining private lenders to submit to the terms of the exchange. It would then urgently have to co-opt holders of the bonds maturing on March 20 in order to avoid default. Greece would still need a couple more weeks to enact the bond exchange, taking the process to early April, but once it had secured universal participation it would be out from under the cloud of default. Its debt would be denominated in new bonds issued with the explicit backing of the eurozone. In effect, while European money is bailing Greece out, these are eurobonds under another name.

The dangers are then more political than financial. Greece’s euro partners are becoming increasingly mistrustful that the country intends to see through reforms and austerity measures that would, on paper at least, return the country to growth in the second half of next year, and to budget surpluses by 2015. They have seen the Papandreou government squander 73 billion euro of a 110 billion euro bailout by performing very little in the way of structural change, and incur massive political cost by enforcing across-the-board pay cuts, tax increases and other austerity measures that penalized the weak.

That policy may have reduced the budget deficit from 15.6 percent of GDP to 9.6 percent last year; but it also put the socialist Papandreou government in a crisis of legitimacy. To survive, it was forced into an alliance with the conservatives, and Papandreou resigned his premiership to a technocrat. Now even this coalition seems in danger of losing its legitimacy in the public view, after parliament’s approval of the latest package of austerity measures a week ago was accompanied by a 100,000 strong march, riots and looting in Athens.

Even more than Greek stamina, the Europeans seem to fear for the constancy of conservative leader Antonis Samaras, whose failure until last week to sign a written commitment to back the austerity reforms was the chief reason why the Eurogroup cancelled its emergency conference on the Greek matter on Wednesday. Simply put, adherence to the austerity and reform programme is politically costly. New Democracy is trying to eat its cake and have it. Samaras ended the letter he did send the eurogroup with a caveat that “policy modifications might be required to guarantee the programme’s full implementation... we intend to bring these issues to discussion along with viable policy alternatives.”

The ambition of Samaras has been a factor in European foot-dragging on Greece. When the coalition was formed last November, he insisted on a general election as soon as the interim administration had completed its three tasks of securing a final instalment of eight billion euro from the last bailout; negotiating the participation of private sector bondholders in the debt forgiveness exercise; and agreeing on the terms of the second bailout with the eurozone. He even provided a date – February 19 – to lend his position credence. That was unrealistically short for the weighty tasks at hand, and he was forced to move it to April 8.

This stance has done enormous damage. It has relegated the generosity of the eurozone to a mere procedural task, and suggested that the real political decision-making process would begin again after the election, with Samaras as prime minister. It has also exposed Samaras’ lack of understanding of the processes involved in the bailout, and his lack of contact with political realities outside Greece. There is a clear and growing constituency in the Eurogroup that is in favour of allowing Greece to default as punishment for its ingratitude. The masonry cut to shore up Greece’s foundations would be used instead to build a wall around it.

The Samaras factor is the main reason why German Finance Minister Wolfgang Schaeuble suggested last week that the Greeks consider delaying an election until the expiry of the four-year mandate Papandreou won in October 2009. Germany is rumoured to be considering a post-dating of bailout money until after a Greek election in order to maintain leverage. The Bundestag is scheduled to debate the bailout on Fabruary 27. But this is where northern Europeans expose how tin-eared they are to Greek political realities. The coalition parties garner no more than 35 percent of voter support in the latest polls. Sixty one percent of Greeks favour elections in spring, whereas last year a majority thought more like Mr. Schaeuble. Clearly these figures are not endorsements for the government of Loukas Papademos, the consensus prime minister, or the austerity programme.

The more Germany tries to dictate directly to the Greeks, the more it exposes the semi-elected nature of the government in Athens. The Greeks may willingly give up much of their autonomy for a period; but Europe’s bilious billions are not enough to force them to give up the democracy they fought for through three dictatorships, Axis occupation and a Civil War. Germany will most likely decide not to take its chances financing a democratically elected Samaras-led coalition in the spring. Most likely, the Greeks will be told that the price of democracy is financial self-sufficiency. While the European bailout will finance debt repayment, Greece may have to achieve an immediate primary surplus, meaning that the first act of the new government will have to be axing another five billion euros from this year’s budget. Right-minded politicians can do this without passing the pain to the working and middle class, because there is still a lot of waste in government and a lot of wealth tied up in public land. But can Greek politicians make decisions in a right-minded manner? The record does not give grounds for much hope.

1 comment:

  1. The real question, in my mind, is how the process of "burning" 50 BN EUR annually of other countries' savings can be brought to a halt, or at least slowed down dramatically. Without special taxes on imports and capital controls (both violations of EU-treaties), that won't be possible. And if it doesn't work that way, a Euro-exit is the only alternative. Why? Because at some point the savers of other countries will say "no more 50 BN EUR annually!".

    Is a Euro-exit contractually possible? No, it isn't. But many things have happened so far which were contractually not possible before.


Note: only a member of this blog may post a comment.