Friday, 30 November 2012

Greek Bond Buyback in Trouble

Greece's attempts to buy back bonds may be in trouble. A meeting between finance ministry officials and bankers yesterday ended without a deal, Greek media report.

The bond buyback exercise allows Greece to take advantage of its bonds' low retail value by repurchasing them at reduced rates. It is an essential part of Greece's continued funding by the 'troika' of the European Commission, European Central Bank and International Monetary Fund. On Wednesday Greek Finance Minister Yannis Stournaras called it a "significant part of the debt reduction goal" of 20 points of GDP by 2020, adding that "the buyback has to work." 

Gerry Rice, External Relations Director at the International Monetary Fund yesterday explainedwhy: "we will be looking for implementation of the buyback operation, and contingent on that implementation and the success of the buyback program we will be in a position to put forward the recommendation to our board." 

Should the IMF freeze its portion of the Greek programme, the whole Greek rescue package would come to a halt. The IMF cannot, legally, continue to fund rescue packages not deemed sustainable. 

The debt reduction goal of 20 percent of GDP was deemed necessary by Greece’s creditors on Monday, if the debt is to be brought to 124 percent of GDP by 2020 and “significantly below 110 percent of GDP” two years later. Other measures contributing to that goal include a 15 year extension of bond maturities, a ten year moratorium on interest payments and a return of profits the European Central Bank would make on Greek bonds it bought at a discount.

Bonds for shares?

At Wednesday's press conference, Greek officials failed to clarify how much they intended to spend on the programme, what the minimum buyback contribution to the debt reduction should be, and where the money would come from. They did rule out any funding from the bailout loan or from sales of short-term bonds to Greek banks, which have been the government’s two cash lifelines for the past three years.

Since the state is cash-strapped, one likely buyback method would be to ask Greek banks to sell bonds back to the government at a significant discount in return for some of their shares, rather than cash. Greek banks have lost their independence in terms of equity, because they have received billions in recapitalisation money from the Greek government and the European Financial Stability Facility over the past three years.

But a bonds-for-shares proposal might run into problems. Banks have already used most or all of their bonds as collateral to borrow cash from the European Central Bank and the Bank of Greece. This cash has been keeping the banks, and the Greek government, afloat. Selling these bonds at bargain basement prices, and without a cash prize, might leave them badly exposed.

Thursday, 29 November 2012

Greeks Pay 14bn for Bureaucracy

The cost of Greece's central administration comes to 14 billion euro a year, or 6.8 percent of GDP, a study revealed yesterday. That figure includes above-table costs and an estimate of the cost of corruption.

The study was presented by Prof. Panayotis Karkatsoulis, who teaches at the School of Public Administration. He blames over-regulation, which allows state functionaries to thrive off legal loopholes. Since 1975, says Karkatsoulis, Greece has passed 171,500 laws, presidential decrees, ministerial decisions and local government decisions. He also blames the size of central administration, which he estimates employs over 53,000 people.

"Excessive legal formalism, obsession with detail and [administrative] diaspora ...[lead us] to a system of administration where the functional state and correct organisation are distorted so as to serve the deeply-rooted client relationship between the citizen and the state," Karkatsoulis says.

Karkatsoulis conducted a poll revealing that most public employees would like to be better organised (90 percent) and support reform (90 percent) and deregulation (65 percent). He said all laws and surveys contributing towards these ends have been routinely ignored.

The venue was a conference held by the Greek branch of Transparency International, which has posted Karkatsoulis' presentation

New Poll Confirms Rise of Extremes in Greece

An opinion poll published today shows the Greek radical left opposition party, Syriza, leading the ruling conservative coalition by five points, confirming a trend seen in the polls for the past month.

The poll, which appears in the weekly magazine Epikaira, gives conservative New Democracy 26.5 percent of the popular vote, and Syriza 31.5 percent. It also confirms the oft-predicted rise of the far-right Golden Dawn party to third place with 12.5 percent.

Beyond these three, the field is flat, with a clutch of four small parties claiming between five and 6.5 percent. This is important for three reasons. First, it sinks New Democracy's main coalition partner, the socialist Pasok, to the order of five percent, even lower than its lowest ever election showing of 12 percent last June, and indistinguishable from the likes of other small fry. Pasok had already been cast down from the ranks of potential ruling parties; now it is also on death row. This now should mean that both Pasok and the third coalition partner, the Democratic Left, ought to be more deeply invested in the ruling coalition, for the wilderness awaits them after a Syriza victory (see Pasok leader Evangelos Venizelos' article in today's Efimerida ton Syntakton, asking for the full four-year term).

Second, the poll implies that, unless something radical happens, the next parliament will also have seven parties, making it almost impossible for one of the two big players to secure single-party rule. New Democracy has picked its friends. Syriza has taken a step towards doing so. In a press conference two weeks ago its leader, Alexis Tsipras, opened the door a crack to a possible collaboration with the anti-austerity Independent Greeks. The party's main obsessions since it entered parliament in May have been charging the Germans reparations for illegal wartime loans, drilling for mineral resources and hauling off socialist and conservative politicians to the gallows for bringing the country to this pass. The two parties may come from opposite sides of the ideological divide, but they are both reactionary and possibly vindictive.

Third, if, as polls suggest, the Greek electorate is planning to cultivate more small parties without killing off any of the old ones, this will not only make it harder for larger players to form lasting governments; it will also make it harder for them to form mobile ones. Small parties have a narrow scope for action because they cling to life by preening and feeding a flock of client voters. They are, in effect, limited interest groups (witness the Democratic Left's trench-digging before the hallowed issue of dismissing state workers, its client base). The foreseeable future of Greek politics, therefore, does not seem to hold the promise of bold policy moves. Ultimately, though, this may be a good thing as well as a bad thing. It makes reform harder, but it may also hamper a Counter-Reformation. 

Wednesday, 28 November 2012

Greek Bailout Remains a Ticking Time Bomb

Prime Minister Antonis Samaras sounded a triumphant note after Greece was awarded 43.7bn euro in delayed loan instalments during the small hours yesterday.

In an emailed statement he said, “Greece managed to win back its credibility… it put the foundations in place for the Greek debt… to become sustainable again.”

Some people dispute these claims. The leader of the radical left opposition Syriza, Alexis Tsipras, yesterday reiterated his argument that all forecasts are slippery in the volatile global economic climate. “Two years ago they were telling us that the goal for a viable debt was 120 percent of GDP, now they are telling us it could be 124 percent, tomorrow they may say 130 percent.”

Documents seen by the Financial Times seem to confirm this view. An article run by the newspaper today reveals that the debt would be closer to 115 percent of GDP in 2022, rather than the “significantly lower than 110 percent” foreseen by the Eurogroup. Finance Minister Yannis Stournaras said in an afternoon press conference that the FT estimate was based on an outdated chart, and that adjustments equivalent to 2.7 points of GDP had later been made. 

The money released yesterday represents instalments of Greece’s second bailout loan due since May, when the country went into back-to-back elections. Its loan was frozen along with its austerity and reform programme.

Of the 43.7bn euro,9.3bn will be released next year, following a tax reform. The bulk, 34.4bn, is to be released immediately, in a fortnight. 23.8bn of this will recapitalise banks. The rest will go to state salaries, pensions and suppliers, many of whom haven’t been paid in as much as two years.

The eurozone spent two weeks deliberating on how to deem Greece’s debt as viable, in order to be able to release the money. The International Monetary Fund, which is bailing Greece out along with the European Union, had deemed the debt unsustainable after the economy shrank more than expected this year (recent figures by the Greek Statistical Service revised the recession from a forecast figure of about four percent to seven percent of GDP by the end of the year). This means that Greece’s economy is not thought to be strong enough to reduce the debt over time, only to roll it over indefinitely. It would condemn Greece to a perennial Sisyphian task of rolling the debt uphill, only to see it roll back to the bottom. Sustainability consists of the firm prediction that the boulder will roll down the other side of the hill. As economist George Pagoulatos put it to The New Athenian, the debt would overtax an “anaemic” Greek recovery after 2014, and it therefore “traps the economy in an equilibrium of very low growth.”

The ultimate challenge to the eurozone, which is now Greece’s main creditor, is to forgive a chunk of the capital they have lent Greece. But that would have to come from the pockets of European taxpayers. They are not in a forgiving mood and fear that greater concessions to bigger eurozone debtors like Italy might follow.

For the moment, the Eurogroup has managed to make Greek debt look sustainable on paper by tinkering with interest charged on that capital. The eurozone has lowered it from 1.5 percent to half a point, and offered a ten year moratorium on interest premiums. It also extended the maturity period on Greece’s bailout loans by fifteen years.

Two further things were offered. The European Central Bank will forego profit margins on Greek bonds it bought at a discount. It will now not charge Greece the original face value of those bonds when they mature, but something closer to the discount price it paid, which is about two thirds of face value. Greece will be also be allowed to use some of its bailout money to buy back some of its own bonds on open markets, at the discounted rates at which they are now trading. This means that if Greece sold a bond for 100 euro, it could now buy it back for less than half that amount.

All of these measures theoretically cut Greece's debt by 20 points of GDP and bring it to 124 percent of GDP in 2020, which, if true, is already a concession of four points by the IMF. But this will only hold true if Greece sticks to the programme, which it has a poor track record at doing, and if the international environment doesn't adversely affect it. These are two big ifs. Greece already has 25 percent nominal unemployment, and is looking at deeper recession and joblessness for another year, possibly two. Its latest austerity measures, voted into law this month, take effect on January 1. Growth initiatives, on the other hand, need time to mature. Given that things will get worse before they get better, it is quite possibly that Syriza, which has led the five month-old government in the polls for at least a month, will accede to power before long. The party says it will ultimately uphold the bailout loans, but will tear up the austerity memoranda. Figuring out what that means in practice may take months. The smooth running of the Greek programme should not be taken for granted, or set by creditors as a precondition. Doing so sets a political time bomb ticking.

The Eurogroup said in its statement yesterday that it is “committed to providing adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.” That seemingly unequivocal statement still contains countless uncertainties and trap doors. 

Monday, 19 November 2012

Greece Awaits Payout Decision

Greece awaits an important decision from tomorrow’s Eurogroup meeting in Brussels: the nod on 43 billion euro in delayed loan instalments, which Greece is now eligible for after passing 13.5 billion euros’ worth of spending cuts earlier this month. 

“We are completely ready for Tuesday. There is no further action pending on our side,” said Finance Minister Yannis Stournaras on Sunday evening.

He said the government had moved to put into law a mechanism that will oversee budget execution in each ministry to ensure that there are no cost overruns. At a Eurogroup meeting last Monday the Eurogroup said it expected that this week “the necessary elements will be in place for Member States to launch the relevant national procedures required for the approval of the next EFSF disbursement.”

The fragile, three-party coalition in Athens needs the loan payouts to recapitalise banks and to pay off state suppliers, pumping money back into the economy.

The decision to release the money was meant to have been taken at last Monday’s Eurogroup meeting. But that meeting was dominated by a dispute with the International Monetary Fund, which believes that Greece’s debt is not sustainable unless a large chunk of it is forgiven. Since banks and private sector lenders already forgave 107 billion euros last march, representing more than half of their Greek bond holdings, it is now incumbent on European governments to offer a discount, something the eurozone has been resisting.

Greece has taken a surprisingly soft stance on the restructuring of its debt. The IMF's insistence on official sector involvement was not grasped by the Greek side. Asked about it on Friday, Finance Minister Yannis Stournaras said "I don't have anything to say about that, thank you."

Reuters quotes ECB board member Joerg Asmussen as saying that the Eurogroup will not address the sustainability issue on Tuesday, leaving it to later meetings.

Europe is also consumed by larger concerns, namely a dispute between net contributors and net beneficiaries over the size of the next seven-year European budget. Fiscal hawks like Germany and the Netherlands want the roughly one trillion euro budget cut significantly. An emergency EU summit has been called for Thursday to resolve the dispute.

Friday, 16 November 2012

Greece: Good Marks. Must Try Harder.

This article was published by PBS NewsHour.

A report on Greece’s progress leaked this week by the Financial Times suggests that the country’s bruising struggle to balance its budget is being appreciated, but the road ahead remains strewn with boulders.

The performance review by representatives of the so-called troika of Greece’s creditors - the International Monetary Fund, European Central Bank and European Commission - awards Greece high marks for a “very substantial” fiscal adjustment. Greece has closed a 36 billion euro deficit by 23 billion euro in just three years, leaving just a third of the way to go.

This sentiment was passionately seconded on Wednesday by Charles Dallara, Managing Director of the Institute of International Finance, which represents some 400 banks and private lenders. In a speech delivered in Athens, he called Greece’s course of cost cutting “nothing short of brutal”.

“That reform still marches on, and that Greece clings to the mantle of the euro with tenacity is testimony to the resilience, fortitude and courage of the Greek people,” Dallara said.

According to the original memorandum Greece signed with its lenders in April 2010, it should now be coming to the end of the process. Instead, it has asked for an extension to the end of 2016. A previous two-year extension to 2014 has already doubled the cost of its original bailout loan to 200 billion euro. This extension, the troika believes, will cost another 32 billion euro.

The reason for these setbacks is a slippery recession, which has claimed a fifth of the country’s economy and a quarter of its workforce in just three years. Greece has so far been forced to cut 49 billion euro in spending – more than twice the size of the deficit hole it has managed to plug. New cost cuts voted in last week will over the next two years raise that number to a staggering 62 billion euro, a third of the economy as it now stands. Greece is caught in a vicious cycle. As the economy shrinks its tax revenue falls, meaning that spending has to be reduced even further to achieve targets. That is why austerity policies keep being extended.

The report acknowledges this, calling the recession “deeper” and “longer-than-expected”. It also recognises that the spending cuts have deepened and lengthened it.

So can Greece be saved through fiscal retrenchment? The political opposition in Athens thinks not. At its heart sits the radical left Syriza party, which sees the memoranda of austerity measures as a political dead end that “devour their governments.” Syriza has in the past supported unilaterally defaulting within the eurozone. Recent polls show that it enjoys a slight lead of two to three points above the ruling conservative New Democracy. Embracing austerity as the responsible choice, on the other hand, has punished New Democracy and its main coalition partner, the socialist Pasok. They have fallen from a combined 77 percent of the popular vote in 2009 elections to 42 percent last June.

The four month-old coalition also bears the scars of last week’s legislative battles, where 13.5 billion euro in new cuts were approved. Eight of its members of parliament defected and were permanently expelled, permanently reducing its majority. Its smallest member, the Democratic Left, stepped aside in a crucial vote on the austerity package, showing that it has only one foot in the government. Unsurprisingly, the troika report says that “the political coalition supporting the government appears fragile and some components of the programme face political resistance.”

Prime Minister Antonis Samaras put a brave face on matters after approval of the budget on Sunday night, declaring the week a victory and promising a new focus on growth. But such bravado may not be enough to pull Greece through. Its creditors have stalled 43 billion euro in loan disbursements because they disagree on whether its debt is ultimately sustainable. A seven percent recession this year and 4.5 percent next year will mean that debt is worth 189 percent of GDP.

The troika report believes an additional four or five billion euros’ worth of spending cuts will be needed down the road, something that presently seems politically unlikely to happen. The most recent round of austerity was sold on the basis that it is final. Even what has been legislated won’t work unless “the structural reform agenda is fully and swiftly implemented,” an exercise involving further political bloodspilling. “This will require breaking the resistance of vested interests and the prevailing rent-seeking mentality of powerful pressure groups,” the report says. That is probably an understatement.

Even Charles Dallara, who presided over a 107 billion euro write-down of Greek debt for his members last March, felt that Greece needs more time. “It is time to recognise that austerity alone condemns not just Greece but the whole of Europe to the probability of a painful and protracted era of little or no economic growth.” He suggested more moderate targets, a lowering of interest rates on Greece’s bailout loans and a greater emphasis on pump-priming public projects.  

Greek workers would agree. As Dallara spoke, they took part in a strike along with workers across southern Europe, all hard hit by recession in the eurozone. State workers have long been affected by salary cuts. Now they are worried about layoffs, previously impossible because of union pressure, but now a fact. Two thousand government workers will go this year, starting with those in disciplinary proceedings for not doing their jobs properly. And that is just the start of a net loss of 110,000 public sector jobs over four years. In the private sector it’s the other way around. Workers are used to unemployment, now at 25 percent; but after last week’s austerity measures, their minimum take home pay will be as low as 430 euro a month. These are the ranks from which Syriza is constantly swelling its approval ratings. The markets used to be the main motive for ending the recession. Now it’s the desperate shortness of political time. 

Thursday, 15 November 2012

Greek Workers Besiege German Minister

About a thousand local government workers in Greece’s northern city of Thessaloniki on Thursday besieged a building that contained Germany’s deputy labour minister. The siege was sparked by remarks he made the previous day, suggesting that many workers should be laid off. 

German deputy labour minister Hans Fuchtel is reported to have said that a thousand Germans could do the work of the 3,700 employees of Thessaloniki municipality. He was in the city to inaugurate a third annual Greek-German local government conference. But the timing was unfortunate. On Monday, Greek mayors received orders to start laying off staff, following the passage of an austerity bill last week. Thessaloniki must shed about 100 workers, local union members say. Raw television footage showed them storming the conference grounds with placards and loudspeakers, and weaving their way through buildings. Union leader Sotiris Vaios told The New Athenian that they plan to stay there until they meet with Fuchtel, but they dispersed around noon, eye witnesses reported.

Fuchtel has been travelling up and down Greece for over a year, advising local governments on how to better organise themselves to cope with increased duties and slashed subsidies.

Monday, 12 November 2012

Greece Expects Payout After Tough Votes

Perhaps for the first time since the beginning of Greece’s sovereign debt crisis, the question hovering over Europe is not whether the storm-tossed nation has lived up to its obligations to lenders, but whether they will live up to theirs. 

Greeks fully expected that a eurozone finance ministers’ meeting in Brussels today would approve a bailout instalment of 31.3 billion euro, after parliament last week passed a controversial new austerity package and a tough 2013 budget. But by Monday night those expectations were dashed. The Eurogroup ended with a decision to reconvene a week later.

Greece's loan instalments have been delayed since last spring because of a political crisis, and another 12 billion euro in instalments have also come due. Prime Minister Antonis Samaras told parliament last week that he would try to rake in as much of that as possible to refinance banks, pay off overdue bills to state suppliers and provide liquidity to the marketplace. Finance Minister Yannis Stournaras said on Friday that “there is not the slightest reason to worry... Greece is doing what it ought to, and you can be sure that Europe will too, and the instalment will be paid out.”

But it appeared on Monday that approval would be delayed, after inspectors had failed to deliver to the Eurogroup a long-awaited progress report on Greece. The inspectors represent the so-called troika of Greece’s creditors – the European Central Bank, the European Commission and the International Monetary Fund. They have approved more than 200 billion euro in loans to Greece since May 2010, after Greece failed to draw money from markets.

The progress report may be a figleaf. There appear to be deep divisions among creditors over whether Greece can be saved, and at what cost. The debate began last week, when European Commissioner for Economic and Monetary Affairs Olli Rehn told Reuters that “the debt burden of Greece is clearly not sustainable.” 

The debt had been declared sustainable by the International Monetary Fund after a debt restructuring last March, which saw private lenders forgive 107 billion euros’ worth of debt. But Greek debt is now forecast to reach 189 percent of GDP next year, after the economy shrinks an estimated 6.5 percent this year and 4.5 percent next year.

There is concern for the health of the rest of the eurozone, too. The Commission’s outlook released on November 7 showed that the eurozone economy was set to shrink by 0.4 percent this year and remain stagnant next year. Such news is likely to strengthen the hand of fiscal hawks like Germany, Finland and Holland. 

And a broader EU battle over the seven-year budget is brewing next month, with Britain and Germany preparing for a showdown over the size of the budget.

Finally, Germany is at odds with the United States over how to turn around the eurozone’s malaise. Germany insists on further fiscal discipline, while US Treasury Secretary Timothy Geithner has argued that austerity is driving the EU towards recession and away from growth.

Against this backdrop of larger problems and confrontations, Greece’s conservative-led coalition has for now placed itself quite well to argue for a disbursement of some 41.3 billion euro in accumulated loan instalments. 

It has ratified in parliament a 13.5 billion euro austerity package, with 10.8 billion euros’ worth of those measures front loaded in the 2013 budget, also ratified. Those measures will bring to a staggering 60 billion euro the total spending Greece has cut since the beginning of the crisis, equal now to almost a third of its economy after four years of recession. In the process it has narrowed the deficit from 36 billion euro in 2009 to a forecast fourteen billion euro at the end of this year, and it plans to eliminate that deficit in 2017.

The political cost of these achievements has been enormous. The forces backing eurozone bailouts, the socialists and conservatives, have seen their share of the vote plummet from a combined 77 percent of the popular vote in 2009 to 42 percent last June. Even the young coalition that emerged from that election is showing signs of advanced ageing. It already bears the scars of last week’s two legislative battles. Eight of its members of parliament have defected. Its smallest member, the Democratic Left, stepped aside in Wednesday’s crucial vote on the austerity package, showing that it has only one foot in the government. Prime Minister Antonis Samaras put a brave face on matters last night after approval of the budget by 167 votes to 128, declaring the week a victory and promising a new focus on growth.

But indecision on the bailout could badly shake the Samaras government. It faces stiff competition from the radical left opposition, Syriza, which has in the past supported unilaterally defaulting within the eurozone. Recent polls show that Syriza enjoys a slight lead of two to three points above conservative New Democracy. Those figures are not unequivocal. Greeks still prefer Samaras as prime minister to Syriza’s Alexis Tsipras, and they prefer a conservative-led coalition to a Syriza-led one. But the fact that a relative majority is now consistently favouring Syriza over New Democracy shows that Greeks are gradually losing their fear of the uncertainties a Syriza-led government might entail.  

The difference between pro-bailout and anti-bailout forces can be expected to grow in the new year, as cuts to salaries and pensions take effect while growth takes longer to achieve. The government expects European support in response to that strategic choice of priorities. Failure to provide it now would be a major betrayal of Samaras and his partners.