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Breathing Space
May. 3rd, 2010 11:01 amSo, Greece gets a €110bn rescue package from the IMF and the EU. The IMF portion of this will get to Greece in time for its May 19th deadline (when Greece needs to renew some of its debt), while the EU still needs to meet to discuss the matter (of course) and there's the minor matter of 15 European parliaments that need to approve it.
The weird thing is, the countries keenest to approve it are the countries that can least afford it. I'm reminded irresistibly of someone who has fallen for a Nigerian 419 scam. If you haven't fallen for it in the first place, you will send them nothing, but if you've already hocked everything that you own and they still need "just a bit more before the money is released" then, well, you need to believe.
And so Spain, Portugal and Ireland back the loan to Greece, even though Spain, Portugal and Ireland can ill-afford any spare cash at the moment. because they need to believe that this bail-out will do the trick and will stop the contagion. If it doesn't, then Spain, Portugal and Ireland are in bigger trouble than if they let Greece go down the pan now.
So, there are two fundamental questions here: (1) Will the Greeks stand for the austerity measures that Greece, now unofficially a protectorate of the EU with no power over its own budget (an interesting and probably unintended route towards the federalism that the Benelux countries crave) and (2) even if the Greeks do stand for it, is it enough?
Both questions are hard to answer, and if the answer to either is "No", then the consequences are also hard to calculate. Which is why the EU is just assuming that the answer to both questions is "yes". As someone wrote at the weekend, this is a bit like a drunk looking for his car keys under the lamppost rather than in the gutter where he thinks he dropped them, because the light is better under the lamppost.
Let's take the economic question first. Is it enough? My thanks to the Wall Street Journal for digging out some hard numbers here.
The important thing to note there is that this is not just a matter of bailing out what Greece already owes; it's accepted that there is no way that the Greek position can fail to get even worse for the next four years. So the bailout covers sins past, sins present and sins future. Assuming that all of you can manage simple arithmetic, that means Greece needs €123bn over the next four years.
However, the extra €13bn might, just might, be obtainable from the private markets. That all depends how well Greece performs between now and 2014.
Which brings us to the second question. Will the Greeks take it? In common with the rest of the populus in Europe, the perpetual question is "why should we pay for something that isn't our fault?" Personally I would ask anyone who asks that question whether they have bought a holiday or a washing machine on a credit card over the past decade, or whether their credit card debt is higher now than it was a decade ago, or whether they have remortgaged. Because all of this is "unearned" money that was a benefit of the credit boom over 2001-2007. Sure, some other people have gained more, but don't pretend that every consumer in Europe has not had his nose in the trough.
The austerity being imposed on the Greeks is certainly tough, including (sooner than I anticipated) the realization that it isn't just those still working who will have to make sacrifices. It will also happen to the already retired. I mentioned this to a bright spark in the city who earns well into six figures a year in the pensions business, and he looked at me aghast. Now, just a couple of months later, it's come true. It will come to other European countries sooner rather than later. Sure, it will be tougher for those yet-to-retire (I'm assuming that when I reach 65 my pension will be means-tested) but the concept of the "guaranteed" pension for those already retired will turn out to be a rather nebulous concept. As an accountant might say "ah, yes, well black-and-white contracts are something of a grey area". Perhaps, when exposed to light, they fade.
The greek administration so far has been able to rely on the ambivalence of the trades unions, which did, after all, support Papandreou into power. There's a general strike due this week. This will be very much a case of "what do the ordinary Greeks think?"
It's possible that there is no solution. If the ordinary people decide that moving outside of the "proper" economy is the only way to survive (see southern Italy for an example of this) then the hike in VAT will make little difference, because official GDP will collapse as everything goes under the counter.
So, what about if the whole thing goes tits up? Well, the ECB has changed the rules on collateral (not really a surprise, because if it didn't do this, the Greek banks would be fucked) to accept Greek bonds, even though they are 'junk'. In essence, the ECB has overruled the rating agencies. But rating agencies don't downgrade like this for fun. If and when the default comes, what then? Well, as I said at the start, Spain, Portugal and Ireland are next in the firing line, and they will have less ammunition in reserve, because they will have spent money that they don't have trying to prop up Greece.
This time round, it looks like the Germans will come through with the cash. But if Greece fails, would they come up with the far larger amount needed for Spain? Somehow I doubt it.
Spain, actually, is the key. The euro could probably survive defaults in Portugal, greece and Ireland -- relatively peripheral countries in the grand scheme of European economics. But Spain? Not really. That, surely, would mean the death of the euro as we know it.
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The weird thing is, the countries keenest to approve it are the countries that can least afford it. I'm reminded irresistibly of someone who has fallen for a Nigerian 419 scam. If you haven't fallen for it in the first place, you will send them nothing, but if you've already hocked everything that you own and they still need "just a bit more before the money is released" then, well, you need to believe.
And so Spain, Portugal and Ireland back the loan to Greece, even though Spain, Portugal and Ireland can ill-afford any spare cash at the moment. because they need to believe that this bail-out will do the trick and will stop the contagion. If it doesn't, then Spain, Portugal and Ireland are in bigger trouble than if they let Greece go down the pan now.
So, there are two fundamental questions here: (1) Will the Greeks stand for the austerity measures that Greece, now unofficially a protectorate of the EU with no power over its own budget (an interesting and probably unintended route towards the federalism that the Benelux countries crave) and (2) even if the Greeks do stand for it, is it enough?
Both questions are hard to answer, and if the answer to either is "No", then the consequences are also hard to calculate. Which is why the EU is just assuming that the answer to both questions is "yes". As someone wrote at the weekend, this is a bit like a drunk looking for his car keys under the lamppost rather than in the gutter where he thinks he dropped them, because the light is better under the lamppost.
Let's take the economic question first. Is it enough? My thanks to the Wall Street Journal for digging out some hard numbers here.
Greece has €73 billion in debt coming due between today and three years hence: May 2, 2013. (This doesn’t include more than €11 billion due on May 20, 2013.)
Greece’s new projections show budget deficits declining from 13.6% this year to under 3% in 2014.
We can’t precisely reckon the magnitude of the accumulated deficit between now and May 2013, since the projections are annual. But if we figure the total deficits from 2010-2012 and 2011-2013, and average them, we get around €50 billion. That’s a reasonable guess.
The important thing to note there is that this is not just a matter of bailing out what Greece already owes; it's accepted that there is no way that the Greek position can fail to get even worse for the next four years. So the bailout covers sins past, sins present and sins future. Assuming that all of you can manage simple arithmetic, that means Greece needs €123bn over the next four years.
However, the extra €13bn might, just might, be obtainable from the private markets. That all depends how well Greece performs between now and 2014.
Which brings us to the second question. Will the Greeks take it? In common with the rest of the populus in Europe, the perpetual question is "why should we pay for something that isn't our fault?" Personally I would ask anyone who asks that question whether they have bought a holiday or a washing machine on a credit card over the past decade, or whether their credit card debt is higher now than it was a decade ago, or whether they have remortgaged. Because all of this is "unearned" money that was a benefit of the credit boom over 2001-2007. Sure, some other people have gained more, but don't pretend that every consumer in Europe has not had his nose in the trough.
The austerity being imposed on the Greeks is certainly tough, including (sooner than I anticipated) the realization that it isn't just those still working who will have to make sacrifices. It will also happen to the already retired. I mentioned this to a bright spark in the city who earns well into six figures a year in the pensions business, and he looked at me aghast. Now, just a couple of months later, it's come true. It will come to other European countries sooner rather than later. Sure, it will be tougher for those yet-to-retire (I'm assuming that when I reach 65 my pension will be means-tested) but the concept of the "guaranteed" pension for those already retired will turn out to be a rather nebulous concept. As an accountant might say "ah, yes, well black-and-white contracts are something of a grey area". Perhaps, when exposed to light, they fade.
The greek administration so far has been able to rely on the ambivalence of the trades unions, which did, after all, support Papandreou into power. There's a general strike due this week. This will be very much a case of "what do the ordinary Greeks think?"
It's possible that there is no solution. If the ordinary people decide that moving outside of the "proper" economy is the only way to survive (see southern Italy for an example of this) then the hike in VAT will make little difference, because official GDP will collapse as everything goes under the counter.
So, what about if the whole thing goes tits up? Well, the ECB has changed the rules on collateral (not really a surprise, because if it didn't do this, the Greek banks would be fucked) to accept Greek bonds, even though they are 'junk'. In essence, the ECB has overruled the rating agencies. But rating agencies don't downgrade like this for fun. If and when the default comes, what then? Well, as I said at the start, Spain, Portugal and Ireland are next in the firing line, and they will have less ammunition in reserve, because they will have spent money that they don't have trying to prop up Greece.
This time round, it looks like the Germans will come through with the cash. But if Greece fails, would they come up with the far larger amount needed for Spain? Somehow I doubt it.
Spain, actually, is the key. The euro could probably survive defaults in Portugal, greece and Ireland -- relatively peripheral countries in the grand scheme of European economics. But Spain? Not really. That, surely, would mean the death of the euro as we know it.
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