Euroland's Revolt Has Begun. Greece Has Become The First Country On The Distressed Fringes Of Europe's Monetary Union To Defy Brussels And Reject The Dark Age 'Leech-Cure' Of Wage Deflation.
By Ambrose Evans-Pritchard | 13 December 2009
See also related articles by Ambrose Evans-Pritchard at Telegraph.co.uk
George Papanderou, the Greek prime minister, faces potential riots if he cuts spending to address the deficit
While premier George Papandreou offered pro forma assurances at Friday's EU summit that Greece would "not default" on its €298bn (£268bn) debt, his words to reporters afterwards had a different flavour. "Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state," he said. Were we to believe that a country in the grip anarchist riots and prey to hard-Left unions would risk its democracy to please Brussels?
Mr Papandreou has good reason to throw the gauntlet at Europe's feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113% of GDP. The Commission says it will reach 125% by late 2010. It may top 140% by 2012.
If Greece were to impose the draconian pay cuts under way in Ireland (5% for lower state workers, rising to 20% for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a 'compound debt' spiral.
Ireland may just pull it off. It starts with lower debt. It has flexible labour markets, and has shown a Scandinavian discipline. Mr Papandreou faces circumstances more akin to those of Argentine leaders in 2001, when they tried to cut wages in the mistaken belief that ditching the dollar-peg would prove calamitous. Buenos Aires erupted in riots. The police lost control, killing 27 people. President De la Rua was rescued from the Casa Rosada by an air force helicopter. The peg collapsed, setting in train the biggest sovereign default in history.
Economists waited for the sky to fall. It refused to do so. Argentina achieved Chinese-style growth for half a decade: 8.8% in 2003, 9% in 2004, 9.2% in 2005, 8.5% in 2006, and 8.7% in 2007. London bankers were soon lining up to lend money (our pension funds?) to the Argentine state— despite the 70% haircut suffered by earlier creditors. [[And who can forget the generally positive results to Russia following its default?: normxxx]]
In theory, Greece could do the same: restore its currency, devalue, pass a law switching internal euro debt into drachmas, and "restructure" foreign contracts. This is the "kitchen-sink" option. Such action would allow Greece to break out of its death loop. Bondholders would scream, but then they should have delved deeper into the inner workings of EMU. RBS said the UK and Ireland have most exposure, with 23% of Greek debt between them (mostly for global clients). The French hold 11%, Italians 6%.
Remember, Athens holds the whip hand over Brussels, not the other way round. Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of 'manifest destiny' that has driven EU integration for half a century. I don't wish to suggest that Mr Papandreou— an EU insider— is thinking in quite such terms. Full membership of the EU system is imperative for a country dangling off the bottom of Balkans, all too close to its Seljuk nemesis. But Mr Papandreou cannot comply with the EU's deflation diktat.
No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be "days away". While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece's debt, drawing out the agony. What Greece needs— unless it leaves EMU— is a permanent subsidy from the North. Spain and Portugal will need help too.
The danger point for Greece will come when the Pfennig drops in Berlin that EMU divergence between North and South has widened to such a point that the system will break up unless— either Germany tolerates inflation of 4% or 5% to prevent Club Med tipping into debt deflation OR it 'pays' welfare transfers to the South (not loans) equal to East German subsidies after reunification.
Before we blame Greece for making a hash of the euro, let us not forget how we got here. EMU lured Club Med into a trap. Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom. The ECB was complicit. It breached its inflation and M3 money targets repeatedly in order to nurse Germany through its slump. ECB rates were 2% until December 2005. This was poison for overheating Southern states.
The deeper truth that few in Euroland are willing to discuss is that EMU is inherently dysfunctional— for Greece, for Germany, for everybody.
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Greece Tests The Limit Of Sovereign Debt As It Grinds Towards Slump
Greece Is Disturbingly Close To A Debt Compound Spiral. It Is The First Developed Country On Either Side Of The Atlantic To Push Unfunded Welfare Largesse To The Limits Of Market Tolerance.
By Ambrose Evans-Pritchard | 22 November 2009
Greece's economic malaise contributed to riots in Athens last December
Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract. When the European Central Bank's Jean-Claude Trichet said last week that certain 'sinners' on the edges of the eurozone were "very close to losing their credibility", everybody knew he meant Greece.
The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU's soft South. "As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece," said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.
The newly-elected Hellenic Socialists (PASOK) of George Papandreou confess that the budget deficit will be more than 12% of GDP this year, four times the original claim of the last lot. After campaigning on extra spending, it will have to do the exact opposite. "We need to save the country from bankruptcy," he said.
Good luck. Communist-led shipyard workers have already clashed violently with police. Some 200 anarchists were arrested in Athens last week after they torched streets of cars in a tear gas battle. Mr Papandreou has mooted a pay freeze for state workers earning more than €2,000 a month. This has already set off an internal party revolt. "There is enormous denial," said Lars Christensen, emerging markets chief at Danske Bank. "They don't seem to understand that very serious austerity measures are needed. It is a striking contrast with Ireland," he said.
Brussels says Greece's public debt will rise from 99% of GDP in 2008 to 135% by 2011, without drastic cuts. Athens has been shortening debt maturities to trim costs, storing up a roll-over crisis next year. Some €18bn comes due in the second quarter of 2010 (IMF).
Modern economies have reached such debt levels before, and survived, but never in the circumstances facing Greece. "They can't devalue: they can't print money," said Mr Christensen.
The tourist trade is withering, down 20% last season by revenue. (Turkey's was up.) It is hard to pin down how much is a currency effect, but clearly Greece has priced itself out of the Club Med market. Wages rose a staggering 12% in the 2008-2009 pay-round alone (IMF data), suicidal in a 'Teutonic' currency union. Greece has slipped to 71st in the competitiveness index of the World Economic Forum, behind Egypt and Botswana.
Greece has long been skating on thin ice. The current account deficit hit 14.5% of GDP in 2008. External debt has reached 144% (IMF). Eurozone creditors— German banks?— hold €200bn of Greek debt. A warning from Bank of Greece that lenders must wean themselves off the ECB's emergency funding has brought matters to a head. Default insurance on Greek debt jumped 40 basis points last week.
Greek banks have borrowed €40bn from the ECB at 1%, playing the "yield curve" by purchasing state bonds. This EU subsidy has made up for losses on property, shipping, and Balkan woes. The banks insist that they are in rude good health. EFG Eurobank has halved reliance on ECB funding. "Greek banks are very liquid: we maintain billions in extra liquidity," it said. Yet markets are wary. Recession has come late to Greece, but will bite deep in 2010. It takes three years for defaults to peak once the cycle turns.
David Marsh, author of The Euro: The Politics of The New Global Currency, said the danger for EMU laggards is that the ECB will begin to tighten before they are out of trouble. It is German recovery that threatens to stretch the North-South divide towards breaking point. [[…just as it was the German slump that started the whole EMU down the slippery slope of 'easy' money…: normxxx]] Athens squandered its euro 'windfall'. For a decade, EMU let Greece borrow at almost the same cost as Germany. It was a heaven-sent chance to whittle down debt. Instead, the country dug itself deeper into a hole by running budget deficits near 5% of GDP at the top of the boom.
Like Labour under Brown, idiot leaders mistook a bubble for their own skill. But the consequences in EMU are more dreadful. Austerity may prove self-defeating, without the cure of devaluation. Greece risks grinding deeper into slump. The EU can paper over this by transfering large sums of money to Greece. But will Berlin, Paris— and London, also on the hook— feel obliged to bail out a country that has so flagrantly violated the 'rules of the club', not least by holding Eastern Europe's EU entry to ransom over Cyprus? That is neither forgotten, nor forgiven.
During the panic last February, German finance minister Peer Steinbruck promised 'to rescue' any eurozone state in dire trouble. He is no longer in office. The pledge was, in any case, a bounced 'political' cheque even when he wrote it. Greece can assume nothing.
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