What Greece Needs: Default, Democracy and an Exit from the Euro
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When Europe’s finance ministers agreed last month to the second Greek bailout of 130 billion Euros, they knew very well what to expect. They prolonged the country’s creditor-led default by re-capitalising the banks, while pushing for PSI (private sector involvement) in Greece’s debt restructuring. The deal confirmed Greece’s profound financial and political dependency on Berlin and the ECB, which ensures that even if the current discredited cabinet, or a similar successor, achieves a primary budget surplus, it may not be able to declare bankruptcy because the new bonds will be subject to English jurisdiction. Let us tackle each of these issues in turn.
How the ECB and bondholders socialised their debt
The deal with the PSI was only procured by the 130 billion euros promised by the official sector – basically the so-called ‘troika’: the EU, the ECB and the IMF. Some 30 billion euros went directly into the pockets of the bondholders as a ‘sweetener’ to convert their old paper into new bonds, swapping them with new Greek futures and paper, while generating some further action from CDS (credit default swaps – insurance taken out by the bondholders for protection against default). The rest of the money, linked to mathematical estimates and prognoses of how much debt the Greek economy can sustain by 2020 without collapsing, went directly into re-capitalising banks. Precisely through this re-capitalisation, the famous ‘haircut’ the PSI took is transferred onto the official lenders/sector. In this way, the debt held by the PSI has been socialised almost in its entirety. It will be the Greek and the European taxpayer paying for it.
As a result of this boost to the banks, the above estimates and prognoses bring the debt/GDP ratio of Greece to 120% by 2020. Note that this may still be unsustainable. Note also, that there has been no suggestion that a single penny in all this paper will go into investment, boosting real economic growth. In other words, all these efforts are pointless exercises designed to benefit the bond-dealers.
Total loss of sovereignty
Have growth prospects for Greece improved? At present Greece’s GDP is undergoing a contraction of more than 6% and, due to its deteriorating competitiveness, this contraction is likely to continue. Youth unemployment has surpassed 50% and overall official unemployment is now well over 20%. The country, moreover, borrows at 4.5%-6%, something that renders rather surreal the aforementioned estimate of a 120% debt/GDP ratio by 2020. The disintegration of the productive base of the country over the last two decades due to the competition it faced from the countries of the European core and, above all, Germany, make any futurologist betting on a substantial Greek recovery within the euro-zone sound ridiculous.
Some argue that the austerity measures that have led one-third of Greece’s society into pauperisation may yet bring forth some fruits for the political class currently in power. By the end of the next budgetary year, the discredited party system of the post-1974 era may be in a position to enjoy a primary surplus, thus increasing its degree of independence vis-à-vis the ‘troika’. At that point, the argument goes, Greece could declare a partial default on its debt obligations, refusing to pay part of its debt.
This might have been a valid argument if the current Greek negotiators had either wanted or known how to make capital out of their problem. But they did not. Those who can read Greek should read Nikos Kotzias’s marvellous account, The Politics of Survival against the Troika, Athens 2011. Kotzias, now a Professor of Politics at the University of Piraeus, is one of the most acute observers of the Greek political scene and has been an advisor to the leader of PASOK, George Papandreou.