Atlantic Sentinel

Tag: Greek Debt Crisis

  • The Latest Greek Drama, Explained

    Greece flag
    Greek flag in Athens, October 11, 2008 (Ananabanana)

    Time is — once again — running out for Greece. This time the sticking point is a €7 billion tranche from its bailout program. Greece needs the money by July, but European officials had hoped to reach an agreement with the International Monetary Fund about the payment early next week, lest Greece’s debt crisis become an issue in the Dutch and French elections.

    The mood in Brussels isn’t hopeful, the Financial Times reports. The expectation is that the creditors will miss their self-imposed deadline.

    That would be especially unfortunate for the Dutch prime minister, Mark Rutte, who faces reelection in four weeks. He famously promised voters in 2012 that he would not support any more bailouts for Greece — but then he did. This is the worst possible time for him to be reminded of that broken promise.

    There is no immediate risk of bankruptcy, let alone ejection from the eurozone, for Greece. But the closer we get to July, the more markets will worry and the more pressure will rise on lenders to hash out a compromise.

    So what’s the problem? (more…)

  • Greece Tries to Weasel Out of Spending Commitments Again

    For the nth time, Greece is testing Europe’s patience by circumventing the spending commitments it made to qualify for financial support.

    Surprised by a high budget surplus this year, the Greece prime minister, Alexis Tsipras, immediately vowed to use the money to fund free school meals for poor children, top up pensions for low-incomes retirees and freeze sales tax hikes on islands that are struggling to cope with refugees.

    Tsipras, who leads the country’s far-left Syriza party, did not consult with his bailout monitors before making the spending pledges.

    European finance ministers on Wednesday promptly put plans for short-term Greek debt relief on hold. (more…)

  • The West Must Not Lose Greece the Way It Lost Russia

    Alexis Tsipras Martin Schulz
    Greek prime minister Alexis Tsipras and European Parliament president Martin Schulz answer questions from reporters in Brussels, February 4 (European Parliament)

    Belying the official line of Greek prime minister Alexis Tsipras that a “no” vote in Sunday’s referendum about the latest bailout offer from the nation’s creditors was not a vote on whether or not to stay in the euro, political and economic realities now point inexorably toward a “Grexit”.

    Although a conciliatory tone was struck by the eurozone’s laggards Italy and Spain, the main anchors of the currency bloc are losing patience.

    In Germany, the rhetoric of Chancellor Angela Merkel’s Christian Democrat grassroots has hardened substantially. One leading member of the Christian Social Union in Bavaria openly stated that Athens “chose a path of isolation” by rejecting what Merkel effectively presented as the final offer on the table. Even her Social Democratic partners admit they cannot see a path forward from here and that Greece must show greater flexibility than it has up to this point.

    Dutch prime minister Mark Rutte echoed the language of Berlin’s hardliners after the referendum results were announced, saying if Tsipras arrived at an emergency summit with proposals not closely resembling those its creditors put forward a week ago, the eurozone would be at an impasse. “There is no other choice,” he maintained. Greece “must be ready to accept deep reforms.”

    Finally, French president François Hollande, terrified of strengthening Marine Le Pen’s Euroskeptic forces but simultaneously concerned about giving a resurgent Nicolas Sarkozy too much political ammunition, abandoned his media-constructed role as a sympathetic go-between and issued a joint statement with Merkel demanding that Greece put out its own proposals to stay in the euro within two days. (more…)

  • Unedifying Row Between Tsipras and Rajoy

    Greek prime minister Alexis Tsipras has unwisely accused Spain and Portugal of intentionally trying to block a solution for his country’s troublesome discussions with the Eurogroup at a Syriza party meeting. The reaction has gone beyond any reasonable limit. The two targeted nations filed formal claims to the European Commission asking it to take action against Greece. One wonders why their Foreign Ministries did not warn of the utter ridicule such a step would precipitate. Worse still, the row between European Union partners might leave longstanding scars.

    The Greek government is all too conscious of having failed to deliver on its election manifesto promises. That is scarcely surprising, given the attempt to restructure outstanding debt and doing away with the rescue plan was doomed from the outset. Convincing the German Bundestag on the long-term merits of such a scenario was out of question. Even Nobel Prize laureates would be at pains to achieve such a feat. Germany stood as the real blocking hurdle all through the tough negotiations.

    Greece secured an agreement on favorable political terms. After all, reviewing the current rescue package represents a formidable victory for a country bound to require extra money to cover its immediate needs. It will implement a humanitarian plan for those suffering from sheer poverty and freeze privatization processes. Other promises such as offering employment for redundant civil servants, reducing the retirement age or steeply increasing the minimum wage, will have to wait. Yet the Greek government has achieved widespread support among the population for its stubborn defence of national interests.

    Was it prudent to engage in a tug-of-war with its Iberian partners? Certainly not, as such conduct only helps to underline its purported failures. (more…)

  • Greek Debt Agreement Met With Cautious Optimism

    Last Friday saw the culmination of efforts that had started their official trajectory in the last days of July of last year when it was made official that Greece would be allowed to write off part of its sovereign debt.

    Controversial at the time was the insistence on private bondholder participation, a demand that many felt increased the volatility in the sovereign debt market for all the countries that were vulnerable — Italy, Portugal, Spain.

    Beyond this, the insistence by the European Central Bank that this would not trigger a credit event, effectively a way of claiming that Greek had defaulted, would not be allowed to happen. The rationale was that this would impede the ability of the bank to legally provide Greece with funds. (more…)

  • Eurozone Crisis Enters New Phase

    The last two weeks have proven interesting for people who follow the unfolding situation in Europe for two separate events.

    On July 15, the European Banking Authority released reports on the health of the European banking system. These “stress tests” measured the stability of banks by evaluating their ability to hold a minimum amount of core capital when set against economic situations similar to a prolonged recession. Another function for these tests was to establish which banks were exposed to Greek sovereign debt and thus enhance trust among financial institutions, as banks are wary of lending to each other if the extent of exposure is unknown.

    On July 21, eurozone leaders came together and agreed on far-reaching measures that were the most convincing for rescuing Greece to date.

    Although these two events have provided transparency, time and confidence, a number of issues remain unresolved. Indeed, the reason that a relatively weak compromise on averting bankruptcy for Greece could be met with great relief in financial markets may be a lack of clear political direction within the singly currency area. There are crucial questions still unanswered and there is real risk that the framework may be the seed of an unfavorable outcome.

    The larger outlines of the deal are well known by now. Greece has been alleviated of the burden of relying on the market for funds for a considerable time. This was achieved by a combination of support from the European Union and the International Monetary Fund and a voluntary, private-sector rollover and debt swap.

    After much controversy, private-sector involvement was introduced partly to make the resolution feasible in Germany to continue providing funds for Greece. Although this solution entails writing off a share of the original value due to investors, for the time being it effectively removes the fear of a disorderly default that would lead to contagion. Fear of a “Lehman Brothers” moment has disappeared for banks exposed to Greek debt.

    Important was also the lowering of the interest rate of Greece’s debt to 3.5 percent which will apply to Ireland and Portugal as well, in the hopes that this relief can keep them safe from further intervention. Lastly, the summit saw a widening of the powers of the European Financial Stability Facility, a financial vehicle that was granted the power to intervene if a country in the eurozone is under financial duress. This “European IMF” may prove to avert the dangers of a self-fulfilling crisis for the countries that are still deemed to be at risk.

    Positive news as this is, the foundation which this solution relies upon is fragile. Although Greece will have funds at its disposal for the time being, it does little to increase the competitiveness of the Greek economy. Even with the latest package, debt-to-GDP ratios will still be higher than those of Italy at 120 percent. If Greece’s economy is not reformed in the coming years, it could need another bailout in the future.

    A worry with wider implications is found in the words of the summit’s communiqué (PDF) which states that,

    As far as our general approach to private-sector involvement in the euro area is concerned, we would like to make it clear that Greece requires an exceptional and unique solution.

    All other euro countries solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms…

    This is currently the only guarantee that private investor debt in countries with similar problems will not face a similar write off as was the case with Greece.

    For the market this will create uncertainty as the promise comes from the same leaders whose credibility is in shatters. What market uncertainty implies is hard to say at present yet when Moody’s recently further downgraded Spanish sovereign debt, it cited the possibility of future private-sector involvement as one of the main concerns. Also worrying is that since Greece’s write off will be voluntary, it does not trigger credit default swaps. The trigger may have the effect of raising borrowing costs for other highly indebted economies as investors shift to the CDSs of their debt, thus leading to higher volatility in debt spreads and increased market jitters.

    What emerges from the past weeks is that no scenario is impossible. Although many important steps were taken in bringing clarity to the situation, we have yet to see the final outcome. Many saw these resolutions as a step toward further integration of the eurozone however it is unclear how strong the popular mandate is for such a development. The short-term outcome will likely entail more last-minute compromises, high stress put forth by the markets and a new financing plan for Greece. The depth of last week’s political efforts does offer some optimism for a more coherent path forward.

  • Liberal Wrongheadness on Greece

    In his column yesterday, New York Times columnist Paul Krugman demonstrates how wrongheaded liberal thinking on economics can be.

    Pointing to the fiscal problems being experienced by Greece, Krugman correctly points to the core of the problem: excessive spending and borrowing by the Greek government. Although he doesn’t point out that all that spending and debt is to pay for the ever growing expenditures of Greece’s welfare state, at least he recognizes that a government can spend and borrow too much. Indeed, he even recognizes that the situation can become so dire that investors don’t want to invest anymore in a government’s bonds because they fear a default, which is precisely what is now happening in Greece.

    But then Krugman goes awry, finding another culprit to blame for Greece’s debacle: deflation or even “excessively low inflation.”

    What he’s alluding to is that because Greece doesn’t have control over its money supply, the Greek government cannot do what the American government and other governments do to pay off excessive debt — simply print the money and paying off creditors in debased dollars.

    Krugman says that one possible solution to Greece’s problems is to slash spending and raise taxes. But of course slashing spending would involve major reductions in welfare benefits for the Greek citizenry, who are, by the way, protesting against any reductions in their dole. They take the same position as American dole recipients: that they have a right to their dole, come hell or high water, even if the government doesn’t have the money to continue paying them their dole. As Krugman observes, raising taxes will put more businesses out of business, raising unemployment and thereby aggravating the overall problem.

    Krugman suggests that another possible solution is to have other European countries guarantee Greece’s bonds. But as he suggests, German taxpayers are not excited about having their money taken from them so that Greek taxpayers can continue receiving their “free” welfare state dole.

    So, the obvious solution to his quandary, one that the American government’s Federal Reserve has long used, is simply to crank up the printing presses and pay off all that debt in depreciated, debased currency.

    But there’s one big problem, one that Krugman deeply laments: Since Greece is part of the eurozone, it doesn’t have the power to crank up the printing presses without the approval of the other EU countries, which are not likely to want to debase the euro for the sake of saving the welfare state dole for Greek citizens.

    That leaves Greece with the option of withdrawing from the eurozone and resorting to its own monetary system. But as Krugman points out, that might not be successful given that would likely be a rush of people to get their money out of the banks, along with a refusal by investors to buy bonds issued in the new currency.

    Needless to say, Krugman deeply laments the inability of the Greek government to inflate itself out of the crisis. Never mind that paying off creditors in debased currency constitutes an intentional default. That doesn’t seem to bother Krugman one whit. All that matters, obviously, is that the Greek welfare state be saved from collapse.

    Unfortunately, by not surprisingly, Krugman draws the wrong lesson for America from this Greek tragedy. He says that while the American government needs to be “fiscally responsible,” it should also “steer clear of deflation, or even excessively low inflation.”

    In the final analysis, Krugman gets it wrong. What has collapsed in Greece is the welfare state, and hanging on to this anchor is what is sending Greece to the bottom of the ocean.

    Americans need to take what has happened in Greece as a warning: Get off the dole road before it’s too late. Dismantle and repeal (that is, don’t reform or reduce) all welfare (and warfare) programs and departments, along with the taxes that support them.

    Moreover, don’t do what the Federal Reserve has done for decades — that is, don’t inflate. In fact, abolish the Fed, America’s engine of inflation, and restore sound money to America.

    This story first appeared on Hornberger’s Blog, The Future of Freedom Foundation, April 9, 2010.