Monday 13 July 2015

A-Greek-ment: the day after

The medicine Greece has to take now is very unpleasant and aggressive. The way it is being administered by the Eurozone - even if they had objectively speaking all the reasons to do so - shockingly humiliating.

But let's not forget that it was Syriza who put Greece in its hopeless negotiation position. Greece was the fastest growing Eurozone economy in 2H2014. It was running a primary surplus. A current account surplus. The economy was turning the corner. And debt relief via maturity extensions & lowering of interest rates (plus refinancing of ECB held bonds and IMF loans) after June 2015 was implicitly on the table. 

But Tsipras & Varoufakis were not on top of the numbers. Otherwise, they wouldn't have put debt relief at the top of their Eurozone agenda after all the debt relief that had already taken place since 2012 (http://cubismeconomics.blogspot.co.uk/2014/12/greece-what-now.html). And the one that was implicitly agreed to take place after June 2015. The priority should have been to implement reforms, win the other Eurozone's countries trust, and then ask for additional, substantial, debt relief.

The key assumption on which Syriza based their entire Eurozone strategy - a Grexit would lead to massive financial contagion and therefore force the Eurozone/Troika to make material concessions - was flawed. And, once again, they were not on top of the numbers. Otherwise, they could have falsified and rejected the assumption by running them (http://cubismeconomics.blogspot.co.uk/2015/06/grexit-and-risks-of-financial-contagion.html). Or, more philosophically, by simply asking themselves what was the worst that could happen if their assumptions proved wrong. And if there wasn't an alternative strategy that offered similar upside in case of success but much more limited downside in case of failure. But they didn't. Now we have a sad story to tell.

However, as sad as the story may be, let's not fool ourselves: the main responsibles for it are Tsipras / Varoufakis / Syriza and their very, very poor strategic decision-making. At the receiving end of the now needed additional austerity will be ordinary Greek citizens - the ones Syriza allegedly wanted so much to help and protect.

Thursday 9 July 2015

Greece: a response to Martin Wolf

A response to Martin Wolf's Financial Times article "Grexit will leave the Euro fragile" published on 8 July 2015 (http://www.ft.com/cms/s/0/4e5ef8c0-23df-11e5-bd83-71cb60e8f08c.html#axzz3fHpBbv34)


Dear Martin,

banks / private creditors shouldn't have been bailed-out and should have suffered the full losses of a Greek debt restructuring. Agreed. 

However, you are missing a few points: 

(i) there was a bail-in of banks / private lenders in 2012. The net present value of the resulting debt relief amounts to Eur 100bn, i.e., around 50% of Greek GDP.

(ii) you argue "the financing provided by the Troika was of negligible benefit for Greece". You are wrong. 

Greece was running both a public deficit and a current account deficit of over 10%. Even if the banks/ private lenders had borne the full burden of a Greek debt restructuring, Greece would still have had to deal with this twin deficit. Without the financing provided by the Troika the adjustment would have had to take place in a few weeks or in a few months at best. The resulting massive spending cuts in such a short period of time would have led to a rapid collapse of the Greek economy (assuming a public spending multiplier of 2 - a conservative assumption in an economy cut off from external financing - public spending cuts accounting for 10% of GDP would have led to a 20% sudden collapse in GDP).

The financing provided by the Troika gave the Greek authorities the chance to adjust more slowly. The consolidation of public finances - the so-called austerity - would always drag the GDP down. Structural reforms (reform the judicial system, open up protected sectors to competition, fight tax evasion....) would push up GDP by attracting foreign direct investment (FDI). To be fair, Greece has implemented a massive austerity programme. But it barely delivered on structural reforms. The unwillingness to touch vested interests is not the Troika's or Eurozone's member countries fault.

(iii) you implicitly state that the Troika hasn't so far provided any meaningful debt relief to Greece. You are wrong again. As Paul De Grauwe shows: http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications And as I had written in 2014: 

On a different note, the risk of financial contagion from a Grexit is now zero. It would be very different in 2010 or even 2012. But in the meantime the Eurozone has put mechanisms in place that make a contagion impossible. As a result, only countries that do not want to stay in the Eurozone will leave. There is no way that financial market forces can push a country out. Here is why: http://cubismeconomics.blogspot.co.uk/2014/12/greece-what-now.html

The time has come for Greece to ask itself why it wants to stay in the Eurozone. You cannot impose reforms on a sovereign state unwilling to be reformed. And If Greece doesn't really want to reform, its Eurozone membership turns into a mere political prestige project. It has much more costs than benefits. In this case, let's face reality and be honest with oneself: EU membership outside the Eurozone is the best option for Greece. As well as for the Eurozone, and European Union, as a whole.