South Africa Viewpoint
July 10, 2015
www.etmanalytics.com
Greece: History in the Making
Opinion piece: George Glynos (MD and Chief Economist, ETM Analytics)
Bottom Line: The ball swung very firmly into Mr Tsipras’ court and he has delivered proposals that go further
than previous proposals did. The topic of debt restructuring is being entertained, even by the Germans and so for
now, the possibility of a Greek deal remains alive. Even at this late stage when hopes have faded and forecasts of a
Grexit are at their peak, we should not discount the possibility that Europe could prove their doubters wrong, again
and the core view remains that a Grexit will be avoided.
Margaret Thatcher, in a TV interview for Thames TV This
Week on Feb. 5, 1976,
Prime Minister Thatcher said, "...and Socialist governments tradi-
tionally do make a financial mess. They [socialists] always run
out of other people's money. It's quite a characteristic of them."
Austerity is a consequence, not a choice. The “NO” vote this past
weekend did not change that. The word austerity is in many
ways a misnomer. Substitute the word austerity with reforms
and you get closer to the truth of what fiscal policy needs to accomplish in Greece in order to ensure sustainability. That it ultimately translates into a more austere outcome is again a consequence of fiscal mismanagement.
There has been a lot of mischaracterisation by the press of what
the Greek people were voting for last weekend. They were not
voting against the necessity to reform, they’re not in a position to
do that. They were voting against a specific mix of reforms that
in their experience had wreaked a massive and very painful adjustment to their economy, their lifestyles and the social fabric of
society which they could no longer tolerate. This was the message from a desperate population, not a bunch of lazy and militant voters that had not wanted to atone for the sins of the past.
Greece has lived through its own version of “The Great Depression” and for anyone to suggest that they have not suffered the
consequences of their actions, is to ignore reality.
of rising sovereign indebtedness which a truly free market would
never have tolerated? Were the authorities on to something
when they announced a debt write-off in October 2011 when the
debt profile of Greece was seen as unsustainable?
It became quite obvious that after the initial bailout of €110bn in
May 2010 and set of reforms imposed on Greece, that a lot more
would be needed to keep the sovereign from collapsing. In Feb
of 2012 more reforms were required to secure a further €130bn
bailout and in March 2012 the Public Sector Involvement (PSI)
where 83.5% of Greek bond holders accepted 75% reductions in
the value of their bond assets in what was at the time the world’s
largest debt restructuring deal. Between then and Dec 2014,
various other reforms were implemented and finally in 2014
Greece showed some positive signs of stabilisation, recording real
GDP growth according to official statistics.
The problem was that this stabilisation or green shoots recovery
was reflected at a macro and fiscal level, but not yet evident to a
jaded and wearied man on the street who’d suffered through
more than six years of recession, wage deflation, unemployment
and rising incidence of poverty. At some point, the question
should have been asked, whether any population could suffer
through more such reforms before rebelling. Put differently, if a
population will no longer tolerate reforms, then there is no point
in even implementing them as they would be socio-politically
doomed to fail.
Plenty of blame to go around
Historical context
Historical context is important because it speaks to the very problem the eurozone finds itself in. When were the true mistakes in
this Greek saga really made? Of course Athens has to shoulder
the bulk of the blame for profligate policies of the past, economic
and fiscal mismanagement, corruption and the populist policies
that were ultimately aimed at supporting a politically influential
bureaucratic class and a minority and influential elite, entrenched
through cronyism, nepotism and clientelism.
After the financial crisis of 2008, when Greece first began imploding, it was supported for the purpose of avoiding a systemic
banking failure involving Europe’s largest banks. Should it have
been handled differently back then? Were banks bailed out without due consideration to some of the longer term consequences
Greece as a nation has to shoulder the bulk of the blame, but it
would be disingenuous to think that eurozone creditor institutions
were not complicit in this crisis. Trying to prop up the unsustainable to wrap their banking systems in cotton wool and then continue to do so to protect their own political interests constitutes a
major failing. Not having had adequate structures, to contend
with countries that broke Maastricht Treaty parameters, and then
disregarded these fiscal rules completely during the crisis meant
the eurozone bumbled from one crisis to the next over the past
six years and unnecessarily drew out a reform process that
should have been tackled in at least half the time. Another failing. Finally, the very loose quasi union that exists at a monetary
level, but not a fiscal one is the other glaring failure that to this
day has yet to be adequately tackled.
ETM Analytics (Pty) Ltd Viewpoint | Premium analysis www.etmanalytics.com | 10 June 2014
This last point forms one of the biggest criticisms of the eurozone,
highlighted once more through the Greek crisis. The eurozone as
it stands is a fragile union bandaged together by political will, a
legal structure and the ECB’s monetary influence. Given the failure in dealing with Greece’s comparatively tiny economy adequately, the question that begs an answer is whether the eurozone has the technical and/or financial capacity to deal with potential problems in Spain and Italy should they arise. Greece,
given its size could have been used as a great case study of how
best to deal with a eurozone nation in fiscal crisis. Instead,
Greece will now be used as a case study of what not to do. Perhaps there is some value in this lesson.
It was encouraging to hear Greek PM Tsipras acknowledge that
Greece was to blame for the position its finds itself in courtesy of
a string of governments that were complicit in building a clientelistic, rent seeking, corrupt, inefficient and oversized public
sector which ultimately sowed the seeds of its own demise. The
narrative appears to have changed slightly from being combative,
to one of realism where the fate of the country’s future rests very
clearly in his hands on account of the mandate handed to him by
the referendum outcome. Whether he adopts a pragmatic approach from here or chooses to guide Greece through an EU/EMU
exit will be a defining moment in his tenure.
PR nightmare
Following the referendum in Greece, the Troika has a public relations nightmare on their hands. The message from the Greek
people was portrayed in the media as strong and it what not
what the creditor institutions wanted to hear. The Greek people
were portrayed as wanting nothing to do with more of the same.
The demands from the creditors kept coming and Greeks, unable
to make ends meet turned increasingly desperate. Greeks started to question whether it was even humane to subject a European population to this sort of misery with no end in sight. That
level of desperation found expression in the “OX” or NO vote,
reminding creditors that economic bullying tactics would no longer be accepted as economic best practice. It is one thing to talk
about reforms, and another completely to live through them.
However, Mr Tsipras also knows full well that only 62.5% of the
registered voters cast their ballots over the weekend. Of that,
just over 61% voted “OXI” implying that only 38% of all registered voters were bold enough to object to a difficult and confusing question relating to documents very few had even bothered
to look at or understood. In other words, close on 62% of registered voters voted either YES or didn’t vote at all. One could
hardly call this a clear mandate, when most surveys also show
that more than 70% of Greeks want, without question, to remain
in the eurozone. For Mr Tsipras this now increases the pressure.
He may have a mandate, but he also knows that he does not
necessarily have the support of more than half the electorate
which implies he now shoulders full responsibility for leading
Greece towards an exit. Perhaps a failing on both sides was not
recognising the size of the task at hand and the inherent difficulties in taking the tough decisions needed.
Political posturing has also been a powerful dynamic that has
played a role in hardening positions. In the same way the Greek
authorities wanted to look after their constituency, the same can
be said for the other 18 member countries. For politicians, the
perception that they did not do all that was possible to safe
guard tax payers’ money would not have endeared them to voters. It was imperative for them to show that they cared about
what happened to their hard-earned euros used in the bailouts
and that they would not tolerate non-payment. That message
has by now been clearly heard and understood, but in playing up
to their voters, they may have pushed things too far.
If looking after taxpayer funds was an objective, then throwing
money at an unsustainable debt problem and pushing the debtor
nation into bankruptcy and default was not smart. Perhaps
knowing this, creditor nation politicians are trying to atone before
their own electorates decide to vote them out. Before any commercial bank chooses to classify debt as a non-performing loan, it
will first seek ways to restructure and recoup as much as possible.
Using this analogy and appreciating just how far the fiscal position in Greece has deteriorated, one could argue that it demands
a fresh approach. With the IMF having penned a report highlighting the need to write off some of Greece’s debt, creditor nations may very well look upon the situation differently. They
could progress from the position of trying to force Greece to pay
every last cent, to a more defensive position where they then try
to recoup as much as is realistically possible. The IMF report
offers both parties the political room to move towards the centre
and negotiate a more acceptable outcome. If a debt write down
is explained in this way and references the IMF report as evidence of what is needed, it would offer a believable alternative to
voters which would arguably be preferable to the public relations
nightmare that would accompany a Grexit and default.
Finally, it is worth considering what might transpire in the event
that Greece exits successfully and that following the initial painful
but real fiscal adjustment, succeeds in returning the economy to
sustainable growth with a vastly reduced debt pile. This scenario
requires Greek authorities to manage their fiscal and monetary
positions with a great deal of care to avoid the pitfalls of massive
currency depreciation, punitive inflation and a fresh deep recession. However, should Greece then highlight the benefits of regaining sovereignty and being able to take more appropriate decisions for the prevailing economic environment, other marginalised countries within the eurozone might be tempted to follow
suit. It is something that will have crossed many politicians’
minds.
Austerity or Fauxsterity
Thus far, lip service has been paid to real austerity. One cannot
deny that there has been pain taken by the Greek people but it
needs to be characterised correctly. Greek people may think that
they have lived through austerity, but what they’ve really experienced has been economic stagnation and decline, the result of a
public sector that refuses to shrink as much as it should relative
to GDP to free up private sector dynamism and a tax burden that
consequently remains too high. Until such time as the public
sector shrinks to around 25-30% of GDP from current levels of
more than 50%, real fiscal reforms have not yet been implemented. This might imply further difficulties for public sector
employees, but it is necessary and will likely unfold either
through being forced through by creditors or Greece being forced
to deal with reality should they exit.
Whether that level of pragmatism materialises is the €340bn
question for the weekend when the Eurogroup will decide whether to accept the Greek proposal or not. What is certain is that
allowing Greece to exit would crystalise some significant losses
for many sovereigns across the continent and would be a far
from optimal outcome for them.
Lesson to be learnt
If there is one major lesson to be learned from all this is that one
cannot impose a set of rules on a population if those rules will be
not be accepted. People accepted that there was a price to pay
for the profligacy of the past, but never fully understood how the
reforms currently under way would help them. When all they did
was escalate hardship, the effort of implementing reforms was
frustrated by Greeks trying to circumvent the rising tax burden
that was being levied on them. Broader consultation was what
ETM Analytics (Pty) Ltd Viewpoint | Premium analysis www.etmanalytics.com | 20 March 2014
was needed many years ago to achieve what may arguably have
come too late in the form of the support secured from the most
recent referendum. Lest we forget, the creditors pressured the
previous Prime Minister George Papandreou to abandon his calls
for a referendum that might have achieved just that. Perhaps
there is a democratic lesson to be taken from this experience.
If nothing else, the current government has secured a PR coup in
their efforts to get a better deal and as many Greeks quite rightly
point out, the mandate given to Tsipras might have been even
stronger had the EU propaganda PR machine not framed it as a
vote to be “in” or “out” of the euro, or that the ECB brought
Greece’s banks to its knees and caused major disruptions for
pensioners and businesses. In so doing, the ECB may have even
abandoned one of its key mandates, namely securing financial
stability in all member banking systems to ensure smooth banking operations of those very same members.
The thin end of the wedge
After more than five months of negotiations it has come to this.
A mischaracterisation of what Greeks actually voted for, lots of
accusations and counter-accusations of where blame lies, the
misrepresentation that Greece is turning its back on the eurozone
and vice versa and the lazy argument that it is a nearly impossible agreement to stitch together.
From the above, it should be clear that there is still plenty at
stake and with enough political will these negotiations can be
concluded in a way that will avoid the worst case scenario. Mr
Tsipras will not want to be known as the Prime Minister that
pushed Greece out the eurozone into purgatory, securing isolation from eurozone support and capital markets for years to
come. Furthermore, there is national pride at stake. In the
words of Mr Guy Verhofstadt the former PM of Belgium when he
addressed Mr Tsipras in the EU Parliament, “How do you want to
be remembered?” “As an electoral accidental who made his people poorer in his country, or …… as a real revolutionary reformer,
in the tradition of Trikoupis and Venizelos.” “Show that you are a
real leader and not that you are a false prophet.”
Equally, European politicians will not want to take the risk of going down as being party to a set of decisions that set in motion
the destruction of the eurozone due to their intransigence and
desire to retain political capital with their voters at all costs.
The ball swung very firmly into Mr Tsipras’ court and he has delivered proposals that go further than previous proposals did.
The topic of debt restructuring is being entertained, even by the
Germans and so for now, the possibility of a Greek deal remains
alive. Even at this late stage when hopes have faded and forecasts of a Grexit are at their peak, we should not discount the
possibility that Europe could prove their doubters wrong, again
and the core view remains that a Grexit will be avoided.
In reality, Greeks overwhelmingly want to retain the euro as their
currency. If ever there was a red line not to cross that is it. Furthermore, the Greeks consider themselves as Europeans and take
great pride in the historical significance and role their culture has
played on the continent. The most recent comments in the EU
Parliament make it clear that blame is shared and that Greece
desperately needs reforms to become a stronger and more selfsustainable member of the eurozone community. These points
are indisputable.
ETM Analytics (Pty) Ltd Viewpoint | Premium analysis www.etmanalytics.com | 20 March 2014
Published by ETM Analytics (Pty) Ltd
Author:
George Glynos
ETM Analytics (Pty) Ltd:
Tel: +27 11 875 8556
Web: www.etmanalytics.com
Physical Address:
Block 5, Killarney
Fourways Golf Park, Roos Street
Fourways, Johannesburg
South Africa, 2055
© 2015 ETM Analytics (PTY) Ltd. All rights reserved.
Legal Notice:
This document is confidential and intended solely for the use of the individual to who it is addressed. Disclosing, copying or distributing the contents of this
document is prohibited. Anyone who does not abide by this could be in breach of the copyright and possibly the contract signed between ETM and the party
concerned.
Disclaimer:
ETM Analytics (Pty) Ltd obtains information for its analyses from sources, which it considers reliable, but ETM does not guarantee the accuracy or completeness
of its analyses or any information contained therein. ETM makes no warranties, expressed or implied, as to the results obtained by any person or entity from
use of its information and analyses, and makes no warranties or merchantability or fitness for a particular purpose. In no event shall ETM be liable for indirect
or incidental, special or consequential Damages, regardless of whether such damages were foreseen or unforeseen. ETM shall be indemnified and held
harmless from any actions, claims, proceedings, or liabilities with respect to its information and analysis.
ETM Analytics (Pty) Ltd Viewpoint | Premium analysis www.etmanalytics.com | 20 March 2014