Greece's Problems Are Far From Over

By Arnold Ahlert (Archive) · Wednesday, February 22, 2012

After 13 hours of overnight talks ending Tuesday morning at 5 a.m., euro zone finance ministers put together the latest rescue package for Greece. "We have reached a far-reaching agreement on Greece's new program and private sector involvement that would lead to a significant debt reduction for Greece...to secure Greece's future in the euro area," said Jean-Claude Juncker, who chairs the euro-group of finance ministers. It is a future emblazoned by one over-arching reality: the relinquishment of national sovereignty is the ultimate price that must be paid by any EU nation that cannot meet its debt obligations.

Thus it is no surprise that this deal, in which Greece will receive the latest tranche of rescue funds totaling $172 billion, requires the "enhanced and permanent" presence of EU monitors and European Commission, European Central Bank and International Monetary Fund representatives. Furthermore, Greece must pass legislation changing the country's constitution in order to ensure that "priority is granted to debt-servicing payments," which amounts to Greece depositing debt service funds into a "special account" aimed at guaranteeing repayments.

Why are the changes to the constitution and the so-called special account necessary? Greece's next election is expected to be held in April, and these requirements eliminate the possibility that the Greek people might put politicians in office who would scuttle the agreement. It is no secret that many ordinary Greeks find the combination of wage and pension cuts, as well as the elimination of an additional 150,000 jobs to bring labor costs down by 15 percent over the next three years, unmanageable. As if on cue, yet another in a series of seemingly endless strikes has been scheduled for today by two of Greek's biggest labor unions.

Anastasis Chrisopoulos, a 31-year-old Athens taxi driver, encapsulated the mood of a nation that has been buffeted for the last two years by this seemingly endless crisis. "Things will only get worse," he said. "We have reached a point where we're trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year."

Mr. Chrisopoulos has a partially valid point, as evidenced by an EU official who wished to remain anonymous. "We expect Greece to resume growth in 2014," he told reporters. "We see a contraction of 4.5 percent this year and stagnation in 2013. That is a shrinkage of more that 17 percent over four years," he added. That is not a "shrinkage." That is a full-fledged depression, but it too must be tempered with a dose of reality: Greece's minimum wage is still higher than either Portugal's or Spain's, and Greek labor costs have risen by more than 30 percent over the last decade, representing the biggest rise in the euro zone, according to EU data. For perspective's sake, Germany's labor costs have risen only 5 percent over the same ten years.

Yet as always, economic projections are little more than guesses, and the track record of such projections with respect to Greece is anything but reassuring. Greece's 2011 deficit was "supposed to be" only 7.6 percent, a target set by the EU and IMF. The actual deficit was 8.5 percent, representing a difference of $1.9 billion. And one must keep in mind that such a missed projection represents the small picture. In May of 2010, Greece was given a $160 billion bailout that was ostensibly supposed to kick the proverbial can down the proverbial road for three years. Yet on June 17, 2011 the Washington Post revealed the accuracy of that prediction: "But a year later, the initiative has fallen so far short that the country is again running out of money."

Thus the EU has been forced to cobble together bailout number two. Here are the details of the latest deal:

–Greece gets $173 billion in exchange for the aforementioned requirements.

–Banks, hedge funds, pension funds and other private investors who own around $265 billion of Greek government bonds have been asked to forgive 53.5 percent of the face value of those bonds, which would cut Greece's current $460 billion of debt by $142 billion. The private creditor bond exchange is scheduled to take place on March 8th, and will be completed within three days. Greece's next bond re-payment of $18 billion, due on March 20th, will also be restructured, allowing Greece to avoid default.

–Interest rates on the remaining debt will be reduced from the previous 4.8 percent to 3.65 percent, and Greece's timeline to pay off those debts will increase from seven to 30 years.

–The European Central Bank (ECB), which is holding $65.5-72 billion of Greek bonds exempt from the write down, will send profits made on those holdings over the last two years to national central banks, whose governments will pass them on to Athens "to further improve the sustainability of Greece's public debt."

–if all goes according to plan, Greece's debt ratio will be reduced from its current 160 percent of GDP to 120 percent of GDP by 2020.

Unsurprisingly, the politicians involved in creating the package were optimistic. Greek prime minister Lucas Papademos, called it a "historic day" for the country. Greek Finance Minister Evangelos Venizelos claimed "a nightmare scenario was avoided," and that the deal is "maybe the most important in Greece's post-war history." Jose Manuel Barroso, President of the European Commission, contends the deal "closes the door to an uncontrolled default that would be chaos for Greece and Greek people." British Chancellor George Osborne characterized the deal "as good for Britain, because resolving the eurozone crisis would be the biggest boost that Britain could get for its economy this year," while Jean-Claude Juncker called it "a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing and hence for safeguarding financial stability in Greece and in the euro area as a whole." IMF head Christine Lagarde said she "personally welcomed the agreement," even as it remained unclear exactly how much funding the IMF would contribute to the package.

Their optimism was more than offset by others. "The austerity measures [Greece] will have to implement and increased monitoring by the troika (the European Commission, ECB and IMF) amidst public outrage will make things harder and drive it deeper into recession," said Jennifer McKeown, senior European economist at Capital Economics. "There is a risk of a euro zone exit later this year." Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt agreed. "Greece will find it difficult to shoulder even the reduced debt in the long-run if it does not implement far-reaching reforms," he said. "The probability will rise in the second half of the year that a frustrated EU stops payments to Greece," he added. "Does this alleviate the risk of imminent default?" posed Callum Henderson, global head of foreign-exchange research at Standard Chartered PLC in Singapore. "Yes, but not further out. Further out, the concerns of a default will keep coming back."

Adding weight to the belief that Greece's problems are far from over, a nine-page confidential report prepared by experts from the EU, ECB and IMF said that Greece would likely need "extra relief" given the worsening state of the economy, noting that even with the bailout, the "Greek program may thus remain accident-prone, with questions about sustainability hanging over it."

Yet there was also a leaked document from Germany that reveals exactly where this saga is really headed. Clause 2, under the section titled "Proposal for the improvement of compliance," spells out that Greece "has to accept shifting budgetary sovereignty to the European level for a certain period of time." Furthermore, a budget commissioner "will have broad surveillance competences over public expenditure and a veto right against budget decisions not in line with the set budgetary targets and the rule giving priority to debt service."

In other words, whether or not Greece remains in the EU, there can be no dispute that national sovereignty hangs in the balance. Furthermore, this ongoing debacle once again reveals that socialism produces no heroes. On one side, we have the Greeks themselves, brought literally kicking and screaming to the reality that they have indeed run out of other people's money to spend. On the other side, we have the trans-nationalist financiers and supra-national EU bureaucrats, concerned that Greek "contagion" may spread to other EU nations, most notably Spain and Italy, as well as banks in Germany and France. Yet that so-called concern for the plight of the Greeks themselves is disingenuous: there is little question that if contagion were not an integral part of the current equation, Greece would be (and may still be) left to its own devices.

Thus we have an epic tragedy that continues to unfold, even as it reveals the ultimate bankruptcy of socialism: the complete misunderstanding of human nature that engenders the unrealistic expectations of utopian overseers, and the ungrateful wards of their "beneficence."

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