World Affairs

Surprising Role Reversals in the Never-Ending Greek Debt-Slavery Saga

The Never-Ending Greek Debt-Slavery Saga has yielded three remarkable role reversals among core, agenda-setting Western institutions.

If you remember the glory days of the Washington Consensus, the baddest of bad guys in the global neoliberal capitalist order was the International Monetary Fund. It was the star of the currency and sovereign debt crises of the 1980s and 1990s; all of whom had the same basic script:

Step 1. Globally-mobile capital from rich countries would flow into emerging markets (EM), buoying up thinly-traded asset markets and currencies.

Step 2. Shocks to risk aversion back home in the center of the world economy would prompt a dramatic reversal of said capital flows.

Step 3. Rapid capital outflows would lead to a crash in EM assets and of EM currency against the dollar; and therefore, a sharp increase in the dollar-denominated debt of the unfortunate state caught naked when the tide went out.

Step 4. The IMF would step in with a bailout package in exchange for harsh austerity measures and painful reforms that usually included a wholesale privatization of the state’s assets.

Most poor and developing nations wised up around the time of the 1997 Asian financial crisis. All of them, almost without exception, resorted to building up hard currency reserves (mostly dollars) for national insurance during good times. This was the financial equivalent of nuclear proliferation prompted by US aggression. Just as a nuclear deterrent guaranteed insurance against a US invasion, a big enough pile of US dollars ensured freedom from IMF-imposed debt slavery.

One consequence of this international politico-financial interaction was a secular rise in the global savings rate–that Ben Bernanke called the “global savings glut.” (See Figure 1.) In turn, the higher savings rate pushed down global interest rates and powered a credit boom in the United States; with well-known results.

GSR

 

In light of this history it is extremely interesting to watch the IMF play the nice guy through the Greek debt crisis. The IMF has been urging debt relief for years. Northern Europeans in general and Berlin in particular, used to play the good guys back in the 1990s. But since the beginning of the eurozone crisis, Berlin has led northern European creditors on a self-defeating Shylock’s quest. The humanitarian and economic costs of the austerity imposed on debtor countries of the Mediterranean have been substantial across the board. For Greece, they have been nothing short of a catastrophe. (See Figure 2.)

Greece

Figure 2. Greek GDP and Prime Age Unemployment (Source: FRED)

Ahead of the negotiations this week, the Fund released an official debt sustainability analysis calling for substantial debt relief, saying that it would only participate if the Europeans could prove that the “numbers add up.” (See panel.)

The Fund proposed 24-year payment deferrals, 40-year maturity extensions, and 1.5 percent caps on interest rates. The only thing that it did not ask for was an outright debt writedown. But it might as well have. The difference is semantic; even if politically potent for the Germans. The fundamental fact is that Greece cannot pay back all the money that it owes. And the Germans know it too.

The Germans were insisting that Greece maintain a 3.5 percent primary surplus, while the IMF has been arguing that no more than 1.5 percent is sustainable. (The primary surplus, receipts less spending before interest payments and debt repayments, is a basic measure of fiscal austerity: 1.5 percent is medium austerity; 3.5 percent is draconian.) The Germans have yielded on this front.

More fundamentally, as with previous deals the current deal amounts to kicking the can (further) down the road. The Europeans will pay the Greeks to repay the Europeans. It’s not even two different institutions! They are literally giving with one hand and taking from the other. German economists Stahmer and Rocholl showed that more than 95 percent of the 216 billion euro Greek bailout has found its way back to the coffers of banks and creditors.

And so the charade of the Never-Ending Greek Debt-Slavery Saga continues.

Pay

Now for the third and last role reversal. Remember how the New York Times used to be more progressive and, yes, leftist, than the business press? Not any more. Reading this report by James Kanter, I had to go up twice to make sure I was not reading an opinion piece.

In the very first paragraph, we are told that the IMF is “threatening to create more political and economic uncertainty at an already tumultuous time for Europe.” Later we learn that,

The fund is playing the role of the financial police, adamant that Greece will never return to growth if its debt burden is not sustainable. And Germany is the political pragmatist, leaning on Greece to stick with its austerity commitments lest it set a bad precedent for future bailouts and provoke unrest at home.

One could perhaps forgive this sort of nonsense on the pages of the Grey Lady if it were an Op-Ed by Paul Ryan or another ultraconservative idiot. But on page B2? What the hell is going on at this newspaper? Contrast that to the premier newspaper of global finance (sinister music), Financial Times:

As has now been the pattern for several years, the pressure to recognise reality has come from the IMF. The fund realised much earlier than the eurozone authorities that the programmes of fiscal tightening and microeconomic change being pushed on Greece would not provide a sustainable exit from the country’s recession and sovereign debt burden…

…the eurozone must confront the reality that some form of relief from official creditors is a non-negotiable part of giving the country a chance of returning to economic sustainability.

One way or another, these operations will represent a transfer of resources from the eurozone creditors to Greece, whether or not they are labelled as such and even if they avoid a politically explosive writedown in face value. So be it. The eurozone must shoulder some blame for its predicament.

What is going on with all these role reversals? Next thing you know, the GOP will start ranting against globalization! Oh, wait.

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Markets

Capitulation?

German-Chancellor-Angela-Merkel-French-President-Francois-Hollande-and-Greek-Prime-Minister-Alexis-Tsipras

The Hollande-Merkel-Tsipras agreement on Monday is being described as a capitulation by many major newspapers [Telegraph, Bloomberg, Times, BBC, MSN, EU Observer].  “Brutal” and “humiliating” is how The Economist choose to describe the terms of the agreement. The Western press seems to be suffering a bad case of sensationalism and hyperbole. The deal is nothing so dramatic.

The Europeans have done what they do best: Kick the can down the road. It has been manifest for a while that the only way to end the Greek tragedy is substantial outright debt relief. The €86 billion deal is the third bailout package for Greece; the first one was for €110 billion in 2010; and the second in 2012 brought Greece’s debt to foreign creditors up to €246 billion. The probability that Greece will be able to pay back the €320 billion it now owes to foreigners, with or without reform and with or without austerity, is for all practical purposes zero. Major sovereign crises do not get resolved without substantial debt write-offs; as Reinhart and Trebesch have demonstrated. In the official statement, there is so far no recognition of this reality: “The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.”

Around the time of the Greek referendum, German policymakers were converging to the hardline position that Greece should be pushed out of the eurozone; a position championed by the veteran German finance minister Wolfgang Schäuble. The political optics changed after the results of the referendum were announced. Apparently, Luxembourg Foreign Minister Jean Asselborn’s dire warning to Angela Merkel, that pushing Greece out would be a “catastrophe for Europe”, pulled the Germans back from the brink. Merkel agreed to let Hollande play the good cop routine with Tsipras. Hollande arm-twisted Tsipras to concede on far-reaching reforms in exchange for relief on austerity.

Tsipras has agreed to push through a package of reforms through the Greek parliament. It includes an overhaul of VAT and income taxes, pension reform, labor market and financial reforms, and the privatization of utilities. This is certainly a surrender of sovereignty. But consider that Greek institutions were and are highly dysfunctional and in dire need of reform. That the Greek governement has to push through these difficult reforms under EU supervision is not the worst thing in the world. Even the much-feared labor market reforms only aim to bring Greece up to Western European standards. It is reasonable to expect that the Greeks themselves will be strictly better off as a result of these reforms.

As for austerity, the agreement calls for a primary surplus target of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018. This is an improvement over the 2012 bailout agreement which called for 4.5 percent of GDP in 2014, 2015 and 2016. The numerical proximity of these numbers is an optical illusion. The difference is that between catastrophic and mild austerity. The agreement also calls for what amounts to a medium-term stimulus of €35 billion for Greece. This is a substantial concession to macroeconomic reality.

Greece gets to keep the euro as a ward of the European Union. The ECB will now ensure than the Greek banking system does not implode. The government has to undertake substantial and far-reaching reforms under EU supervision. In exchange for a surrender of sovereignty over national policy to the European Union, the Greeks are spared from continuing to endure the equivalent of a Great Depression. The deal is nowhere close to being ideal. But for what it is, it is not catastrophic for the Greek people.

The Greek saga, of course, is very far from over. It will continue until a substantial portion of the debt is written off. Meanwhile considerably more significant market developments are underway half-way around the world. As I predicted, the asset price bubble in China is beginning to unravel. The stock market collapse is likely just the beginning of a major bust that will eventually lead to a lower-growth trajectory for the Asian giant. We are entering a new, perhaps more violent, phase of turbulence in global markets.

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