Thursday, June 18, 2015

Greek crisis rolls along

Martin Wolf, Divorce in haste, repent at leisure Financial Times 06/16/2015:

As the Irish economist, Karl Whelan, points out in a blistering response to Mr Giavazzi, the Greek economy has suffered a staggering collapse. From peak to trough, aggregate real gross domestic product fell by 27 per cent, while real spending in the economy fell by a third. The cyclically-adjusted fiscal balance improved by 20 per cent of GDP between 2009 and 2014 and the current account balance improved by 16 per cent of GDP between 2008 and 2014. The unemployment rate reached 28 per cent in 2013, while government employment fell by 30 per cent between 2009 and 2014. Such a brutal adjustment would have shredded the politics of any country. ...

Europeans are now dealing with Syriza because of this calamity. But they are also dealing with Syriza because of the refusal to write down more of the debt in 2010. This was a huge error, made far worse by the subsequent collapse of the Greek economy. Indeed, the vast bulk of the official loans to Greece were not made for its benefit at all, but for that of its feckless private creditors. Creditors, too, have a duty to take care. If they are careless, they risk big losses. If governments want to save them, their own taxpayers should be told to pay up.
Still, he talks about the need for Greece to make "bold structural reforms," which in the euro crisis has consistently meant the kind of austerity policies that produced the disastrous result for the Greek economy Whelan describes.

Paul Krugman (Thinking About the All Too Thinkable 06/18/2015) has already decided to break his vow of silence from a couple of days ago about Greece: "The point is that nobody should be casual or confident here. But the creditors should actually be even more worried than the Greeks about a potential exit that has no upside for the rest of Europe."

He refers to one of the most important precedents for the current situations. "As it turned out, the Argentine scenario was headed off by the political determination of elites to stay in the euro and the success of the ECB’s 'whatever it takes' declaration of willingness to act as lender of last resort. But the reprieve wasn’t permanent; in this respect, at least, Athens 2015 is Buenos Aires 2001." With constructive (non-Herbert-Hoover/non-austerity) economic policies, Argentina from 2003 to 2010 had very healthy growth, the largest economic expansion in their history. This is why the current Greek Prime Minister Alexis Tsipras​ said in Parliament a couple of years back, "I wish we were Argentina!"

Yves Smith offers his take in What If There is No Deal on Greece? Naked Capitalism 06/18/2015:

The alarming part of the deadlock is the lack of a plan on the creditor side to develop a Plan B, a sort of mirror image of the Greek government’s claim that its has bet everything on securing a favorable agreement. Even if the ECB has been gaming out scenarios (as was rumored as early as February), it can only do so much unilaterally. The Eurozone crisis is on the verge of entering a phase where a common view among different governments and institutions is necessary before any concerted action can take place. Even allowing for a relatively quick agreement on preliminary steps, there is still a ton of moving parts, as well as the near certainty of continued high friction with Greece.
Smith also reminds us how grimly far from any genuine sense of solidarity the EU is today: "It’s career suicide in too many countries for politicians to vote through a deal with Greece with no pension reductions, and far too little time to soften public opinion by June 30."

And deadlines are still to come down hard (Corina Ruhe, Stephanie Bodoni and Rebecca Christie, EU Calls Emergency Summit as Greece Runs Out of Time Bloomberg Business 06/18/2015:

For Tsipras, there are immediate repercussions. While Greece still has 12 days left before the bailout window shuts, the need for some parliaments to sign off on any agreement the ministers can broker means it’s already too late for them to access aid in time to pay the IMF about 1.5 billion euros ($1.7 billion) at the end of the month, according to Dijsselbloem.

“Let’s say that we do reach an agreement; it’s unthinkable that the implementation and then disbursement will also have to take place before the end of the month,” Dijsselbloem said. “That is simply impossible.”

To get its hands on some money, Greece will now look to extract am extension of its bailout agreement at a June 22 summit that will bring Tsipras and Germany’s Angela Merkel, who has tried to smooth out tensions [SAY WHAT?], in the same room. That EU meeting will start at 7 p.m. in Brussels.

The "at 7 p.m." is a nice dramatic touch, communicating that cliffhanger vibe.

Smith clears up one point that has been awfully vague in a lot of the reports I've seen on the June 30 payment due to the IMF:

Other lenders to Greece apparently do not have cross-default clauses with IMF debt, so the immediate impact of an IMF missed payment (the term of art is “arrearage”) is the blow to confidence, a bar on new IMF lending, and a reduction in the quality of the collateral pledged to the ECB for loans under the ELA, particularly Greek government debt (which is a comparatively small portion of total collateral). Note that the Eurozone member states, many of which are lenders through the European Financial Stability Fund and the Greek loan facility, won’t suffer any immediate impact. ...

While the ECB could in theory cut off the ELA air supply on June 30, the complexity of the situation, plus its “rule driven” message seems to signal that it will wait to act until it has a clear cut cause. But going past the June 30 event horizon means Greece will be under more pressure to introduce capital controls, particularly since experts have estimated that Greek banks will run out of collateral eligible for the ELA sometime in July, and that was before allowing for the possibility of increased haircuts on collateral as a result of the IMF arrearage. That is not a pretty picture
I've followed this story for years. But Smith's description of how nasty Merkel and the ECB could potentially get still strikes me as hair-raising.

Smith's closing paragraph: "I must confess to being fried by following this drama so closely, and the idea that this could go on another month or even longer is draining. Imagine how the officials involved feel. Frayed nerves and exhaustion increase the already high odds of bad decisions and impulsive action."

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