tag:theconversation.com,2011:/id/topics/greferendum-18458/articlesGreferendum – The Conversation2015-07-20T10:27:40Ztag:theconversation.com,2011:article/447442015-07-20T10:27:40Z2015-07-20T10:27:40ZReading between the lines of Greece’s bailout: debt relief is inevitable – just not yet<figure><img src="https://images.theconversation.com/files/88944/original/image-20150720-2328-1qz1x3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How to explain Greece's bailout puzzle? </span> <span class="attribution"><span class="source">Greece puzzle via www.shutterstock.com</span></span></figcaption></figure><p>At first glance, the latest developments in the Greek bailout saga seem a little puzzling, particularly those concerning debt relief. </p>
<p>The current <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">proposal</a> from Greece’s eurozone creditors does not offer debt relief. To the contrary, it <a href="http://www.bbc.com/news/business-33505555">emphasizes</a> that debt relief is not involved: “nominal haircuts on the debt cannot be undertaken.” </p>
<p>Yet the day after Greece agreed to the proposal, the International Monetary Fund <a href="http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf">released</a> a report showing that Greece cannot possibly pay back its current debt. This position is hardly surprising in itself -– the IMF has been saying as much for months. But the timing was mystifying because the IMF had initially endorsed the proposal. In fact the eurozone countries would <a href="http://blogs.wsj.com/moneybeat/2015/07/13/heres-what-the-greek-deal-entails/">not have agreed</a> to the proposal otherwise. </p>
<p>Truth be told, no one seems to think the latest bailout (alone) will work, the official word notwithstanding. Whether it’s the <a href="http://www.wsj.com/articles/germanys-schauble-dismisses-greek-haircut-option-1437032027">German finance minister</a>, the <a href="http://www.telegraph.co.uk/finance/economics/11743163/Greece-news-live-Brussels-prepares-to-release-emergency-loan-to-get-Greece-through-July.html">Greek prime minister</a> who agreed to the deal, the <a href="http://www.bloomberg.com/news/articles/2015-07-17/greek-bailout-needs-debt-reduction-imf-s-lagarde-says">head of the IMF</a> or the pundits, there’s a “Greek” chorus in the background wailing that this bailout will just bring another crisis.</p>
<p>In other words, it’s a puzzle any way you look at it. If debt relief will ultimately be essential, why not just provide it now? Why insist on fiscal and structural reforms that will increase Greece’s economic pain? </p>
<p>Could it be that eurozone leaders are simply setting the stage, however quietly, for significant debt forgiveness in the not-too-distant future? </p>
<p>Here’s why that idea may not be so far-fetched – and why there probably isn’t any better time than now, with Greece’s banks in crisis, to pursue reforms as a step toward debt relief. We just need to read between the lines.</p>
<h2>Why debt relief must wait</h2>
<p>First of all, proposing debt relief today would be politically dangerous for leaders in the eurozone creditor countries. Their voters <a href="http://www.washingtonpost.com/blogs/monkey-cage/wp/2015/07/12/other-europeans-say-they-cant-trust-greece-the-problem-goes-both-ways/">do not trust</a> Greece, given the country’s many unfulfilled promises of reform, and many view debt forgiveness as unfair. </p>
<p>It’s difficult for pensioners in Latvia, who <a href="http://ec.europa.eu/economy_finance/publications/publication14992_en.pdf">retire</a> on average at 63, to see why it’s fair for them to sacrifice to help pensioners in Greece, who retire on average at 60 – and <a href="http://greece.greekreporter.com/2014/12/04/75-of-greek-pensioners-enjoy-early-retirement/">sometimes</a> at 50. It’s difficult for voters in Finland, who <a href="http://www.kpmg.com/global/en/issuesandinsights/articlespublications/vat-gst-essentials/pages/finland.aspx">pay</a> a value-added tax (VAT) of 24%, to see why it’s fair for them to be taxed to support voters on Greek islands, many of whom <a href="http://www.ekathimerini.com/199529/article/ekathimerini/business/four-tier-vat-status-for-islands">pay</a> a VAT of only 13%. </p>
<p>So Europe’s leaders face a catch-22. Greece cannot recover without debt relief, but Europe’s voters will not approve such forgiveness. To complicate matters further, the Greeks think they merit relief since they have already implemented some reforms and their economy is suffering.</p>
<p>Economic activity <a href="http://money.cnn.com/2015/01/22/news/economy/greece-elections-austerity-syriza/">is down</a> by almost 30% since 2008. Prices are falling 2% per year. The banks are still closed, limiting Greeks to withdrawals of just €60 a day. Overall unemployment is 26%, and unemployment among the young is 50%. Homeless shelters are overwhelmed. Proper medical care is out of reach for many people.</p>
<p>Naturally the Greeks think they’ve suffered enough.</p>
<h2>Why insist on reform amidst the ruins</h2>
<p>Given the terrible economic pain in Greece, why do its eurozone creditors insist on fiscal and structural reforms that will make things even worse? Reform is critical financially, economically and politically.</p>
<p>Greece already owes more than it can pay, yet Greece’s government keeps borrowing more because it still runs a substantial <a href="http://www.tradingeconomics.com/greece/government-budget">budget deficit</a> every year.</p>
<p>The <a href="http://www.theguardian.com/business/2015/jul/13/greece-bailout-agreement-key-points-grexit">bailout plan</a> requires fiscal reforms that will dramatically reduce the need for borrowing: Greece must bring its pension system to financial sustainability via “comprehensive reform,” streamline VAT and broaden the tax base and introduce “quasi-automatic spending cuts” that kick in if the government can’t hit its targets. </p>
<p>Sustainable economic growth also requires structural reform. Existing Greek laws and regulations severely impede business activity and strangle job creation, all of which reduce tax revenues and make it hard for Greece to balance its budget. The deal aims to enhance competition, introduce greater labor-market flexibility and privatize certain industries. </p>
<p>History shows that these reforms will make a big difference to Greece’s economy. Similar reforms brought Germany to economic dominance within Europe and enabled China to explode onto the world economic scene. And the reforms are likely to pass: most Greeks strongly <a href="http://greece.greekreporter.com/2015/06/16/poll-7-in-10-greeks-want-the-euro-at-any-cost/">support</a> their country’s membership in the eurozone and are willing to pay a steep price to keep it. </p>
<p>But the political benefits of reform are just as critical as their financial and economic benefits. By implementing the reforms, Greece could alleviate voter distrust among its creditor countries and reduce the perceived unfairness in debt relief. Thus the deal could ultimately make it politically feasible for leaders in these countries to propose significant forgiveness. </p>
<p>The adjustments associated with reform will be very painful, and the Greek economy is already in bad shape. Indeed, it was to avoid such pain, or at least spread it out, that Greek voters so often opted to slow or stop reform in the past. Unfortunately, slowing reform over the past year led the country into greater debt, precipitating the current crisis, so the rest of Europe will no longer support that option. </p>
<p>And the one option still available to Greece -– spurning its creditors altogether –- would be even worse than reform because it would intensify the banking crisis. </p>
<h2>Banking crisis boosts Europe’s leverage</h2>
<p>It is the banking crisis – which began after Prime Minister Alexis Tsipras surprised everyone in late June with his call for a referendum, prompting the European Central Bank to cap how much Greek lenders could borrow – that gives creditors the most leverage over Greece. </p>
<p>To review: the <a href="http://www.abc.net.au/news/2015-07-18/greek-banks-to-reopen-monday-but-capital-controls-remain/6631014">bank closures</a> in Greece have sent the economy reeling, firms are closing at an accelerated rate, and Greek banks are at risk of insolvency. The banks have just reopened, but they’re still desperate for cash.</p>
<p>If the banks are not recapitalized soon, they’ll sharply curtail lending, and economic activity will fall precipitously. Greece would be forced out of the eurozone and would have to adopt a new, devalued currency. Greeks would find euro-denominated debts to foreigners more difficult to repay, and many would default. The defaults would delay the return to growth because foreign lenders would be even more reluctant to extend credit in the future. </p>
<p>Key to the new political calculus is Greece’s inability to recapitalize its own banks. Because it is so deeply in debt, the Greek government has no financial resources to spare. It is already behind in paying regular expenses. And the Greek central bank gave up the power to recapitalize the banks by printing new money when Greece joined the euro. </p>
<p>To recapitalize its banks and avoid economic implosion, Greece needs an immediate infusion of foreign funds. This gives Europe unprecedented leverage to help Greece help itself. By making current aid depend on immediate reform, Europe changes the calculus for Greek lawmakers when voting on reform proposals: it increases the payoff to voting Yes, because it helps Greek voters avoid a deeper banking crisis, and it reduces the costs to voting Yes, because the eurozone itself will take some of the political heat. </p>
<p>What’s in it for the eurozone? Its leaders would prefer to avoid the uncertainties and precedents of a Grexit. And in the long run a stronger Greek economy will import more of their products, supporting economic growth throughout the region. And, of course, a stronger Greek economy will need less debt relief; who can complain about that?</p>
<h2>What’s with the IMF?</h2>
<p>Another puzzle: why would the IMF acquiesce to the current agreement if it believes debt relief is critical? Keep in mind that the IMF wants to maximize its chances of being paid back. Those chances rise whenever Greece implements reforms, because they strengthen the economy. </p>
<p>The IMF could also benefit indirectly from reforms because they might alleviate the political opposition to debt relief. Forgiveness from other institutions frees up resources in Greece that can be used to pay back the IMF. </p>
<p>In short, another incentive for not insisting on immediate debt relief could be that waiting is required to make reform happen, and reform is politically necessary for actual debt relief to occur down the road.</p>
<h2>Clues that debt relief lies ahead</h2>
<p>If the Eurozone creditor governments do have in mind a long-run plan that includes significant debt relief, they clearly cannot openly discuss it today. </p>
<p>Nonetheless, their close cousins in the European Commission called this week for just that: an eventual “<a href="http://www.reuters.com/article/2015/07/15/eurozone-greece-eu-assessment-idUSB5N0ZA05420150715">reprofiling</a>” of Greece’s debt conditional on “a far-reaching and credible reform program.” Reprofiling amounts to implicit debt forgiveness through the lengthening of maturities, deferring of interest and similar adjustments. </p>
<p>The <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">eurozone plan</a> itself hints at this possibility. The first sentence highlights the importance of rebuilding trust. Specific reform proposals target the perception of unfairness, stressing that Greece should match policy standards elsewhere in Europe. For example, “labor market policies should be aligned with international and European best practices.” </p>
<p>And tucked in at the end is a brief but explicit hint of possible future forgiveness: </p>
<blockquote>
<p>Against this background, in the context of a possible future [European Stability Mechanisms] programme … the eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. </p>
</blockquote>
<p>Of course, this vague gesture toward forgiveness is immediately linked to the necessity of reform: “These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme.” </p>
<p>So Greeks and others who think the Germans are being a little harsh with their demands for austerity without debt relief should take heart. Good things may ultimately come to those who wait – and endure.</p><img src="https://counter.theconversation.com/content/44744/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carol Osler does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>No one seems to really believe the latest bailout plan will work without debt relief. But the only way to get Greece to adopt essential reforms is to pretend it isn’t in the cards.Carol Osler, Professor of Business, Brandeis UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447452015-07-15T18:27:16Z2015-07-15T18:27:16ZGreece’s ‘aGreekment’ isn’t Versailles: why the bailout won’t lead to sudden rise of Golden Dawn<figure><img src="https://images.theconversation.com/files/88524/original/image-20150715-26319-1xb0mxy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Grecians have made it clear how they feel about Golden Dawn: get out. </span> <span class="attribution"><span class="source">Greece protest via www.shutterstock.com</span></span></figcaption></figure><p>It is not uncommon that a compromise is made that leaves practically everyone disappointed, but the aGreekment, as the recent agreement between the EU and the Greek government has been so coyly dubbed, takes it to a whole new level. </p>
<p>An avalanche of (<a href="http://www.theguardian.com/business/2015/jul/13/greek-supporters-social-media-backlash-germany">orchestrated</a>) tweets tells us that #ThisIsACoup and <a href="http://www.euractiv.com/sections/euro-finance/12-july-agreement-puts-greece-slippery-slope-towards-right-wing-extremism">pundits</a> warn that “the 12 July agreement puts Greece on a slippery slope towards right-wing extremism.” </p>
<p>The hero of continuous resistance, former Greek Minister of Finance <a href="http://www.abc.net.au/radionational/programs/latenightlive/greek-bailout-deal-a-new-versailles-treaty-yanis-varoufakis/6616532">Yanis Varoufakis</a>, also weighed in on this, comparing the aGreekment with the Treaty of Versailles – putting contemporary Greece on par with Weimar Germany – and proclaimed with his usual level of certainty that the neo-Nazi party Golden Dawn will be strengthened by more austerity.</p>
<p>I am not going to focus on the irony that the <a href="https://www.opendemocracy.net/cas-mudde/european-elites-politics-of-fear">European Union elite</a> has used the same cynical and misguided fear-mongering tactic again and again against both the far right and the far left, including Varoufakis’s Syriza Party itself. </p>
<p>I am also not going to dwell on the fact that Weimar Germany was literally destroyed by a (real) war, while contemporary Greece has seen no armed conflict since its own civil war, more than 50 years ago. </p>
<p>Nor will I develop further the meaningless comparison of the aGreekment, which is essentially a loan of billions of euros to Greece in exchange for binding reforms, to the <a href="http://www.ushmm.org/wlc/en/article.php?ModuleId=10005425">Versailles Treaty</a>, which meant a payment of billions by Germany in the form of reparations.</p>
<p>I am even going to ignore the fact that the whole leadership of Golden Dawn is currently in jail or <a href="http://www.thenation.com/article/rejoice-caution-golden-dawn-under-arrest/">under house arrest</a> and the party can hardly organize in a normal fashion.</p>
<p>Instead, let’s just look at the empirical facts. Is Golden Dawn really on the rise? </p>
<p>There is little doubt that Golden Dawn did profit from the crisis, <a href="http://www.nytimes.com/2012/10/01/world/europe/amid-greeces-worries-the-rise-of-right-wing-extremists.html?_r=0">growing</a> from an irrelevant party of less than 1% before 2010 to a moderately successful party with roughly 7% in 2012. </p>
<p>Perhaps high, but hardly a threat to Greek democracy. While no polls have been held since Monday morning following the bailout, a <a href="http://www.electograph.com/2015/07/greece-july-2015-metron-analysis-poll.html">Metron Analysis</a> poll taken between the Greferendum and the aGreekment shows remarkable stability in Greek party preferences since the January 2015 elections. </p>
<p>Only one shift was outside of the margins of error of plus or minus 3.1%: New Democracy (one of Greece’s two major parties) lost almost 9%, which is undoubtedly in part a temporary response to the fresh news of the <a href="http://greece.greekreporter.com/2015/07/05/antonis-samaras-resigns-from-nd-party-leadership-after-no-win-in-greek-refrendum/">resignation</a> of party leader Antonis Samaras after the No vote in the Greferendum. Golden Dawn was down 2%, from 6.3% in January elections to 4.3%. Again, this is within the margin of error, but at the very least shows that there is absolutely no evidence for a rise.</p>
<p>If Varoufakis and others <a href="http://alphahistory.com/weimarrepublic/why-the-weimar-republic-failed/">really want</a> to learn lessons from Weimar Germany, they should remember that the rise of the Nazi Party was at least as much caused by the material economic effects of the Versailles Treaty and the Great Depression as by the psychological consequences of the framing of the two. </p>
<p>As <a href="http://www.huffingtonpost.com/cas-mudde/weimar-greece-and-the-future-of-europe_b_6876944.html">Weimar Germany</a> was largely a democracy without democrats, contemporary Greece is largely a liberal democracy without liberal democrats. Just like in Greece today, anti-Semitism was <a href="http://www.haaretz.com/jewish-world/jewish-world-features/1.591841">rampant</a> in Weimar Germany. However, while anti-Semitic conspiracies were highly popular in other countries in the 1930s too, including Austria and France, Weimar Germany had an even more toxic conspiracy theory.</p>
<p>The “<a href="http://www.bl.uk/world-war-one/articles/the-legacy-of-world-war-one-propaganda">Dolchstoβlegende</a>” (Stab-in-the-Back Myth) emerged already at the end of the First World War and was spoon-fed to ordinary Germans by a broad range of elites. The accusation was that the capitulation of Germany and the consequent Treaty of Versailles were the result of a stab in the back by a “fifth column” and a “traitorous elite” who did the bidding of hostile international forces. </p>
<p>Sound familiar?</p><img src="https://counter.theconversation.com/content/44745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cas Mudde has received funding from the Alexander von Humboldt Foundation, British Academy, Dutch Scientific Organization (NWO), Flemish Scientific Organization (FWO), Israeli Institute, and Volkswagen Foundation. He is affiliated with the Center for Right-Wing Studies at the University of California, Berkeley, and consults/ed for the Canadian Security Intelligence Service (CSIS), Institute for Jewish Policy Research (JPR), and European Policy Center (EPC).
</span></em></p>Some, including Greece’s ex-Finance Minister Varoufakis, have warned that the bailout’s austerity will strengthen extremist parties like Golden Dawn. They’re wrong.Cas Mudde, Associate Professor in the School of Public and International Affairs, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443752015-07-08T20:09:57Z2015-07-08T20:09:57ZGreece, like Wahlberg in The Gambler, just needs a friend — and a new currency<figure><img src="https://images.theconversation.com/files/87606/original/image-20150707-1271-1gvfbqs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Greece's gross domestic product, shown here in 2010 constant dollars, has plunged since 2008. </span> <span class="attribution"><span class="source">RED St. Louis Federal Reserve Bank and Hellenic Statistical Authority </span></span></figcaption></figure><p>On Sunday, the citizens of Greece <a href="https://theconversation.com/after-the-no-vote-greece-faces-its-last-judgement-44247">voted</a> No on the country’s referendum to accept a package of money in exchange for further austerity measures. </p>
<p>Now what?</p>
<p>Every armchair economist from Iowa to the Aegean Sea has an answer and opinion, including, as it happens, me. </p>
<p>Although I’m an actual economist, I’m thinking about the events of Greece as they relate to the plot of a recent movie, The Gambler, starring Mark Wahlberg. It occurred to me that Greece is just like Wahlberg’s character Jim Bennett.</p>
<p>Examining the unfolding drama in Greece through the lens of this movie should help illustrate what’s really going on here, who the main players are and how it could be resolved. </p>
<h2>Premise of The Gambler</h2>
<p>The movie is about the gambling problems of an English professor and the issues surrounding borrowing and paying back loans (the movie also touches on ideas of talent, wasted talent and understanding one’s place in society, but for these purposes, I’ll just focus on the loans). </p>
<p>The professor had, at one point, received some attention (good reviews, a promotion and tenure) from his novel. So he has been productive and done some good work in the recent past. </p>
<p>But he has a problem: he likes to gamble. </p>
<p>And since the house always wins, he is in debt to the owner of the local underground gaming parlor, Mr Lee. Since Bennett is an English professor, we know he doesn’t have a huge income. In order to keep his gambling going, he continues to borrow from Lee. And, of course, he keeps losing. </p>
<p>Bennett tries to get caught up by borrowing from another fellow, Neville Baraka, and loses that money as well. Within the first 10 minutes of the movie, Bennett is indebted to Lee (US$240,000) and Baraka ($50,000, plus $10,000 in interest). Given that he has no income potential (he is an English professor, after all) and the bad guys want their money, he is in big trouble. </p>
<p>At one point, Bennett approaches Frank (John Goodman, playing one of the lovable scary tough while doughy roles that we expect from him) for a loan. When Frank analyzes the risk/reward, he comes to a simple conclusion (something everybody in the audience already knows): Bennett doesn’t really have the means to pay any of the money back. </p>
<p>In the end, Frank does loan Bennett some serious cash, knowing very well that he can’t pay it back unless he gets lucky gambling. Frank makes this move because, I believe, Frank sort of likes Bennett, relates to Bennett’s helplessness and, perhaps, is a risk-seeking individual. </p>
<h2>Greece the gambler</h2>
<p>Although Greece doesn’t exactly have a gambling problem, it does have a borrowing problem. Greece <a href="http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html">owes</a> money to just about everyone. The table at right shows the principal amounts owed to different countries, groups, banks and other parties of interest, to the tune of €320 billion, or at current exchange rates about $355 billion.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=541&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=541&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=541&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=680&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=680&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=680&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The table shows Greece’s loan partners and how much of its debt they own.</span>
<span class="attribution"><span class="source">Open Europe; IMF; Greek Public Debt Management Office</span></span>
</figcaption>
</figure>
<p>Does Greece have a chance of paying off any of these loans? Not realistically and certainly not anytime soon. </p>
<p>The real gross domestic product (GDP) of Greece stands at around $240 billion. In other words, Greece’s debt is approximately 150% of its current GDP. By comparison, the real GDP of the United States is $16 trillion with a $19 trillion debt (119%). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=467&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=467&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=467&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=587&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=587&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=587&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Greece’s gross domestic product, shown here in 2010 constant dollars, has plunged since 2008.</span>
<span class="attribution"><span class="source">FRED St. Louis Federal Reserve Bank and Hellenic Statistical Authority</span></span>
</figcaption>
</figure>
<p>Greek GDP has been falling the last several years, ever since the European Union and other creditors imposed <a href="http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html">austerity</a> on Greece in exchange for €240 billion in bailouts. The Greek economy has been in a recession or even <a href="http://money.cnn.com/2015/07/06/news/economy/greece-economy-warn-torn-country-depression/">depression</a> since 2008, losing one-quarter of its GDP. That has significantly reduced its income.</p>
<p>What is the cause and effect here? It’s not exactly clear. But it is very possible that austerity has made it harder for Greece to pay back its loans by stifling output. </p>
<p>Another way to examine Greece’s helpless situation is by looking at the relationship between the revenue generated through taxes and tariffs and the spending behind government and social programs. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=469&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=469&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=469&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=590&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=590&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=590&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The deficit has come down significantly, but Greece still overspends.</span>
<span class="attribution"><span class="source">IMF</span></span>
</figcaption>
</figure>
<p>Greece has been spending more than it earns. The austerity measures that took hold several years ago have helped bring the expenditures more in line with revenues, but the expenditures are still greater than earnings.</p>
<h2>History lessons and next steps</h2>
<p>Greece is the first developed country to <a href="http://www.telegraph.co.uk/finance/economics/11709473/Greece-defaults-on-the-International-Monetary-Fund-after-launching-11th-hour-attempt-to-agree-new-rescue-deal.html">miss</a> an IMF payment. But other less developed countries have both missed IMF payments and/or defaulted on other loans. In other words, it’s not a completely uncommon occurrence; Mexico, Thailand and Argentina have all defaulted on loan payments. </p>
<p>Mexico, for example, <a href="http://www.economist.com/node/3524948">suffered</a> from a significant crisis in 1994, when decreases in investor confidence caused capital to flow out of the country. </p>
<p>After signing the North American Free Trade Agreement (NAFTA) the year before, Mexico began to be seen by investors as a budding opportunity for new markets. In order to keep investor confidence high, the government of Mexico used its own US dollar reserves to purchase Mexican currency and debt. </p>
<p>This was a shell game of sorts – one in which Mexico used its own resources to prop up the idea that Mexico was strong. Unfortunately, Mexico ran out of reserves and eventually had to devalue its own currency. The figure at right shows the model of how this was done. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=511&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=511&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=511&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=642&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=642&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=642&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">This chart shows supply and demand of currency and exchange rates.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Consider that the exchange rate for Mexican pesos was at $0.80. Mexico wanted investors to think it was a strong country and a great place for investing. Any time the demand for the peso started to soften, the Mexican government used its own reserves in dollars to purchase pesos or government debt or both. </p>
<p>That is, anytime the market started to move along line A, the government responded by pumping its own funds into the system to move along line B. Eventually, the government ran out of money and wasn’t able to keep the exchange rate. When this occurred, the peso fell dramatically in value, investors left the country and Mexico wasn’t able to sell its debt. </p>
<p>The solution is to have a strong trading partner and a newly devalued currency that allows other countries to take advantage of a strong trade position. When the Mexican currency fell in value, the US was there as a strong partner. President Clinton had just signed NAFTA and wasn’t interested in seeing Mexico fail. </p>
<p>In 1995, Clinton signed a resolution to provide $20 billion in loans to Mexico. This didn’t “fix” Mexico – the country went through a horrendous recession. But it did provide a foundation upon which Mexico could rebuild. Other countries became more certain that the exchange rate of Mexico was realistic, and it allowed countries to clearly evaluate the risk and rewards associated with investing in Mexico. </p>
<h2>A friend in need…</h2>
<p>This is what Greece needs – a strong trading partner and its own currency to devalue. Greece needs the John Goodman character Frank to come along and give it another chance, another loan, hoping that Greece gets lucky. </p>
<p>The US is not in position to be that trading partner – there just isn’t a strong need for the products that Greece produces. Perhaps Germany can step back in or France or Spain. But Greece needs a friend. </p>
<p>And Greece needs its own currency to devalue. If Greece had been on its own currency, we would have seen a significant devaluation this past week. And this would have allowed investors and other interested parties to truly identify the risk and reward of getting back on the wagon with Greece. </p>
<p>This partner will be hard to find! Consider the <a href="http://www.transparency.org/research/cpi/overview">Corruption Perception Index</a> of Greece, Italy, France and Germany:</p>
<p>The Corruption Perception Index for Greece is very low, which means there’s a lot of corruption. In order for a trading partner such as a Germany or a France to want to do business with Greece, Greece will have to change its ways. </p>
<p>Graft, insider payments and tax evasion will have to be removed and replaced with a consistent system of fiscal restraint and effective tax collection. </p>
<p>In The Gambler, Bennett borrows more money from Mr Lee and Frank and, with a little insider help, bets the lot on a fixed basketball game. </p>
<p>Bennett pays Baraka back with some of those winnings and then bets the rest on a single roll of roulette – he bets black and wins. He escapes with his life because he receives more loans, makes a deal with a ball player and gets lucky. </p>
<p>I don’t see Greece getting away this cleanly – there is no roulette wheel to spin. In a movie, everything is controlled by the writer, the director, the actors and the guiding principal of pleasing audiences and making a little profit to boot. </p>
<p>A happy ending for Greece is unlikely at this point, even with a friend and a new currency. While the plot may mirror The Gambler, the ending is more likely to be in the style of Titanic.</p><img src="https://counter.theconversation.com/content/44375/count.gif" alt="The Conversation" width="1" height="1" />
On Sunday, the citizens of Greece voted No on the country’s referendum to accept a package of money in exchange for further austerity measures. Now what? Every armchair economist from Iowa to the Aegean…Thomas More Smith, Assistant Professor in the Practice of Finance, Emory UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443242015-07-06T14:26:51Z2015-07-06T14:26:51ZLessons from Greece as controversial finance minister exits stage left<p>Greece’s economy is in ruins. It is hard to imagine how things could have gone worse. Banks closed, no liquidity, very high unemployment, businesses closing down or fleeing the country, and the brain drain is accelerating.</p>
<p>And now the Greek people have voted No in a referendum that some cast as being about whether they would remain in the eurozone – though many were <a href="https://theconversation.com/greece-votes-no-now-syriza-must-clarify-what-that-really-means-44289">unclear</a> about what exactly the vote meant. What it certainly means is that the Greek people are deeply wounded by the prolonged recession of the last six years. </p>
<p>As Greek Prime Minister Alexis Tsipras heads back to the negotiating table in hopes of securing a new deal to save his country, he will go without his controversial finance minister, Yanis Varoufakis, who <a href="http://www.theguardian.com/world/2015/jul/06/greek-finance-minister-yanis-varoufakis-resigns-despite-referendum-no-vote">resigned</a> a day after the vote. According to Varoufakis, Tsipras asked him to resign in order to help with the negotiations.</p>
<p>One reason we’re where we are today, so close to a “Grexit,” is that journalists – Greek and foreign – failed to carefully scrutinize Varoufakis’s strategy to win better terms from Germany – one that didn’t pan out. Let’s hope they look much more closely at his replacement.</p>
<h2>Path of destruction</h2>
<p>Tsipras, Varoufakis and their left wing Syriza party were elected to office back in January because of how much the Greek economy had suffered. Between 2009 and 2014, a tremendous amount of value was <a href="http://qz.com/248821/greeces-collapse-is-officially-worse-than-the-us-great-depression/">destroyed</a>, both because of the failure of Greek governments to implement reforms and because of the austerity measures imposed by creditors. The pace of value destruction only accelerated in the first six months of 2015. </p>
<p>Consider this: just in the first quarter of 2015, the Hellenic Financial Stability Fund (the fund established with loans from eurozone governments and the European Financial Stability Facility to finance Greek bank recapitalization) <a href="http://www.hfsf.gr/files/HFSF_Interim_January_March_2015_en.pdf">lost €5 billion</a>. </p>
<p>This loss and the postponement of cash payments from the Greek government to its suppliers isn’t being accounted for in its budget. Doing so would turn the 4% primary budget surplus that was reported for the first quarter into a 13% deficit. The primary surplus is the sum of spending and income, excluding interest payments.</p>
<h2>From expert to pariah</h2>
<p>When Varoufakis emerged on the public scene, he was quickly <a href="http://business.financialpost.com/news/economy/greeces-superstar-finance-minister-yanis-varoufakis-tests-eus-ways-of-winning-friends-and-influencing-them">baptized</a> by the media as an expert and world-class economist. </p>
<p>That created a figure of authority, a person that many Greeks deeply believed. In the last couple months, however, he has been under attack, accused of destroying the country’s finances. </p>
<p>The same people who now criticize him never questioned the basic premise of Varoufakis’ negotiating strategy: that Europe would blink first because of the risk of contagion. His assumption was that the threat of a Grexit would have devastating consequences to the eurozone. </p>
<p>Back in February, I <a href="https://www.linkedin.com/pulse/greece-threat-eurozone-george-serafeim?trk=mp-reader-card">said</a> the opposite: do not count on this because we are not in 2012 anymore. The eurozone built a concrete fence around the Greek economy so that if it blows up, the consequences for other countries would be minimized – though it still would send Greece back to pre-euro economic development levels. </p>
<p>Whether this will now prove to be true is irrelevant. What matters is that both European politicians and the markets believe it. All Greek threats during negotiations were dismissed.</p>
<h2>Lack of scrutiny</h2>
<p>Unfortunately, before Varoufakis was given the license to implement his strategy, he was never hard-pressed to present evidence of his hypothesis. </p>
<p>What data did he have that suggested that European financial institutions were exposed to the risk of a Grexit? Would big foreign multinational companies be forced to fire a large number of people as a result of the Greek market collapsing? Did the prices of government bonds of other countries move in the same direction as the prices of Greek government bonds in 2014 – in other words, is there evidence of a close connection between the fate of the Greek economy and that of other countries?</p>
<p>The role of a finance minister is incredibly important in a country’s economy. </p>
<p>Given the importance of attracting investments, the finance minister needs to inspire confidence and build trust. The only way to do this is through consistency, specificity and clarity in decision-making and public statements. </p>
<p>A finance minister needs to have a clear plan and to be able to support his or her rationale with evidence. </p>
<p>I do hope that Greek – and other – journalists will scrutinize the country’s future finance ministers to present evidence that justify the policies they choose. They have a very important role to play, if Greece is ever to recover.</p><img src="https://counter.theconversation.com/content/44324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Serafeim is affiliated with Harvard Business School, KKS Advisors, the High Meadows Institute and the Global Initiative for Sustainability Ratings.</span></em></p>Greek Finance Minister Yanis Varoufakis, who led a failed strategy to change the terms of Greece’s bailout, resigned Monday.George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443172015-07-06T10:14:49Z2015-07-06T10:14:49ZVictory for politics of defiance in Greece means the real crisis starts now<p>Now that the Greek referendum has produced a <a href="http://news.sky.com/story/1513901/greece-referendum-no-vote-what-does-it-mean">decisive No vote</a>, never mind what happened before. The real crisis starts now. </p>
<p>It has to be recognised that the Greek people faced a difficult choice. The referendum itself was a political gambit by the Syriza government to seek to split the eurozone governments and obtain a better deal. The politics of defiance has won. It was a major gamble, so will it pay off? </p>
<p>There will be some EU leaders, particularly in France and Italy, who will urge a return to the negotiating table. But the odds which the Greek government now faces are stiff. One political commentator wryly told me in recent days that Syriza has achieved what few others managed: to unite the eurozone governments against it, even those most critical of austerity policies. In my view there is now an 80% probability of Grexit. </p>
<h2>The Greek reality</h2>
<p>The IMF’s debt sustainability report, which <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf">was published</a> on June 26 just days before the vote, shows how dire Greece’s fiscal predicament is. Just a year before, the fund projected the country’s debt/GDP ratio falling from 175% in 2013 to around 128% in 2020. But the poor growth performance and poorer primary fiscal balances have worsened the outlook such that the ratio is now expected to be over 150% by 2020. </p>
<p>Worse is still to come: the report does not yet reflect the negative impact of the current banking closure and capital controls, which will have severely affected economic activity, and numerous commentators have said that the IMF’s growth forecasts for the country are too optimistic.</p>
<p>Although one can partly blame Syriza’s intransigence for the latest economic setbacks, the result of the referendum should be a wake-up call to the eurozone economies that fiscal austerity alone cannot be a solution. Greece’s <a href="http://www.tradingeconomics.com/greece/gdp">GDP decline</a> of more than 27% between 2008 and the first quarter of 2015 is one of the worse peacetime economic declines in history. </p>
<h2>Entrenched warfare</h2>
<p>Following the No vote, the rhetoric on both sides will be turned up another notch, having already sharpened in recent weeks. Northern-European critics <a href="http://www.cesifo-group.de/cesifo/newsletter/0515/Original_Sinn_May_2015.html">point out</a> that none of the reforms to pensions or to the economy, such as privatisations, which were agreed in 2011 have been carried out. </p>
<p>There were <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf">supposed to be</a> €23bn (£16bn) of proceeds from privatisation over the 2014–22 period, and further ones which the Greek government promised but which have since been taken off the table. The IMF now notes that there have been privatisations of €3bn in the past five years and forecasts proceeds of only €500m a year over the next few. </p>
<p>In contrast, critics of the <a href="http://www.bbc.co.uk/news/business-15149626">troika</a>’s approach <a href="http://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06">argue that</a> Greece’s economy has lagged behind because of a basic lack of domestic demand, and that aiming to run a 3%-4% primary surplus in the national finances is incompatible with any sort of economic recovery. </p>
<p>This polarised debate disguises that the better path probably lies in the middle: Greece does need to improve the supply side of its economy by investing in new technologies and making its existing sectors more competitive. But in the meantime, demand needs to be sustained and you need more than three to four years to radically restructure an economy. In simple terms Greece needs another bailout (probably about €50bn), this time with a major debt restructuring (about €80bn, maybe more) to ensure that a new medium-term economic plan can be adopted which has a chance of working.</p>
<p>That’s what the bargaining should be about, and following the referendum the Tspiras government has a strong mandate. But this will require flexibility so far unseen among the eurozone governments – many have already said publicly that a No would lead to a Greek exit from the euro. Negotiating a new bailout will also take time. </p>
<h2>The liquidity threat</h2>
<p>But in the short run the main binding constraint is the banking shutdown. It is rumoured that one Greek bank is almost running out of cash, <a href="http://www.telegraph.co.uk/finance/economics/11715198/greece-crisis-live-no-yes-referendum-polls.html">and that</a> the whole banking sector has no more than €500m-€1bn left to dispense: about three days’ worth of cash. Without political cover from the eurozone governments, the European Central Bank (ECB) cannot reverse its move on June 28 to cap the Emergency Liquidity Assistance programme, which led to the closure of Greece’s banks the following day. </p>
<p>Having already received €89bn in assistance to keep functioning, the banks can’t resume business unless the cap is removed. Without additional ECB support, there would quickly be serious dislocation in the economy as businesses and government cannot pay salaries, and key imports like food and medicines cannot be guaranteed. Many businesses would cease to operate. So if the eurozone does not restart negotiations then Grexit could follow, de facto if not de jure, as the banks run out of cash. </p>
<p>If the eurozone shuts out Greece from ECB assistance, the Greek government would then be forced to issue promissory notes or IOUs: in essence the precursor of a new Greek currency, to which the Greek Central Bank and the Greek banks would need to be parties. Indeed, outgoing finance minister Yanis Varoufakis <a href="http://www.telegraph.co.uk/finance/economics/11719688/Defiant-Greeks-reject-EU-demands-as-Syriza-readies-IOU-currency.html">has already indicated</a> that this is a possibility. In theory this exit from the euro could be reversed if an agreement were reached with the eurozone.</p>
<p>But a dual currency limbo cannot last long. Very quickly it would make sense to convert all bank accounts, prices and contracts to the new currency. Because it would take time to issue new drachma notes, euro notes would continue to circulate alongside IOUs. But people would seek to hide them in the knowledge that the new drachma would quickly devalue, probably by about 50%. It is also likely that the euro would eventually stop being legal tender and tight capital controls would operate, with a forcible conversion of euro notes to new drachma notes. </p>
<p>For the creditors, Grexit means Greece could walk away from its debt, which is mostly held by governments rather than European banks. This will have a negative fiscal impact on large eurozone countries like Germany, France, Italy and Spain. But European banks have built up capital reserves in the last five years and should be able to withstand the shock of the sovereign bonds of large eurozone countries that they hold on their balance sheets plunging in value as a result. </p>
<p>For the eurozone, the key will be to prevent a contagion through increasing debt costs to other weaker members such as Spain, Portugal, Ireland and Italy. The ECB will need to use whatever it takes to defend these countries, including its <a href="http://lexicon.ft.com/Term?term=outright-monetary-transactions-OMT">Outright Monetary Transactions programme</a>, under which it can buy their sovereign bonds.</p>
<p>For Greece, debt relief would follow an exit from the eurozone. But there are risks, not least that it would have violated its adherence to EU treaties by exiting the euro. So an exit from the EU, though seemingly implausible, cannot be excluded. </p>
<p>And in spite of having a currency with a much lower value following a Grexit, there might be little benefit to net exports for Greece. This is because the Greek economy <a href="http://www.ft.com/cms/s/1bf65f00-1f29-11e5-ab0f-6bb9974f25d0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F1bf65f00-1f29-11e5-ab0f-6bb9974f25d0.html%2523axzz3f2HiHl5L%3Fsiteedition%3Duk&siteedition=uk&_i_referer=">is quite closed</a>, with net exports less responsive than might be expected to a devaluation. Greece would also need to maintain a fiscal surplus with no short-run external finance sources. So for Syriza this risks being a pyrrhic victory. For the eurozone and the EU, meanwhile, this is their biggest ever challenge.</p><img src="https://counter.theconversation.com/content/44317/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anton Muscatelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Greek rejection of the bailout means it’s time to brace ourselves: Grexit is now an 80% probability.Anton Muscatelli, Principal and Vice Chancellor, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.