EU Can-Kicking Is Undermining Greece

Greek Parliament

Πηγή: CNBS
By: Nick Skrekas
Sept 18 2012

Over the last few weeks European leader have paused on their persistent criticism of Greece, now recognizing it belongs to the Euro family since there is a new, determined leadership in place.

They say they can do business with the new government but such words are cheap since every so often they push back the goal posts and the dates of coming through on their tangible promises. Inaction and longer delays will only mean higher costs in the end.

Greece remains in a five year recessionary free-fall made worse by the toxic austerity conditions imposed by it its troika of backstopping lenders of last resort — the European Commission, the European Central Bank and the International Monetary Fund. Previous administrative resistance to reforms and two electoral cycles this year have brought public finances to their knees, much like in 2010 when Athens turned to the international community for help after being frozen out of borrowing markets.

Recently Prime Minister Antonis Samaras kicked into a gear an impressive privatization policy for the sale of real estate assets and public enterprises. These include family silver like holdings in betting monopoly OPAP, undervalued electricity and water utilities, large tracts of prime land for development and even long term leases of uninhabited islands and islet.

However, EU political leaders themselves knew for the last year that they were torpedoing the sale and reform efforts by casting doubt on the debt-laden Mediterranean country’s place in the euro common currency. The looming fear of a return to a heavily devalued Drachma has eased recently, but troika can-kicking is again depressing interest and prices.

On top of that, EU lenders are militant in their case for more of the policies that have failed everywhere and piled on misery across the European periphery. The three-month old tripartite coalition government has been thrown in the deep-end, working overtime to hammer out an 11.5 billion euro package of more cuts and taxes on a weary public at its wits end.

It’s a Herculean task to appease backstopping lenders while ameliorating the impact on the worst-off because the social fabric is so stretched it could be torn. The measures are likely to be finalized by Sunday, but the troika and Europe are doing no more than shedding some crocodile tears for the poor and downtrodden.

The hypocrisy is palpable because Greece has been waiting for many months for the long promised 31.5 billion euro bailout tranche. And even though the government is getting its act together, it may take two more squandered months of delays before a single euro is disbursed. That doesn’t bode well for the real Greek economy nor public finances.

Because of the needless delays, the Mediterranean country can’t recapitalize its banks so more businesses will hit the wall for lack of liquidity, causing avoidable economic contraction. Choked-off credit is even impacting nascent exports. Moreover, the state can’t count on using about 7 billion euros of the tranche to stabilize its needs and also be able to pay the billions it owes to third-party supplies that are also shedding jobs.

The EU response continues to lack determination and speed, making it essentially harder for Greece to succeed because of the perpetuated debt-trap. An endless recessionary spiral means fewer taxes can be collected, delaying the achievement of a primary surplus and thereby worsening the nation’s debt sustainability profile.

In an effort to help the local economy stabilize earlier, the Greek PM Samaras and Finance Minister Stournaras have had unending but indeterminate dialogue on gaining a two-year extension on this second and final troika program until 2016. And again we have had conflicting assurances and statements as to whether this is possible.

The troika and Greece’s euro zone partners seem unwilling to publicly recognize the plainly obvious — that the Greek program is derailed and has been for two years. That isn’t only because of Greek inaction on structural reforms and privatizations, but also because the austerity mix was toxic in potency from the beginning. Note that Portugal which moved swiftly on supply side reforms is also off track because, as obvious to the non-ideological, the policy recipe was wrong to begin with.

What every sensible expert knows is that Greece cannot meet the 120 percent debt to GDP target by the end of 2014. In fact, it is likely to come in anywhere between 140 to 160 percent. A two year extension of the program will also cost an additional 20 billion to 40 billion euros, not just because of the extra 24 months of financing, but also because the depth of the recessionary spiral has persistently been underestimated.

There are three fairly simple solutions that are cash neutral for Europe and the troika which would also be valuable in assisting a Greek economic rebound. They can buy extra time by deferring 21 billion euros of IMF loans until 2016. The ECB and national central banks can forego 13 billion euros in profit on Greek government bonds without taking any loss. And the ESM/EFSF bailout mechanisms can recapitalize Greek banks directly, like the Spanish model, and this will cut Greek debt to GDP in one stroke by about 15 percent. These solutions don’t take genius and there are no good reasons they should be postponed for more months.

Whether it is negligent dithering and posturing, purposive delays for more leverage to impose more dead-end hash austerity on a lab rat, or supercharging internal deflation so foreign buyers can snap up cheaper assets, if one scratches the surface of modern European solidarity for Greece there are some worrying parallels to the medieval sin of usury.

Nick Skrekas is Author, Economic Analyst and International Lawyer.\