Greece Needs a Deep Debt Write-Off

Πηγή:  Research on Money and Finance
Written by Costas Lapavitsas and Daniel Munevar
May 20 2014

Greece needs debt relief to generate additional fiscal space for the government, allowing it to adopt fiscal policies that could quickly facilitate recovery and growth. This is imperative in a country with adult unemployment currently standing at the extraordinary level of 27%. The real question is not whether but how to effect debt relief for the country. In this light there
are two options.

First, there is the ‘soft’ option of consensually extending the maturity of debt and lowering the average interest rate, thus reducing the annual interest outlay. This form of debt relief is preferred by the EU and the current Greek government because it would leave the nominal value of the debt intact, thus avoiding major conflict with the official lenders by protecting their interests.

(Available in Greek translation here)

Greece Needs a Deep Debt Write-Off

Greece Back In The Market. A Financial Miracle or Voodoo Economic Therapy?

Πηγή: Huffington Post
By Ilias Sourdis
April 12 2014

Greeks due to the collapse of their economy are still under lethal Troika's (IMF-ECB-EU) financial austerity measures which accelerated poverty, bankruptcies, massive unemployment and suicides. Surprisingly, their government announced the resumption of selling bonds to pile-up more debts.

This announcement surprised even the most optimistic Greeks who don't feel any improvements in the economy but ironically, are also experiencing further deterioration of their daily lives. Paradoxically, this idea is supported by the same financial institutions who are relating the Greek economy to everything that represents evil, their refashioned economic strategy from fiscal managers to debt pushers raises speculations about their real motives.

Ever since Greece joined the Euro, surrendered its monetary sovereignty and after the collapse of its economy, all major economic decisions are prescribed by the Troika which in effect reduced the Greek Government's role similar to a Customers Service Department.

It's good to be optimistic and open-minded, listening to reasonable analysis about signs of improvements but, floating the buzzword of economic recovery while uncertainty is lingering over the suffering Greeks is an over-exaggerated and irresponsible assessment. Raising hopes of people who lost everything and telling them that they will be pulled off poverty because the economy is improving, it's a serious statement that demands accountability, making misleading false claims -a non-negotiable cause for punishment.

There is little doubt that the architects of this new path to probably another cliff, are the ECB, IMF and Germany, who in order to get rid of Greece's requirements for more EU sovereign guarantees, are purposely ignoring the fragile confidence on the Greek bonds as well as the incompetence of Greek fiscal regulators and pushing Greece to more expensive borrowings.

Obviously these bonds are designed by financial gurus who believe that an ailing and over-borrowed economy can recover with more borrowing without ever explaining how and when these debts will be paid back.

Through market news reports and rumors we learn that in order to provide safety net for the investors-speculators, these bonds are protected by UK laws and offer at high yields. Greeks, who are enduring the endless battle against austerity measures imposed on them due to monstrous national debt, are not celebrating over this imaginary economic success and are entitled to know if the government and its financial advisers have violated the law by surrendering sovereignty of these bonds to the British laws.

Treasury bonds comprise part of the country's sovereignty and surrendering jurisdiction to a foreign law might constitute treason.

Furthermore the supporters of this idea for the new borrowing spree, in order to generate interest on these bonds, created an artificial optimism which they use as a vote of confidence that the economy is recovering and even trumpeting to the world a budget surplus. They are completely ignoring the fact that the selling of government bonds resulted to accumulated massive national debt and is proven to be beyond doubt, a recipe for disaster.

As most of the businesses are bankrupt or at the brink of bankruptcy, unemployment keep soaring, job creations at a grinding halt, the majority of young Greeks have completely lost hope if they will ever find a job in their life. This situation has pushed suicides rate even higher and the people are wondering if their officials know how to define financial success.

While Greeks are blindly blaming the present financial mess to faulty national and international economic strategies practiced by successive incompetent governments, this government must stop self-declaring itself as the savior of the economy. Additionally must cease to broadcast the claim of economic success story with budget surplus and refrain from further borrowing on behalf of the Greek people without disclosing the full details of such borrowings.

Governing over so much poverty and misery, with 27% unemployment, deep cuts on wages and pensions, heavy taxation on poor and unemployed citizens, with no new business no new jobs, declaring unsubstantiated claims of economic success is an insult to the suffering people. Besides, that fiscal responsibility is their sworn duty and not an achievement for celebration.

Despite the several multi-billion economic packages prescribed and delivered to Greece by the Troika, not even one Euro was allocated for job creation or to support some of the struggling businesses to keep employing people and help the ailing economy. Even the real estate sector which prior to the crisis was providing employment to a large number of people today is at a full stop. Therefore, instead of citing unspecified economic success Greek government must answer to its people the question:

Which sector of the economy performs so well that it generated this surplus budget?

In plain words, they went to the dining table of the Greek family, took away a big portion of their food and demonstrated it to the world that Greeks have surplus food, hailing it as an economic miracle.

Undoubtedly this "economic miracle" is inaccurate, unrealistic and exaggerated. As Greece is holding local and Euro election this month, suspicions are high that the ruling parties are using this "success story" to support pro-EU candidates.

Despite the efforts of the government to raise the bar of their performance, they cannot hide the fact that not only they failed to improve the lives of the Greek people but they also failed miserably to identify revenue generating sources to allocate even a fraction of the borrowed billions in order to help the national economy and create job opportunities.

Unfortunately, for indebted economies like Greece's, the strategies and solutions which are in practice today resemble a depressing economic philosophy. Prescribing the accumulation of more debts to service old debts, is equivalent to seeing someone almost drowning in his flooded house and instead of emptying the water from it, we keep adding more.

This strategy of keeping us afloat and perpetually at risk of getting drowned in our already flooded houses is unrealistic, and could probably be applicable only in Voodoo Economic Therapy.

Crisis-Hit Greece Cuts Lifeline to Minority in Albania

81-year-old Vasili worries about making ends meet after loosing his pension

Πηγή: Balkan Insight

March 13 2013

Athens’ decision to scrap pensions for the Greek minority in Albania has left the community worried about its future wellbeing. 

For more than a decade, financial allowances paid by Greece to older members of the Greek minority in the Dropull region of southern Albania have provided an important economic boost.

Nearly 18,000 members of the Greek minority in Albania received a €330 per month pension from Athens, costing Greece €71.2 million a year.

In an area that has seen massive outward migration over the past two decades, pensions several times higher than those paid by the Albanian state helped rebuild houses and boost consumption in the local economy.

However, with its finances in tatters, Athens has been forced to cut the pensions as part of the IMF- and EU-imposed austerity drive.

The move has left many elderly people without an important economic prop.

According to last year’s census, the Greek minority accounts for 0.87 per cent of Albania’s population of 2.8 million, mainly concentrated in the region of Gjirokastra, Saranda and Himara.

While Greek minority politicians remain hopeful that the aid will be restored, albeit at a lower rate, locals are concerned about what the future holds.

Marianki, a 76-year-old grandmother from Dervican, in the upper Dropulli area, says she has not received her pension from last month and is already thinking of the difficult choices she will have to make.

“What should I do first, go to the doctor or spend money for food?” she asked. “It’s very difficult to live on the pension I get from the Albanian state, which is only €60.”

Vasili, an 81-year-old, says that he also has not received last month’s Greek state pension.

“The pensions have been a great help for us old folk living here, and for those who moved across the border with their children,” he said.

“I understand the economic crisis that Greece is suffering, but it is hard to make ends meet on the €100 I receive from the Albanian state,” Vasili added.

 

Jorgo Militi | Photo by : Telnis Skuqi

Jorgo Militi, a former journalist for the now defunct Greek minority newspaper, Lajko Vima, says the Greek pensions were vital for the local economy.

“A lot of houses in Dervican were revamped through the pensions, people spent more, and the whole region’s economy benefited from them,” he said.

Acknowledging that the cuts will be painful, Militi says most people understand the crisis that Greece is facing, and hold no resentment toward Athens.

“If Greece overcomes the crisis, I believe it will open its hand again,” he said. “No matter how we sometime see it from afar, Greece is a generous state and nation,” he added.

Dhimitri Maluqi, head of the commune of Upper Dropull, says that the local economy will feel the burden of the pension cuts.

“This is revenue that will now disappear from every Greek minority family and the impact will be undeniable,” he said.

Mayor Maluqi, who is also the head of the Greek minority organization Omonia for the Gjirokastra area, however, remains hopeful that something may change.

“We have had contacts with the Greek government and we believe that something will be done,” he said.

“However, Greece is suffering a severe economic crisis, so that even if the pensions are restored, they will surely be smaller,” he added.

Despite their positive impact on the local economy, the Greek state pensions have always been controversial in Albania.

For decades, Greece maintained a territorial claim to southern Albania, which it calls Northern Epirus.

As a result, Greek moves to foster economic and cultural connections to the region have always been eyed with suspicion in Albania.

Many Albanians see the pensions as forming part of a wider agenda, aimed at building up a large community in southern Albania that identifies primarily with Greece.

Albania's Minister of Labor, Spiro Ksera

They also believe that many people only declared themselves of Greek nationality in order to benefit from Athens’ generosity.

However, Spiro Ksera, Albania’s Minister of Labor and Equal Opportunities and an MP for the Dervican area, says the pensions should be viewed like the remittances that Albanian emigrants send home to their families.

“The MPs from the Epirus area in the Greek parliament are drafting a new law, and are looking at all the possibilities under the conditions that Greece is now in, to restore the subsidies,” he noted.

“Through this aid the Greek minority has invested more money [in Albania], which has ultimately helped their integration into the wider community,” he added.

Ksera said misconceptions in Albania about the pensions from Greece stemmed from a lack of knowledge about the community and its values.

“People should come here and see their hospitality, and realize the positive contribution that the Greek minority has made in strengthening the Albanian state,” he continued.

“Nationalist who cry foul for reasons of political expedience cannot break the bond created between the two communities.”

Militi, the journalist, agrees, arguing that the minority has served to act as an important bridge between Albania and Greece.

“Like every bridge, the stronger it is, the better the bond between the two nations,” he concluded.

Charles Dallara Discusses Greek Debt Reduction on CNBC

Mr. Dallara addressing the Hellenic Bank Association in Athens on November 15th.

Πηγή: IIF
Nov 27 2012

IIF Managing Director Charles Dallara told CNBC that it is critical for Greece to restart its engines of growth, without which no adjustments will help achieve debt sustainability.

On November 15th Mr. Dallara addressing the Hellenic Bank Association in Athens, called for a new Strategy to enable Greece and Europe to emerge from the Crisis.

He said that “less austerity and more growth” was urgently needed in both Greece and Europe, adding that “until the Greek economy returns to growth,” doubts will persist regarding Greece’s membership of the Euro and these will fuel contagion elsewhere in the Euro Area. “It is time to recognize that austerity alone condemns not just Greece but the whole of Europe to the probability of a painful and protracted era of little or no economic growth,” he said.


He praised the Greek people for their “resilience, fortitude and courage” and their “impressive willingness to bear short-term pain for the long-term gain that will come from the structural adjustment of the economy.”

He paid tribute to the governments of Greece that “have guided Greece through these last three tumultuous years”, and pointed out that “the current coalition has made a commendable start on the difficult measures needed to carry on the important work begun by its predecessors.”

On Greek banks, he reminded the audience that “in contrast to some other countries in the Eurozone, the banks here did not bring down the sovereign” and that in fact they “registered impressive levels of capital adequacy before the crisis, with core Tier 1 ratios of 10% or more, well above those for banks in the U.S. and the rest of Europe” and a return on equity before the crisis of “near 15%, compared with only about 10% on average in the U.S. and the rest of Europe.”

Mr. Dallara said that what is needed now for Greece “is to ease the pace of the remaining fiscal adjustment to something closer to that of Ireland, which has been moving steadily with annual reductions of 1.5% per annum” and pointed out that is “just one third of what is programmed in 2013 for Greece.”

On debt sustainability for Greece he laid out several steps that ought to be implemented, including “cutting interest rates on existing and prospective EU and IMF lending to funding costs,” which would give “meaningful debt service relief to Greece.” A more moderated adjustment path and accelerated drawing on unused EU investment structural funds would support investment spending and improve economic growth prospects.

On Europe, Mr. Dallara said that while “discipline and steady progress in reining in fiscal deficits are essential” they cannot alone do the job and that “growth must be restored sooner rather than later if Europe is to resume its rightful place as one of the world’s leading economic powers.” Mr. Dallara noted the important progress the Euro Area had made with regard to providing firmer fiscal foundations to Europe’s monetary union, but called for a clearer road map towards that goal.

A better balance within Europe between growth and austerity, he said, “could turn what threatens to become a vicious spiral of stagnant decline more generally into a virtuous circle of stronger growth and improved government revenues, feeding in turn into better job prospects and stronger profits for corporations and banks, the world over.”

Greece Needs Growth, Not Austerity

Illustration by Kyle Platts

Πηγή: Bloomberg
By Costas Meghir, Dimitri Vayanos and Nikos Vettas
Nov 21 2012

Greece’s economy and society are imploding.

Gross domestic product has declined more than 20 percent since 2008. The unemployment rate has tripled, and now stands at 25 percent, with joblessness among youth at twice that level. Crime is on the rise, as are racist incidents, and ideologies of the extreme right and left are gaining significant support.

Worse, current policies aren’t stemming the economic decline. The new three-party government elected in June has focused its energies on negotiating a new package of austerity measures to meet the conditions set by the so-called troika (the European Central Bank, the European Commission and the International Monetary Fund) for the disbursement of the next tranche of the bailout loan.

The reforms that are the only pathways to growth, such as building a well-functioning public administration and liberalizing markets, are resisted by Greek politicians and vested interests. They are also greatly underemphasized by the troika’s push for austerity.

Unless there is a change of course, Greece is headed for disaster: further declines in GDP, a possible chaotic default on its debt, extremist political parties in power, and isolation fromEurope. The European Union also stands to lose because a Greek meltdown would reverse the decades-long process of integration and undermine the credibility of the single currency. AndGreece’s creditors won’t get any of their money back.

Debt Reduction

To avoid such an outcome, which could occur soon, Greece’s European partners should devise a long-term strategy with two mutually reinforcing objectives: a drastic reduction of Greece’s debt and a thorough overhaul of the country’s dysfunctional economy.

Greece’s debt is projected to rise to 189 percent of GDP next year, from 129 percent in 2009. This is despite the restructuring of privately held debt and severe austerity measures that have almost wiped out the government’s primary deficit.

Most of the increase in the debt-to-GDP ratio can be attributed to the large decline in GDP. Further austerity measures, designed to generate the large primary surplus necessary to begin reducing the debt, will cause GDP to fall further, making the debt-to-GDP ratio even larger. This will make it impossible for Greece to ever repay its debt in full. Its European partners should recognize this state of affairs and write off a significant fraction of the debt. This would allow Greece to grow and repay the rest.

Writing off Greece’s debt can be done in a way that preserves, and even promotes, incentives for reform. A portion of the officially held debt -- 50 percent or more -- should be set aside to be written off gradually over the next five years or so, on the condition that Greece completes a set of institutional and market changes. The steps include making the public administration more efficient, speeding judicial proceedings, reducing corruption and liberalizing markets.

Achievement of these milestones could be monitored using existing indexes designed by institutions such as the World Bank and the IMF. Such a system would not only promote reform, but would put Greece’s debt, which cannot be repaid in full in any case, to good use.

More generally, the troika should emphasize structural changes rather than the rapid accumulation of a primary surplus. The initial emphasis on reducing the deficit was appropriate given the unsustainably large budget shortfall.

Retaining Talent

However, continued austerity will be counterproductive because it undermines reform. For example, deep salary cuts in the public administration are causing talented personnel to leave, thus impairing an already weak system and worsening the core problem of low public-sector productivity. The agencies in charge of essential tasks such as tackling tax evasion, supervising financial markets and prosecuting white-collar criminals, are often short of funds, equipment and the ability to attract talent. The troika should ensure that those funding needs are met, regardless of the effect on the deficit.

And it is hard to imagine how the Greek politicians and vested interests who have successfully resisted reform could continue to block institutional changes that are the condition for writing off a large part of the debt and averting disaster.

An emphasis on transformation and debt reduction would be welcomed by the Greek population, whose support is necessary for these efforts to succeed. Giving voters the chance to back debt relief in exchange for reforms will dim the appeal of the extremist parties.

The only way forward is to overhaul the Greek economy. For the population, that means recognizing that resisting structural reforms would be suicidal. For its part, the troika should acknowledge that further budget cuts would be catastrophic, and could only lead to a continuing deterioration of the economy and to the severing of Greece’s links with Europe.

(Costas Meghir is a professor of economics at Yale University; Dimitri Vayanos is a professor of finance at the London School of Economics; and Nikos Vettas is a professor of economics at the Athens University of Economics and Business. The opinions expressed are their own.)

Greece: When anger goes beyond despair

Municipal workers clashes with riot police during a demonstration against the presence of a German deputy labour minister Hans-Joachim Fuchtel, in Thessaloniki on November 15, 2012.

Πηγή: CNN
By Athanasia Chalari
Nov 19 2012

London (CNN) -- For the last three years Greek society has suffered a prolonged period of economic and political crisis, which has been magnified by unprecedented austerity measures.

The crisis has caused social destabilization, and dramatically affected the everyday lives of Greeks.

Such measures have never before been implemented in any European Union country, and their political and social consequences have not been effectively calculated or, in many respects, even anticipated.

Modern Greece suffered ongoing turbulence during the 20th century, from the Balkan wars and conflict with Turkey to the Nazi occupation, civil war and the military juntas.

These all caused significant delays in social, political and economic development, and did not allow Greek society to form and organize freely.

After the fall of the last military junta in 1974, democracy in Greece was rapidly restored but it was not done so systematically nor thoroughly. Inevitably, structural dysfunctions formed.

Today, Greeks are experiencing a different social reality, characterized by uncertainty, insecurity, distress, disappointment and the inability to map out any form of future for their lives.

Last year I conducted thirty five in-depth interviews with Greeks aged between 20 to 65, who are still living in the country.

Participants expressed negativity, pessimism and disorientation, particularly regarding the lack of any specific plan to improve their everyday lives.

"We see our dreams get destroyed, and our hopes for a better future disappear," said one 27-year old woman, an unemployed doctor.

Their comments reflect the overall reality in Greece: Unemployment rates have increased continuously, with the overall rate now at 24.4%. For those aged under 24, it's hit 55%.

Everyday life for many people has become more challenging, as crime increases, inflation remains high and redundancies become an everyday occurrence.

Even those who have an income cannot escape, as cuts continue and salaries and pensions are sliced by 40%. The monthly basic salary has now dropped from 739 euros in 2009 to 586 euros in 2012. In contrast, the price of essential goods has not dropped, and taxes have continued to rise.

Participants in the study felt cornered and cross as they explained that they were trapped by a government system that was only concerned about maintaining power without offering anything in return.

"We lived part of our lives in a way we didn't deserve, but the system allowed us to do it," a 37-year old electrician explained.

"They didn't stop us. They even encouraged us. So if the system works in a certain way you have no option but to follow."

Greeks are progressively losing their trust in a political system which consists mainly of the parties and politicians who have governed the country during the last 30 years.

The elections earlier this year resulted in a coalition government in which the two significantly weakened opposing parties -- who have governed Greece since 1974 -- joined forces in order to renegotiate financial aid.

But the most damaging aspect remains how Greeks collectively and repeatedly fail to identify any possibility of future improvement as their faith in current government drops.

Instead, they perceive the implementation of austerity measures as an ongoing punishment, even revenge, from the European Union which will have no positive result and have no end in sight.

"The situation is tragic, not because of the economy but because of the fact that there is no future," a 55-year old journalist said. "We have been convinced about that. There is no prospect. This is killing us."

Other people explained that the lack of an inspirational politician or party, coupled with the realization that the worst is yet to come, has made them alarmed how they can face each day.

For many the main priority is how to make a living, not lose their jobs or how to get a job. They are grateful if they are still employed, although some note that employment conditions are becoming more exploitative.

As a 46-year old teacher put it: "Professionally, I don't know if I will have a job tomorrow and, personally, I have no desire to do anything joyful anymore. There is so much insecurity about everything."

As Greek society experiences unparalleled social, political and economic crises, it is still uncertain what peoples' tolerance levels will be once further austerity measures -- and their consequences -- are implemented.

Participants expressed agony about the future of their country, although they have also realized their own part of responsibility in this crisis (even if it was passive). Many are mindful of passing on their harmful mindset to their children.

Until there are improvements to everyday lives, the structure of the state or political life, then Greeks will continue to feel angry, cross and cornered. This has led to the popularity of extremist groups such as the right-wing Golden Dawn.

This crisis has triggered an unpredictable domino of incalculable social consequences -- and when and how it will end is still unknown. It remains to be seen if other European societies will follow the Greek path or if social stability can be restored.

Dr Athanasia Chalari is a senior lecturer in sociology at the University of Worcester and a research associate at the Hellenic Observatory, London School of Economics.

Greece needs 2.5 billion extra spending cuts over two years: paper

Πηγή: Chicago Tribune
By Reuters
August 18 2012

BERLIN (Reuters) - Greece will likely need to cut an additional 2.5 billion euros in spending over the next two years to meet demands made by its international lenders in return for financial aid, Germany's Der Spiegel magazine reported on Saturday.

Citing an interim report by the troika of European Commission, European Central Bank and International Monetary Fund, Der Spiegel said Greece would likely need 14 billion euros over the next two years to get its deficit below 3 percent by the end of 2014, up from a previously expected 11.5 billion.

The country's budget deficit stood at 9.3 percent in 2011.

The increased financing gap was due to setbacks to privatization plans and as the economy, in its fifth year of recession, was faring worse than expected, the magazine said.

International creditors, who have bailed out Greece twice, have set those targets in return for financial aid. A positive verdict from the troika is key for lenders to decide whether they will keep funds flowing to the austerity-bound country.

The troika representatives wrote the report after their last trip to Athens and would determine the exact amount needed when they next visit Greece in early September, the magazine reported.

"The delegation also criticized in its interim report that Prime Minister Antonis Samaras' government had already been unable to explain how the savings of 11.5 billion euros should be reached," Der Spiegel reported. "Roughly a third is uncovered."

On Friday, a Greek government official said Greece had inched closer to securing the cuts, agreeing 10.8 billion of the 11.5 billion euros worth of cuts demanded.

The official did not elaborate on where the cuts would come from and said talks to finalize the package would continue on Monday.

Samaras will meet next week with the leaders of France and Germany - he will see Chancellor Angela Merkel in Berlin on Friday - as well as Jean Claude Juncker, head of the Eurogroup of finance ministers. He is expected to lobby for a two-year extension to reduce the country's budget deficit.

According to a Greek newspaper, finance ministry officials have calculated that the economy would recover faster and its debt be more sustainable if Greece were given two more years, but leaders in the lender states are unlikely to give in easily.

However, there is already a clause in Greece's 130-billion-euro ($160.7 billion) bailout deal that says the deficit adjustment period could be extended if its recession is deeper than expected.

Greece's economy contracted at an annual rate of 6.35 percent in the first half of this year, compared with an EU/IMF forecast for a 4.7 percent contraction for the full year. Samaras said last month that the economy would shrink by more than 7 percent in 2012.

Greece to Request Extension on Austerity Measures

Protesters shout slogans against reforms in Greece at an Aug. 1 protest.

Πηγή: Spiegel
August 15 2012

Greek Prime Minister Antonis Samaras is expected to have a difficult mission next week. He wants to persuade German Chancellor Angela Merkel to ease strict austerity conditions on his country, and he may also need to ask for billions in additional aid. Speculation is also growing about a possible bond-buying program for Spain.

Antonis Samaras is showing a bit of courage at the moment. Next week the Greek prime minister plans to travel to Berlin, where he wants to personally persuade Chancellor Angela Merkel to loosen tough conditions for aid, despite growing criticism of Athens in Germany. Samaras plans to seek a two-year extension to 2016 of an austerity plan that was previously agreed with the so-called troika of the European Commission, the International Monetary Fund and the European Central Bank, the Financial Times is reporting, citing a document it has obtained.

The British newspaper is reporting that Samaras wants to first present the plan next week to French President François Hollande and then travel to Berlin one day later for a meeting with Merkel. Iannis Mourmouras, Samaras' chief economic adviser, told the newspaper the extension was justified because of the country's deep recession, with the economy set to shrink this year by 7 percent.

Under current agreements with its international donors, the Greek government must cut its budget by €11.5 billion ($14.2 billion) by 2014. The new plan would see Greece reducing its government budget by 1.5 percent of annual GDP instead of the previously foreseen 2.5 percent. This would spread the implementation of all the cuts over a four-year period.

According to the document cited by the Financial Times, Greece will also need additional funding of €20 billion to support its running budgets. However, Athens' proposal does not foresee it requesting that money from its European partners. Instead it would be raised from an existing IMF loan or issues of treasury bills. According to the document, the country is hoping for a postponement of the start of repayments of its first EU-IMF loan from 2016 until 2020.

Successful Bond Float

On Tuesday, Greece succeeded in auctioning off bonds worth €4 billion, although they come due in just three months. The last-minute auction had been conducted to cover a bond redemption due on Aug. 20 and also happened with indirect aid from the ECB, which allowed the Greek central bank to issue additional emergency loans to the country's banks, which in turn bought up the Greek bonds with short maturities. The money had been needed to buy time until Greece obtains its next tranche of aid.

Samaras' plan to delay Greece's austerity plan is a daring one given a recent sharpening of criticism against Greece. In Germany, politicians within Merkel's conservative government coalition are already talking openly about the possibility of a Greek exit from the euro zone. They also categorically reject any loosening of austerity agreements with the country.

Meanwhile, the situation in Greece is deteriorating rapidly and Athens is once again at risk of an uncontrolled bankruptcy. The country had been scheduled to obtain aid tranches from the previously agreed bailout, but the EU-IMF-ECB troika monitoring progress in reforms suspended disbursements in June. As long as it remains unclear what policies the new Greek government will pursue, the donors have said they will hold back the payment of €31.5 billion that is due. The troika is now expected to decide in September whether it will pay out that tranche.

EU Ready for Spain Action if Needed

The crisis in Spain also remained in the headlines on Wednesday. Amid speculation that Madrid may soon require a full-fledged bailout, the EU's economics commissioner said the bloc would be ready to provide aid to the country if needed.

"The European Commission and the Euro Group stand ready to take action if needed," Olli Rehn told broadcaster CNBC. "Concerning Spain, we have already started the implementation of the banking sector program," he said, a reference to the €100 billion bank bailout currently being provided to the country. "We will in parallel be prepared for any further action if it is needed."

Responding to calls for the ECB to resume purchases of Spanish government bonds, Rehn answered: "To my mind, it is clear that both the EU -- and I dare say the ECB -- are ready to take action once certain conditions are met and if there is a request by some member state to go into a primary market purchase program."

The ECB recently said it is considering relaunching a bond-buying program, but only if countries first request aid from the euro bailout fund, which would require them to submit to strict supervision. Currently, the ECB can only purchase bonds on the secondary market, but the euro bailout fund is technically allowed to buy bonds directly on the primary market.

For Greece there is an alternative to austerity – as Argentina proved

German chancellor Angela Merkel is seen on the front page of the Greek magazine Crash dressed as prisoner with handcuffs. 

Πηγή: The Guardian

By Dean Baker
July 30 2012

The IMF and Germany don't want Greece to know the truth – that a euro exit might lead to a stronger economy, not ruin.

It has been a bit over four months since the latest bailout of Greece was negotiated. 

This bailout featured a write-down of most privately held debt in exchange for further austerity measures. It is already clear that Greece will not meet its deficit targets from this bailout, the main reason being that cuts to the budget have led to a much steeper recession than official forecasters had predicted. 

The Greek government now expects the economy to shrink 7% over the course of the year. That compares to the decline of 4.7% that the IMF projected for Greece back in April.

This was hardly the first time that the IMF and other official forecasters had badly underestimated the severity of Greece's downturn. In April 2011, the IMF had predicted that Greece's economy would grow 1.1% in 2012, after shrinking just 3% in 2011. 

In fact, Greece's economy shrank by almost 7% in 2011. And, in April 2010, the IMF was projecting that Greece's economy would be on a slow and steady growth path in 2012 after shrinking by just 1.1% the prior year.

Clearly things are not panning out as the IMF and the rest of the troika – the European Central Bank and the European Union – had planned. Budget cuts and tax increases in the middle of a downturn are having exactly the effect predicted by the old economics textbooks: they are reducing demand, slowing growth and raising unemployment. 

Furthermore, since lower output means less tax revenue and higher unemployment means more payouts for unemployment benefits and other transfers, the austerity imposed on Greece is doing little to even bring down its deficits.

This is why Greece will almost certainly miss its deficit targets for this year. In principle, this is supposed to trigger a cutoff of funds from the EU. 

That would lead to a default by Greece and force Greece to leave the euro and bring back the drachma.

That sounds very scary for Greece, a situation implying a fully fledged financial crisis. Banks will have no money to give their depositors, at least until the government can get the new currency printed up and distributed around the country. 

Even in the best of circumstances this would probably take more than a week and quite likely take much longer. 

Running a modern economy on ad hoc credit and barter for even a week would not be pretty.

If the transition to the new currency drags on for three or four weeks, the hit on the economy would be far worse.

And even after the transition, there will be endless disputes to sort out concerning the rate at which debts and other obligations are transferred from euros to drachmas.

As bad as this situation sounds for Greece, however, the troika, propelled by its leading actor Germany, fears this outcome even more. 

The issue for Germany is that Greece may provide a good example for other heavily indebted countries, most importantly Spain and Italy.

The period of transition will cause enormous economic disruption and pain, but once the new currency is in place, Greece's economy can return to a healthy growth path. In the case of Argentina, another country that defaulted and broke the supposedly unbreakable tie of its currency with the dollar, the transition period was less than six months. 

It defaulted in December 2001 and was on a robust growth path by the summer of 2002. It had regained all the ground lost due to the financial crisis by the summer of 2003 and continued to have solid growth until the worldwide economic crisis in 2008.

There are reasons why Greece's economy can be expected to perform either better or worse than Argentina's did a decade ago. 

We will only know for sure if it actually does go the default route, but even if it took a year to get back on a healthy growth path, Greece is still likely to look quite good to Spain and Italy. Both countries could easily face a decade of recession or stagnation on the troika's path.

As long as no country takes the euro exit route, politicians can get away with telling their constituents that there is no alternative. 

They must accept the austerity prescribed by the troika no matter how painful it is. Once Greece leaves the euro, this is no longer a plausible claim. And if the Greek economy turns around and grows at a healthy pace, then the troika's path is likely to prove unacceptable to the people of Spain and Italy.

This is the situation that Germany must fear. However many times Greece misses its targets, the troika is likely to come back and move the goalposts again. 

They don't want anyone in the eurozone to recognise that there is an alternative to permanent austerity and they will make whatever concessions are necessary to ensure that neither Greece nor anyone else ever discovers the truth.

Pain with No Gain: Euro Triadic Illusions on Debts and Deficits

Πηγή: SEJ
By JOHN WEEKS
July 25 2012

The rightwing Spanish government plans a new 65 billion euro austerity package, while the no less rightwing Greek coalition hopes to reduce public sending by 11.7 billion. By accident or mis-design both hope to reduce net public sector spending over two years (2012-2013) by five percent of this year’s GDP. After several years of economic decline, these cuts make no economic sense and are inhumanly callous. We must, however, grudgingly accept that whether necessary or not, the cuts and taxes will reduce the large fiscal deficits of those countries.

Actually, we should not. In Greece and Spain the successful (if that is the appropriate word) implementation of spending cuts and tax increases is likely to have no substantial deficit reduction effect. It might even drive public finances deeper into the red. To understand why this apparently perverse outcome is the likely one, I must start with the deficit measure used by the mad men and women in the Triad (European Commission, International Monetary Fund and European Central Bank, with the first a semi-surrogate for the government in Berlin).

The deficit that the Triadic Scrooges so fervently wish to cut is the overall budget balance, total revenue minus total expenditure, as a share of gross domestic product. I have, in other articles on this website, demonstrated that this is the wrong technical measure for the objective that the Triadic fiscal hawks seek, foolish as that objective is. They should use the primary balance, which is the overall balance minus interest payments.

By whatever measure they might use, the Triad operates under the firm conviction that if a government spends less, this will reduce the ratio of the fiscal balance to GDP. But, will it?

The level of GDP (national output) is determined in the short run by how much households, businesses, governments and foreigners buy (less what the locals buy from abroad). This generalization comes

from the commonsense inference that if products and services go unsold, they will not continue to be produced. When a government reduces its expenditures, it simultaneously reduces production, partly its own and partly that of the private sector. For example, a reduction in spending on health care might consist of firing nurses from the public sector, plus buying fewer medicines from the private.

If cuts and nothing else happened, the deficit measure used by the triad must fall (become less negative). For example, if public expenditure is 15 euros, public revenue is ten euros, and GDP one hundred euros, the fiscal deficit is five percent of GDP. If nothing else changes, a cut in spending of five euros eliminates the deficit (the public balance becomes [10 - 10]/95 = zero). True, national income has fallen by the amount of the spending cut, unemployment rises, but the deficit is gone. With the deficit gone, the famously capricious financial markets will calm, and the economy will recovery (check with the somewhat beleaguered UK Chancellor George Osborne on the details of this recovery process).

Not so fast. The reduction in public spending is a fall in household and business income. As a result of this fall, business and household tax revenue decline. These declines are well-recognized and documented. The Organization of Economic Cooperation and Development (OECD) estimates that the average elasticity across the euro countries of changes in corporate tax to changes in GDP is 1.38. Thus, a one percent rise in GDP increases corporate tax revenue by 1.38 percent, and the same statistic for household income tax is 1.48. When GDP falls the reverse occurs (see Escolano, page 19, full reference below). When a government cuts expenditure, by reducing national output it also reduces its revenue.

The story is still not complete. The fall in household income brought on by the budget cuts occurs because some people lose their jobs (quite a few in Spain and Greece, as matter of fact). In every euro country, people who lose their jobs receive support payments, with some countries more generous than others. The OECD estimates that the average across euro countries for the elasticity of all current expenditures (these exclude public investment) to GDP is minus .11. The negative sign means that a decline in GDP of one percent increases these expenditures by .11 percent.

The final element in the story is how much national income falls when public expenditure is cut. I simplistically presumed a one-to-one relationship. It is never this simple, because the income lost by laid-off public servants will lead to less spending by them in shops. The shops will reduce orders to wholesalers, wholesalers will cancel orders to factories, etc. etc. In periods of recession (like now, as you may have noticed) the change in national income to changes in public expenditure is substantially greater than one-to-one (see discussion at the Royal Economics Society website).

I can now summarize. A reduction in government expenditure results in a fall in national income and employment, which decreases tax revenue and increases social support payments:

(Click on table to enlarge)

For Spain the declines in GDP are less, minus 3.8 and minus four percent for 2012 and 2013. The smaller contraction for Spain, despite the same relative cut in public expenditure as in Greece, results the different structures of expenditures and taxes in the two countries.Using the statistics from the OECD, I first estimated the likely impact of the announced expenditure cuts in Greece and Spain on gross national product (the bottom of the Triadic deficit ratio). This is shown in Chart 1. For Greece, the 11.7 billion euro package, when split equally between 2012 and 2013, results in growth declines of 4.4 and 4.6 percent, respectively. It is probable that these numbers underestimate the declines. They do not include the almost certain possibility of falling private investment that would aggravate the public sector cuts. Underestimation is also implied because these declines are considerably less than the seven percent contraction in 2011. It is unlikely that new cuts added to the old would reduce the rate of national income decline (quite the contrary).

In 2011, the Greek and Spanish fiscal balances were minus 9.2 and minus 8.5 percent of GDP. We can predict with total confidence that cutting net spending in both countries by five percentage points of GDP, will not reduce the deficits by that same five percentage points; that is, to (-9.2 + 5.0) = – 4.2 (Greece), and (-8.5 + 5.0) = -3.5 (Spain).

My calculations, shown in Chart 2, indicate that the deficit reduction for Greece will be trivial, from minus 9.2 in 2011 to minus 8.8 in 2013. In the case of Spain, the calculated fiscal balance increases, from minus 8.5 in 2011 to minus 8.8 in 2013. These results have straight-forward explanations. The downward inflexibility Greek deficit results in great part from the enormous debt service payments of the government, almost seven percent of national income in 2011. Cuts in these would mean government default.

It is important to note that if the Triadic demand for deficit reduction referred to the appropriate measure, the primary deficit, the Greeks in 2011 would have met the infamous Maastricht Criterion of three percent of GDP (overall deficit of 9.2 minus the debt payments of 6.8, yields a primary deficit of 2.6).

In the case of Spain, the cuts make the deficit worse because of the sensitivity of social support payments to falls in output and employment. The Greek deficit problem would become “manageable” by the simple step of measuring it in a technically competent manner. The Spain problem would be solved by growth, which would rapidly reverse the vicious circle of cuts-contraction-deficit.

Chart 1: Actual and calculated GDP for Greece and Spain, 2008-2011 (index, 2008 = 100, constant prices)



Statistics from oecd.org

Chart 2: Actual and calculated Overall Fiscal Balance as percentage of GDP for Greece and Spain, 2008-2011



Statistics from oecd.org

A final comment on Spain is necessary. The recent and repeated anxiety that a seven percent borrowing rate represents a threshold or literal deadline above which Spanish debt is non-sustain has no rational basis. Today, with the public borrowing rate in the 7-7.5 percent range, interest payments of the Spanish government on its debt are barely 2.5 percent of GDP, the same as the German government whose borrowing rate is much lower. Even more important, in the mid-1990s every important indicator of Spanish debt sustainability was “worse” than now (see Chart 3). The net debt (public liabilities less liquid assets) was higher than the OECD forecast for the end of 2012. At eleven percent in the 1990s, the public sector borrowing rate was well above the allegedly unsustainable seven. And, debt service in the mid-1990s was over four percent of GDP, compared to less than three today.

The exit from Spain’s present debt and deficit problems will be achieved in the same way it was during the second half of the 1990s and into the 2000s, by output growth. The growth must come from public sector action, a fiscal stimulus.

Chart 3: Debt Sustainability in Spain, 1994-2012

(net public debt on left axis in percentage of GDP, interest payments/GDP and borrowing rate on right axis, percentages)



Note: Net Public Debt is gross minus liquid assets as share of GDP, IntPD/GDP is interest on the public debt as share of GDP. Values for 2012 are projections by OECD, except for the interest rate which is the public bond rate at end of July 2012.

Albert Einstein famously remarked that doing the same thing repeatedly and expecting a different outcome is a sign of madness. In the case of the Triad, Einstein’s comment must be considered a hypothesis to take seriously. I think it is a more credible hypothesis to explain the euro crisis than a frequently offered alternative, “kicking the can down the road” hypothesis. This explains the on-going crisis as a muddle resulting from lack of resolution and foresight by EU politicians.

A third hypothesis carries considerably more weight with me than transitory madness or dented cans, namely, the national self interest hypothesis. The common currency arrangement has proved a tremendous advantage for large German capital, as I have argued in other articles. To put it simply, strict inflation control, largely through real wage restraint, provided German industry with a tremendous competitive advantage over euro countries not pursing the same mercantilist trade strategy. The financial power generated by aggressive export-led growth has served the interests of those in Germany seeking economic pre-dominance in Europe. In my view the German government’s strategy is, stretch out this crisis as long as possible. The weak will leave and those that remain will themselves be too weak to challenge to German self-interest as it is perceived by the present government in Berlin. One might say that the re-unification of Germany has run its course.

Escolano, Julio (2010) A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates, Technical Notes and Manuals, Fiscal Affairs Department (Washington: IMF)

About John Weeks

John Weeks is an economist and Professor Emeritus at SOAS, University of London. John received his PhD in economics from the University of Michigan, Ann Arbor, in 1969.

Euro’s Medicine May Be Making Greece’s Symptoms Worse

Prime Minister Antonis Samaras, center, says lenders’ austerity targets were unrealistic.

Πηγή: New York Times
By RACHEL DONADIO and SUZANNE DALEY
July 24 2012

ATHENS — Only a month after Greece installed a new government, the country is facing renewed peril. Its official lenders are signaling a growing reluctance to keep paying the bills of the nearly bankrupt nation, even as the government is seeking more leniency on the terms of its multibillion-euro bailout.

Adding to the woes, there is little agreement within either side. The Greek government is itself a motley coalition of conservatives and Socialists, and the leaders of the European Commission, the International Monetary Fund and the European Central Bank, known as the troika, are increasingly divided among themselves. That is creating even more uncertainty as Greece and the rest of Europe head for yet another showdown, renewing doubts about how long Athens can remain within the euro zone.

Even as fears mount in Europe about the rapidly worsening situation in Spain, Greece’s problems are far from solved. The president of the European Commission, José Manuel Barroso, is expected to make his first visit to Athens since 2009 on Thursday to meet with Prime Minister Antonis Samaras as the troika begins yet another assessment of how well the country has complied with a spate of harsh austerity measures imposed as the price for loans. Greece’s lenders say they will not finance the country any further unless it meets its goals. But many experts say that the targets were never within reach and that pushing three increasingly weak Greek governments to comply has only profoundly damaged the economy.

“We knew at the fund from the very beginning that this program was impossible to be implemented because we didn’t have any — any — successful example,” said Panagiotis Roumeliotis, a vice chairman at Piraeus Bank and a former finance minister who until January was Greece’s representative to the International Monetary Fund. Because Greece is in the euro zone, he noted, the nation cannot devalue its currency to help improve its competitiveness as other countries subject to I.M.F. interventions almost always are encouraged to do.

At the same time, Mr. Roumeliotis and others note, the troika underestimated the negative effect its medicine would have on the Greek economy.

“The argument that is used usually by the troika in order to criticize Greece — and to ignore their mistakes — is that the deep recession is because of the nonimplementation of the structural reforms,” Mr. Roumeliotis said. While Athens has fallen woefully short on that front, he conceded, the bigger problem is that the severe cuts contributed to the downward spiral by decimating economic demand within Greece.

It remains to be seen whether the troika is prepared to force Greece to default. Much of the talk on both sides is aimed at extracting concessions in negotiations. But while Greece has been pushed to the edge before, it now appears to be running out of time because its European partners, however complicit in Greece’s current plight, appear to be running out of patience.

On Monday, the European Commission reaffirmed that the next tranche of aid to Greece would probably not be disbursed until September, putting the country at greater risk of running out of money to pay salaries and pensions.

At the end of last week, the European Central Bank cut off a crucial source of cash for Greek banks, saying that it would stop accepting Greek government bonds as collateral for low-cost loans until the troika completes its report, which is not expected until late August at the earliest. Greek banks must now borrow from the Greek Central Bank at a higher interest rate, from a fund with limited means; if it runs out, Greece would have to start printing drachmas.

Mr. Samaras’s government will try to persuade the lenders keeping it on life support that the targets they set are off base because Greece’s economy keeps contracting as a result of the tax increases and spending and wage cuts mandated by the troika. Greece’s economy shrank 3.5 percent in 2010 and 6.9 percent in 2011 and is expected to contract 7 percent this year, a decline reminiscent of the Great Depression of the 1930s. Unemployment is at 22.5 percent and expected to rise to 30 percent, while Greece’s main retailers’ association warned on Monday that sales were expected to drop 53 percent this year.

The original plan called for Greece to return to financing its debts on the open market in 2014, an idea that one European official, speaking on the condition of anonymity, now calls a “fiction.”

Complicating matters is the fact that the troika’s institutions have different mandates and constituencies. “The troika is not one homogeneous bloc,” said Guntram B. Wolff, the deputy director of Bruegel, a public policy research institute in Brussels. “They have different views.”

Some experts say that the I.M.F. has been quietly pushing to ease the austerity terms while European leaders have mostly been trying to satisfy Germany’s demands to keep Greece on a tight leash to persuade its own voters to support the bailouts.

In an interview, former Prime Minister George Papandreou, a Socialist who was in power when Greece asked for a bailout in 2010, said Athens was given nearly impossible targets at the outset because Germany wanted to send a message to other European countries of what could await them if they asked for the same, a reality now spreading across southern Europe.

“There was the moral hazard idea: ‘We can’t give Greece money too cheaply,’ ” Mr. Papandreou said. “There was a sense: ‘Punish them. We have to be careful that if we make it too easy for a bailout, others will want similar things.’ ”

While Greek officials say they were set up for failure, the mood in Germany has grown less sympathetic and calls for a Greek exit from the euro zone have escalated. Alexander Dobrindt, the general secretary of the Christian Social Union, the Bavarian sister party of Chancellor Angela Merkel’s Christian Democratic Union, said provocatively on Monday that the Greek government should now pay half its wages and pensions “in drachmas,” Greece’s former currency.

Meanwhile, Germany’s economy minister, Philipp Rösler, said on television last weekend that “for me, a Greek exit from the euro zone has long since ceased to be a frightening prospect.”

As Germans sharpen their statements, in Greece the cuts have come at a steep political cost: the more the economy contracts, the less consensus the government has to carry out the fundamental changes needed to help restart growth.

Despite the obstacles, Greece has made substantial strides. From 2009 to 2011, it slashed government spending before interest payments by 20 billion euros, or 18 percent — a feat even Greece’s critics concede would be challenging for any government. It is also expected to reduce the number of civil servants it had in 2009 — 874,000 — by more than 100,000 by the end of the year.

Today, the coalition is divided over how to identify an additional 11.5 billion euros in cuts from 2013 to 2014 without causing a total collapse in basic services. In the coming days, it is expected to announce the merging of state entities and cuts to social welfare payments. Athens has said it will not lay off state workers, but reduce them through attrition and early retirement. And it has set a ceiling of around 2,400 euros a month for pensions.

But some of the government’s gain in reducing its deficit has come from not paying its bills to Greek companies, making things worse for the economy when thousands of such companies are going out of business.

“A reform needs two things: time and trust,” said Anna Diamantopoulou, a minister in the governments of Mr. Papandreou and Lucas Papademos. “We needed time to persuade people, but we did not have it.”

“If you want to restructure a small company, that takes two years,” she added. “Can you restructure a country in two years?”

The eurozone endgame will begin in Greece

A discount euro shop in Athens. Greece is ‘in the midst of an unprecedented depression, made largely in Brussels'. 

Πηγή: The Guardian
By Costas Lapavitsas
July 16 2012

Greece won't be able to make its austerity policies stick and, as the global depression worsens, will have to leave the eurozone.

The June summit of the eurozone was initially trumpeted as a decisive step towards resolving the crisis. Italy and Spain won agreement to allow European institutions to recapitalise banks and purchase sovereign debt directly.

But once financial markets had a closer look, it became clear that little of substance had been achieved, and the borrowing costs of Italy and Spain again approached forbidding heights. Meanwhile the Spanish government has imposed fresh austerity, breaking its promises to the electorate. And unemployment in the eurozone continues to rise,exceeding 11% on average.

It is now a fair guess that the European Monetary Union (or the eurozone) has crossed the Rubicon and is heading towards breakup or collapse. In the periphery of Greece, Portugal, Ireland and Spain, there is despair at the ever-deepening recession. In France and Italy there is burgeoning opposition to long-term austerity. In Germany there is frustration at feckless southerners.

Disintegration is likely to take a turn for the worse in 2013, as a global slump is in the offing. The large economies of Europe, including the UK, are entering recession largely due to austerity policies. The US economy is veering towards negative territory, as Barack Obama's expansionary policies were never vigorous enough. China is facing a hard landing that will force a re-examination of its growth strategy. The international financial system, meanwhile, remains weak and unreformed.

After three years of festering, truly drastic action is now required. Peripheral countries must abandon austerity as part of a Europe-wide programme to raise productivity, financial institutions must be taken into public ownership, and debt written off. But it is unthinkable that Europe's current political leaders would embark on such changes. Hidebound by neoliberal economics, they will continue with austerity, privatisation and liberalisation. The financial markets have sensed it and are preparing for disaster.

The disaster is likely to start in Greece. The country is in the midst of an unprecedented depression, made largely in Brussels. In 2012 output is likely to contract by 7% to 9%, on top of about 14% in 2008-11. Not surprisingly, the bailout programme is again missing its targets as recession has reduced tax revenues.

Yet the EU is insisting that the country should stick with the failed programme by imposing huge cuts in public expenditure in 2012-14. The aim is to achieve a primary surplus at the earliest date. If the cuts do take place and a global slump does indeed materialise, the Greek economy will contract ruthlessly in 2013, even by 10%. It would be an economic and social catastrophe, especially as unemployment is already at 23%, including 52% for the youth.

The present Greek government, formed out of the establishment parties of New Democracy and Pasok with the addition of the ardent Europeanist Dimar, is incapable of dealing with the crisis. They won the June election by playing on middle-class fears about returning to the drachma and losing savings.

They also cynically promised to renegotiate bailout terms knowing full well that renegotiation was impossible as long as the framework of the bailout was accepted. In practice, they are about to impose the spending cuts demanded by the EU, while liberalising closed professions and selling public assets in the ludicrous hope of boosting growth.

The government is unlikely to survive for long. As depression worsens in the next six months to a year, Greece will again confront the impossibility of sticking with bailout policies.

This time the decision is likely to be final, with profound implications for the ruling elite that took the country into the EMU on a wing and a prayer. The elite is now watching in horror as its strategy is falling apart, and seems incapable of devising an alternative path.

But Greece is unlikely to attempt suicide: at some point it will default on its debts and exit the EMU. There will then be a genuinely new government, perhaps formed by the left, which will navigate the chaos and guide the rebuilding of economy and society. Once Greece has made its move, the unravelling of the EMU will probably start in full earnest.

Fiscal Austerity, Borrowing Costs and the Eurozone Economies

Πηγή: SEJ
By IYANATUL ISLAM and MARTINA HENGGE
July 12 2012

The current approach to fiscal austerity measures as a means of resolving the Eurozone sovereign debt crisis is widely regarded as ineffective. Economies, most notably in Southern Europe, undergoing the pain of fiscal austerity measures have not seen a significant reduction in long run borrowing costs (as measured by 10-year interest rates). Attaining the latter is important both for debt sustainability as well as kick-starting growth in the debt-distressed Eurozone economies. What went wrong?

There are many criticisms that one can level against the uncritical embrace of fiscal austerity measures as a response to sovereign debt crises. Here, we explore the widely held – but largely unsubstantiated – view among policy-makers that international capital markets populated by ‘bond vigilantes’ care largely or exclusively about national debts and deficits. Hence, cutting deficits in a resolute fashion in order to reduce public indebtedness is expected to be rewarded by lower borrowing costs because it will restore ‘market confidence’. Such reduced costs in turn are expected to spur investment, growth and creation of jobs. As a former President of the ECB put it, ‘At present, a major problem is the lack of confidence on the part of households, firms, savers and investors who feel that fiscal policies are not sound and sustainable’.[1] The British Prime Minister delineates the perceived linkages between interest rates, debts and deficits quite clearly: ‘If markets don’t believe you are serious about dealing with your debts, your interest rates rocket and your economy shrinks’.[2]

These pronouncements by influential policy-makers (both past and present) overlook the fact that multiple studies show that formal assessments of sovereign credit worthiness by credit rating agencies routinely include growth indicators in addition to measures of debts and deficits.[3] What is perhaps less well known is that growth has a more significant impact on sovereign default risks than debts and deficits.[4] The implication is that that cutting deficits to reduce public debt might be self-defeating given that such actions typically reduce growth raising doubts among ‘bond vigilantes’ about the sustainability of fiscal austerity measures.

We show in Figure 1, based on a sample of observations for Eurozone economies, that there is an expected negative correlation between annual growth rates and long run borrowing costs.Figure 2 exhibits the expected positive correlation between long run interest rates and annual changes in gross debt-to-GDP ratios. On the other hand, our attempt to plot an association between annual declines in structural deficits and long run interest rates yields the seemingly counter-intuitive pattern that fiscal tightening is not associated with lower interest rates – seeFigure 3.

We combine the information in the aforementioned figures into a simple regression estimate. We find that a one percentage point increase in the GDP growth rate is associated with a statistically significant decrease in borrowing costs of 0.75 percentage points. A one percentage point increase in the annual debt-to-GDP ratio, on the other hand, has a comparatively smaller impact on long run interest rates (of the order of 0.26 percentage points). In addition, we could not ascertain any statistically significant impact of changes in fiscal deficits on long run interest rates. It thus follows that the current pursuit of fiscal austerity measures in the case of the Eurozone economies is unlikely to accomplish its key objective of reducing borrowing costs on a sustainable basis. It also supports the contention of those who advocate the need to focus on growth in dealing with the debt-distressed economies of the Eurozone.

Figure 1

Eurozone – GDP growth rates are negatively correlated with 10 year interest rates, 2010-2011



Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).



Figure 2

Eurozone – higher increases in the debt-to-GDP ratio are associated with higher interest rates, 2010-2011

Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).

Figure 3

Eurozone – fiscal tightening is not associated with lower long run interest rates, 2010-2011

Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).



[1] See European Central Bank, Interview with Jean-Claude Tritchet, President of the ECB, and Liberation, July 8, 2010


[2] David Cameron, ‘A Speech on the Economy,’ Thursday, May 17, 2012 available at http://www.number10.gov.uk/news/pm-economy-speech/


[3] See, for example, Alfonso, A., Gomes, P. and Rother, P. (2011) ‘Short and Long-run Determinants of Sovereign Debt Credit Ratings’, International Journal of Finance and Economics, 16(1), 1-15. See also European Parliament (2011) Rating agencies – Role and influence of their sovereign credit risk assessment in the euro area, Monetary Dialogue December 2011.


[4] Cottarelli, C. and Jaramillo, L. (2012) ‘Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies’ IMF Working Paper 12/137.

About Iyanatul Islam and Martina Hengge

Iyanatul (‘Yan’) Islam, a Cambridge- educated economist, is currently Chief, Country Employment Policy Unit, Employment Policy Department, ILO Geneva. Martina Hengge, a graduate of the University of St Andrews, is currently working on macroeconomic and labour market policies for the Country Employment Policy Unit at the International Labour Office (Geneva).

Spanish police clash with protesting miners

Miners sit on a street to protest against government austerity measures in Madrid July 11, 2012. Joined by supporters and trade unionists in the capital, the miners rallied noisily at the climax of a 44-day protest against a 60 percent cut in coal subsidies which they say will force mines to close and put many out of work.

Πηγή: Reuters
By Clare Kane and Emma Pinedo
July 11 2012

Police fired rubber bullets at protesting miners on Wednesday, injuring several people, during a demonstration against slashes in coal subsidies aimed at trimming the budget deficit of the euro zone's fourth largest economy.

Spain is cutting costs and raising taxes in an effort to hit strict European budget targets. Prime Minister Mariano Rajoy on Wednesday outlined a package of measures aimed at saving a further 65 billion euros ($79.66 billion).

The miners, joined by public sector workers and unions, rallied noisily in central Madrid at the climax of a 44-day protest against a 60 percent cut in coal subsidies, which they say will force mines to close and put many out of work.

"We're only asking that they cut 10 percent instead of 60," said Carlos Marcos, 41, who has worked in the mines for more than half his life. "If they don't pay attention to us, we'll be back - with dynamite."

Tens of thousands of protesters, chanting and throwing firecrackers, marched through the capital to the Industry Ministry, where some threw stones, fruit, bottles and firecrackers at waiting riot police.

Police charged at protesters and fired unleashed several rounds of rubber bullets after demonstrators knocked down fences to contain the protest.

Some of the miners on the "black march" had walked 400 km (250 miles) from the north of Spain where mining has been a part of life since the 18th century. Many waved wooden walking sticks.

"We have to take to the streets to fight because the time is coming when we won't have enough to eat," said 38-year-old miner Jose Ramon Pelaz.

Miners from all over Spain traveled in 600 buses to the capital on Tuesday.

They gathered in Madrid's Puerta del Sol, the center point of Spain and switched on the lights on their helmets in the early hours of Wednesday, and were met by thousands of Spaniards who turned out in sympathy.

The protesters marched down the city's main business strip, Paseo de la Castellana, singing rowdy songs and waving banners with slogans like, "Rajoy, your future is darker than our coal."

Official figures on the number of arrests were not available, but a Reuters witness saw several people detained at the protest.

Greece drops demand to ease bailout terms

Given that elections are past with the phrase “renegotiation of the memorandum” chanted by all major political parties, now “Mr. Euro” seems to back off stating that “The programme is off-track and we can’t ask for anything from our creditors before we get it back on course”.

Πηγή: FT
By Kerin Hope
July 5 2012

Greece’s new government has dropped a plan to seek softer terms for its second bailout following warnings that it would be rejected by international lenders.

Yannis Stournaras, finance minister, said the governing coalition would have to accelerate reforms before asking for modifications in a €174bn programme agreed in February with the European Union and the International Monetary Fund.

“The programme is off-track and we can’t ask for anything from our creditors before we get it back on course,” Mr Stournaras told the Financial Times.

“There is light at the end of the tunnel but it is a long tunnel,” he added.

Greece’s change of tack came as EU and IMF officials visiting Athens this week echoed a statement by Christine Lagarde, the IMF managing director, in a television interview that she was “not in negotiations or re-negotiations mood” on the Greek bailout.

The three coalition partners – the conservatives and two left-of-centre parties – all pledged during recent election campaigns that Greece would seek a one- or two-year extension of the programme to ease the impact of almost five years of recession, with unemployment now above 21 per cent.

Yet Antonis Samaras, the centre-right prime minister, avoided any mention of a timetable change during his first meeting yesterday [Thur] since taking office with officials from the so-called troika – the EU, IMF and European Central Bank – according to people with knowledge of the discussions.

“The prime minister stressed his commitment to accelerating structural reforms, especially privatisation, in order to turn the economy around and start creating jobs,” one such person said.

“It went well, there was a good atmosphere,” another aide said. An IMF official said: “We don’t have any comment on the talks at this point.”

Greek officials had been apprehensive about the meeting given previous stormy sessions between MrSamaras and the troika over the conservative leader’s opposition to the first Greek bailout in 2010 and his initial reluctance earlier this year to provide a letter backing the second programme.

The troika made clear that even though economic arguments could perhaps be made for extending the programme, Greece would then need extra bailout funding, which eurozone member states could refuse to provide given the country’s lack of progress to date.

Greece has missed deadlines for key structural reforms – including an overhaul of the tax administration aimed at reducing high annual levels of tax evasion, estimated at about 5 per cent of national output – because of two general elections in the past two months. This year’s budget is already off-track despite improvements in controlling spending, as revenues shrank amid a collection slowdown during the election campaign and a deeper-than-forecast recession.

“The improvements are welcome but the overall picture is misleading,” said a finance ministry official, pointing out high levels of arrears owed to suppliers and a 25 per cent cut in the public investment budget in the first quarter.

Following this week’s fact-finding mission by the EU and IMF, Greece will hold detailed negotiations at the end of this month to update the bailout programme. Athens will come under pressure to reach a deal by early August or risk further delays in disbursement of a €4.2bn loan tranche due last month, which was held back until a viable government was formed.