Greece cannot milk the cow five times a day
Jason Manolopoulos
September 15 2011 12:01AM
Austerity measures are only making the crisis worse. Whoever does the pushing, Athens will be out of the euro soon
When the IMF withdrew its loan support programme from Argentina a decade ago, its mission chief, Thomas Reichmann, left the President’s residence by helicopter. It was a vivid illustration of the gulf between the elites and the angry populace that picks up the tab for miscalculations in high places.
Riots and public anger over the crisis a toxic mix of groaning public debt, an overvalued currency, rising unemployment and inflation forced President Fernando de la Rúa to resign in December 2001. Two presidents quickly followed, there was more unrest, martial law, the country defaulted and the economy shrank by 11 per cent. The Argentine Government abandoned the peso’s link to the dollar and it plummeted by more than 60 per cent.
Does this fate await Greece? The only slim chance of the single currency surviving in its current form is for the kind of progress that would normally take 20 or 30 years to be telescoped into the next few months. From my vantage point in Athens, that looks a very tall order. So many Greeks are asking what will be the immediate cause of their country falling out of the euro.
The trigger could be political; governments in northern Europe face electoral defeat if they support further bailouts. Many ruling German politicians are firmly against paying for rescue packages and a shared approach to sovereign debt. Philipp Rösler, the German Economics Minister, raised the possibility this week of an “orderly default” for Greece. But the pressure is not just coming from Germany: Jan Kees de Jager, the Dutch Finance Minister, referred last week to the “ultimate sanction” of expelling Greece from the eurozone. But this week Angela Merkel warned of a “domino effect” should any of the eurozone’s 17 members leave.
The trigger could come from the International Monetary Fund, as it did in Argentina. The IMF may conclude that it is not getting enough reform for the billions it has given Greece so far. If the IMF stops the next €8 billion of rescue funds, the Greek State will run out of money by the end of October.
There has been some progress: minor cuts to the bloated public sector, an increase in the modest working hours of civil servants, the curbing of restrictive practices in the professions. But officials from the troika the IMF, European Commission and European Central Bank have expressed concern, if not dismay, at the slow pace of reform. The deficit is still way above target: likely to be around 9.5 per cent of GDP this year, against the projected 7.6 per cent.
But Athens could default voluntarily. Interest payments next year will be around €14 billion of a total revenue of €56 billion. The real economy is collapsing and the austerity measures are exacerbating the problem you cannot milk the cow five times a day. The economy is likely to shrink by 5 per cent this year and Evangelos Venizelos, the Finance Minister, has admitted that the recession will continue into 2012. Unemployment in June stood at 16 per cent, up from 11.6 per cent a year before; consumer spending is down and about 15 per cent of shops in the Athens region have closed since the crisis began. Despite this, the troika is insisting on a further €5.5 billion of austerity measures.
The panicky two-year property tax, announced last weekend by Mr Venizelos promises to be as unpopular as the poll tax was in the UK. It has some of the same features: a levy on all households, regardless of income, of about €4 per square metre. It is the second property tax this year, and will almost certainly bring a fall in house prices a particularly sensitive issue as property is an important part of people’s savings, representing around 85 per cent of private wealth. Many invested in property under the drachma as it was a hedge against inflation.
This tax will be deducted through electricity bills but the power sector trade union is refusing to co-operate. At the same time, tax collectors are again threatening industrial action. Tax evasion is still rife, collection uneven and the burden falls unfairly.
This month taxpayers will start to pay the extraordinary one-off (ie, permanent) “solidarity” tax of between 1 and 5 per cent on income over €12,000 a year. But Greece’s numerous tax evaders and avoiders will escape this mounting burden. Once the extra taxes begin to bite and the recent sunny holidays are a distant memory, vast street demonstrations will return with a vengeance. How many days of protest will be needed before the Government caves in?
There are already problems with the debt restructuring agreed in the summer. Banks and other private lenders are being asked to contribute to a “managed default” of Greek sovereign debt. This is similar to the 2001 “megaswap” (megacanje) in Argentina, in which bondholders agreed to exchange old bonds for new to make the sovereign debt less onerous. It was hoped that 90 per cent of bondholders of Greek debt would take a hit, but at present only about 70 per cent have signed up. The Finance Ministry in Athens has said that it will reject a low participation rate.
If this isn’t sorted out, it could lead to a disorderly forced default with all the risks of contagion, or an even bigger bailout, risking an even bigger political backlash in Germany and elsewhere.
In Argentina, the beginning of the end came with the first symptoms of a bank run in November 2001, followed by restrictions on cash withdrawals. There are disquieting signs of a Greek bank run: deposits are down 21 per cent from a peak of €238 billion in September 2009 to €188 billion in July. People have started to withdraw cash stealthily from ATMs to avoid bank staff who are being trained to stop deposit outflows.
On top of all this, Greek politicians, displaying a talent for self-destruction, do not seem to grasp the importance of the task. Little wonder there are dark mutterings that some in the elite are already planning for the new drachma. The stage has been set for Greece’s default and even for its departure from the euro. It certainly seems that the markets are being primed for it.
When the troika concludes that nothing more can be done, or is denied the authority to act by the northern eurozone states, we in Greece could be left in ruins, with a devalued drachma, or maybe a Latin euro and an unstable democracy. One last question remains: will there be a Chinook big enough to accommodate all the troika officials as they hastily leave Athens?
Jason Manolopoulos is author of Greece’s Odious Debt (Anthem Press)
Posts
