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Tuesday, November 15, 2011

Letter to Mr. Nick Malkoutzis, Deputy Editor of the Ekathimerini

I had to go over this interview a couple of times to find some quotes which are so unbelievable that I thought I had misheard the first time around. Let me comment respectfully.

“Governments (like the Greek government) are now being forced to stack austerity on top of recession because the European banks are undercapitalized” --- I agree that fear on the part of EU/ECB-elites that something bad could happen to their banks prompted them to take some of the most incompetent policy decisions that were ever taken during sovereign debt crises. In the process, they transformed something which should have been the most natural thing in the world (an orderly rescheduling of Greece’s debt) into the risk of a financial Armageddon. For the mess which has been created in the last 2 years, the EU/ECB-elites are entirely responsible for.

But what does that have to do with austerity measures in Greece? On the contrary, Greece should be happy that the European banks were/are so weak! That way, Greece could turn her own problem into a European problem (with the active help from incompetent EU/ECB-elites). Suppose European banks had been strong as rocks. Strong banks would have said to Greece: “Look, we have already made more than enough loan loss provisions against your debt with us so we are indifferent which way you want to play it. We suggest that you get your act together and that we agree on an orderly debt rescheduling within 3 months. If you prefer to default, go ahead”.

Austerity measures became necessary for Greece because the government couldn’t pay its bills any longer because it no longer could get financing for that. Only weak banks (and weak EU/ECB elites) throw good money after bad in the hope that the problem will go away. Strong banks would have told Greece that they won’t offer new financing any longer; regardless!

To this date, the Greek government has not assumed ownership of its problems. By that, I mean coming up with their own proposals of how to get out of their mess. Instead, Greece has so far assumed the role of the willing executor of the will of foreign powers. As Bill Rhodes would tell you, the most important thing in a sovereign debt crisis is that the government of the debtor country needs to take charge (or at least leave the impression that it is taking charge). Otherwise, it will never get the support of the people behind them. Here is an interview with Bill Rhodes. What could/should the Greek government have done in order to keep the appearance of being in the driver’s seat?

First, the government should have said “we are not going to reduce overall government expenditures at this time because that would only be oil in the fire of a shrinking economy. However, we will restructure government expenditures because right now they are very unevenly and unfairly distributed. Why will we not reduce overall government expenditures? Because we really don’t have a problem with overall expenditures: they were 49,5% of (a shrinking) GDP in 2010 compared with 53,0% in Austria and 56,2% in France. So we are far from being out of whack.

Secondly, we will reduce the budget deficit by increasing our revenues because it is our revenues which are out of whack: 39,1% of GDP in 2010 compared with 48,3% in Austria and 49,2% in France. That reduction will only come as little as possible from the “usual suspects”, that is salaried employees and pensioners because they have always been carrying their fair share of contribution to society anyway. We will get those revenues primarily from “the others”. That we can’t do on our own because we lack the administrative apparatus and controls, which is why we will ask for the help of an EU Task Force. That EU Task Force will have our unequivocal support (and they will get the applause of the Greeks who are already paying taxes).

Thirdly, we will get more tax revenues from the economy because we have worked out an economic development plan based on investment, primarily foreign investments, which will quickly stimulate economic activity. (This is where this plan would have to be described except that, to this date, I have not seen the shadow of such a plan being in the workings). Here is the link to a plan which I would propose, but there are probably many better ideas.

Fourthly, we will request our present creditors to form a Steering Committee with which we can negotiate the rescheduling of our debt and we ask EU/ECB-elites to work “behind the scenes” that those creditors do that and negotiate in good faith. The following will be the principals underlying our negotiations:

1)      We will honor our debt to the last Eurocent; no haircut!
2)      We will agree to any rescheduling which is structured in such a way that cash interest paid by us does not exceed 10% of our total government expenditures for the next 10 years. Interest going above that cap must be capitalized.
3)      We offer to prepay 50% of our debt with a new 30-year bond with interest payable on maturity.
4)      We offer to prepay the other 50% of our debt with new bonds with maturities between 10-20 years and interest above the above mentioned cap capitalized.
5)      We request Fresh Money for the financing of our budget deficit (and only for that purpose!) from the EU rescue packages (not from existing lenders).
6)      We request the existing lenders to our banking system to hold their trade credit lines open at the present level. Should we need more trade credit lines, we will request the support of the EU rescue package.

So much for “fourthly”.

Fifthly, we request that funding under the Structural Fund and EIB-facilities (without the co-financing requirement) are rapidly made available for infra-structure projects which we submit. (At this point, there would be a listing of such projects; a new Formula-1 race track would not be among them!).

Finally, we request the formation of an EU Advisory Task Force which can assist us in each and every way to get our country’s public administration and economy in shape.

“Germany has held down the Euro so that she could export more” --- Come again? The Euro has appreciated (not declined) against the USD roughly 40% since the UDSs peak in the mid-1990s. I grant you that the DM would have appreciated much more than the Euro has and German banks would have had less surplus to lend to Greece. But then the Greek consumption-driven and debt-financed standard of living since the Euro could also not have occurred.

Final comment

It gets a little tiresome for a non-Greek observer to see how Greeks use all their brainpower trying to solve a problem which is not theirs: the solution of the European debt crisis. Except for a Report of the Athens McKinsey office which recommended how 500.000 new jobs could be created over the next 10 years (and 50 billion EUR more in GDP), I have to date not seen a single initiative out of Greece how Greeks could handle their own problem. This link details my position.

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