How Greece Miscalculated

“The question then becomes why Greece fared so poorly and how that performance contributed to its recent economic disaster. The most straightforward interpretation of the Greek figures is that it simply failed to integrate effectively with the rest of the European economy. The rest of the periphery was tying itself into EU supply chains, experiencing capital deepening and ungrading technological capabilities, contributing to a rise in underlying growth potential. Greece wasn’t. The southward rush of capital that occurred in the 2000s may therefore have pushed Greece much, much farther beyond potential than was the case in Spain or Portugal. In other words, we see another example of the way in which the Greek government’s profligacy was more symptomatic of the economy’s troubles than a principal cause of them. 

There may be a bright side here for Greece. If a failure to integrate helps explain recent woes, then perhaps that also means that Greece has more capacity to grow rapidly in future as it goes through the integration others enjoyed previously. Assuming, that is, that Greeks themselves remain committed to a club that has yielded them paltry benefits relative to what might have been expected.” 

The original FT article can be found here.

Should Greece Default Now?

Here is an absolutely brilliant analysis by Wolfgang Münchau of the FT. Münchau's conclusion is:

"Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice".

I emphasized the last sentence in bold because that, to me, is the key. Four years after the first rescue loan for Greece, the EU is still acting on the premise that 'there is no alternative'; that 'if the Euro fails, the EU will fail'. A much more convincing scenario is that, if this premise is blind-foldedly pursued, the Euro may very well fail in the longer term and with it the EU.

If the EU were to take off its blind-folds and act as a fair arbiter, it would be the EU - and not a financial journalist - who would advise Greece that the country now has an alternative. That the Greek government should comprehensively inform the Greek population about these alternatives (continue on the present course or follow Münchau's suggestions) and that the Greek government should possibly put this to a national referendum.

The word 'default' has such a bad taste to it. In reality, default is a legal event which occurs when a borrower can no longer fulfill his financial obligations. Corporations can, in such a situation, declare bankruptcy because there are bankruptcy laws for corporations. Since there are no bankruptcy laws for countries, the legal event of default is the only honest alternative. Default is not a unilateral debt repudiation (that term justifiably has a bad taste to it). Instead, default simply says 'we would like to but, sorry, we can't pay our debts'. If creditors continue to make loans to an insolvent corporation, that is, in most countries, a criminal offense. Regrettably, there are no laws which make new loans to insolvent countries a criminal offense.

When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?

I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.

If default were to become a serious point of (confidential!) discussions, its timing would also be of significant importance. Greece is having a run on international capital markets these days and there is a good chance that Greece could raise another few billion Euros there before the end of the year. And Greece still has about 8 BEUR to draw under the rescue program. Possibly by the end of the year, when Greece would have exploited all possible sources of funding, the time might be ripe to put a lid on it and call it quits.

Malicious tongues might suggest that this could be used as a political ploy: set the timing in such a way that it yields maximum benefit at next year's election. Well, actually, why not if it is good for the country?

Not All Germans Are Blind-Folded About the Euro!

Hans-Olaf Henkel is Germany's most critical voice regarding the Euro as a "one-fits-all" currency. His judgement carries weight since, for many years, he has been the most prominent voice of German industry. Henkel had been a passionate supporter of the Euro in its early years. Since the crisis, he 'has seen the light' and became an opponent. Below is a very apt quote from this article in Die Welt.

"The Euro is far too strong for the economies of Southern Europe and France. Of course, Germany still benefits from the Euro so far. But what kind of a ludicrous system is that which allows Germany, as a result of a currency which is too cheap for the German economy, to export too easily when, at the same time, it requires German tax payers to carry the financial consequences of a currency which is too cheap for Germany but too expensive for the South?"

Five Explanations for Greece's Bond Yield

This article explains superbly the reasons for the success of the latest Greek bond issue. Five reasons are given and the conclusion is:

"None of these reasons, individually or collectively, are particularly good reasons to buy Greek bonds at 4.95%. It has always been very easy to lose a lot of money buying junk-rated sovereign debt at low single-digit yields; that hasn’t changed. But if you’re a bond investor, there’s a surprisingly large number of ways that you could end up making money after buying Greek debt at these yields. Which in turn explains why Greece found it so easy to sell €3 billion in bonds".

Greece Stands No Chance if it Stays on the Euro?

"Simply put, Greece doesn't stand a chance if it stays on the euro with no control over its monetary policy. Greece needs a cheaper currency to help compete with its neighbors so it can grow organically, much like it was able to do when it was on the drachma. It cannot do that if its monetary policy is being conducted in Frankfurt and its currency remains so expensive relative to the U.S. dollar and especially to the Turkish lira, its major economic rival in pretty much everything from tourism to olive production".

Full article is here.

"I would ask Mrs. Merkel to bring investments to Greece!"

SpiegelOnline wrote about Chancellor Merkel's upcoming visit to Athens. They asked some Greeks what they would wish of Merkel. One of the respondents, a 20-year old economics student by the name of Christos Nasmis, answered:

"I would ask Mrs. Merkel to bring investments to Greece!"

Whoever and wherever you are, Christos Nasmis --- POWER TO YOU!!!

Greece --- Exports Down, Imports Up?

I hope that there is something wrong in this Google-translation: the article would suggest a very disturbing trend in Greece's trade, as follows:

* February is the fifth consecutive month that exports recorded a decrease on y-t-y comparison. The last time there was an increase in exports was recorded last September.

* February is the first month since last September where imports increased (this despite a significant reduction of oil imports). Excluding oil, imports inreased by a phenomenal 16,4%! 

Exports down, imports up? That would indeed be the wrong trend!