Sobering Messages From The US To Greece

After FinMin Varoufakis had his conversations with President Obama and Treasury Secretary Lew, the following two quotations caught my attention:

President Barack Obama: "When the new PM (Alexis Tsipras) came in, I called him and recognized you need to show your people that there's hope, that you can grow, but you have to show those who are extending credit, who are supporting your financial system that you're trying to help yourself; that requires making the tough decisions".

Treasury Secretary Jacob Lew: "I believe that the kind of detail that's needed requires going literally through every line in your budget. This isn't resolved by speeches, it isn't resolved by rhetoric. It's resolved by the hard technical work. It's something that the European and global economies don't need — to have another crisis".

When one translates this from diplomatic prose into day-to-day English, and can recognize some fairly blunt recommendations. No longer is there talk about “You cannot keep on squeezing countries that are in the midst of depression" (President Obama on February 1, 2015). It now sounds more like: "Stop talking! Start working! And come down to the real world!"


ADDENDUM
I just read that Alternative Social Insurance Minister Dimitris Stratoulis said: "We will NOT implement the reforms that Obama and Merkel want, but those the Greek people want".

Well, Mr. Stratoulis, what are the reforms that the Greek people want? Since the Greek people (albeit not the majority of them) voted SYRIZA into office, I can only guess that the Greek people want the reforms which SYRIZA outlined in its socalled 'Thessaloniki Program'. That rested on the following 4 pillars: (1) Confronting the humanitarian crisis; (2) Restarting the economy and promoting tax justice; (3) Regaining employment; and (4) Transforming the political system to deepen democracy. SYRIZA calculated the total additional cost of these 4 pillars at 11,4 BEUR. Others have come up with calculations up to twice that amount. These are not reforms. These are spending plans.

Perhaps you should rephrase your comment as say that "We will implement those reforms which are good for the Greek people". Default and/or Grexit are not good for the Greek people!

Does Greece Have A Huge Stock Of Financial Assets?

This Bruegel article by Zolt Darvas addresses the issue of the Greek government's financial assets which it claims are huge. A couple of interesting points are made in the article:

* at the end of September 2014, the government's financial assets were 87 BEUR.
* while that was almost 40 BEUR less than at the peak before the crisis hit, it is still significantly higher than the 30 BEUR at year-end 1997.
* as a percentage of GDP, the Greek government's financial assets rank 7th in all 28 EU countries.

I am not sure how to interpret this but it certainly is interesting information.

Target2 Rearing Its Head Again

Greece's Target2 liabilities began increasing, after relatively low previous levels, in November 2008. Thus, that's the point in time when private lenders were beginning to contain their Greek exposures.

In November 2011, Target2 liabilities peaked at 109 BEUR and they remained above 100 BEUR until Noveber 2012. Subsequently they declined, reflecting increasing confidence in Greece on the part of private investors. In June 2014, Target2 liabilities hit a miraculous low of 30 BEUR!

And now, less than 1 year later, Target2 liabilities are back to 91 BEUR.

What a difference a year makes!

No Love Lost Between WSJ and FinMin Varoufakis!

Simon Nixon @Simon_Nixon 

Varoufakis at Brookings: Greece is replete with malignancies" - but enough about that, let's talk about euro failings again.

Simon Nixon @Simon_Nixon 

Varoufakis talked for 25 minutes, not a single sentence on how he thinks Greece should address "malignancies".

Simon Nixon @Simon_Nixon 

Varoufakis has so far answered 2 questions in 20 minutes, windy recital of his greatest hits. Still no reform agenda.

Simon Nixon @Simon_Nixon 

Varoufakis: "we will compromise but we won't be compromised". Enough of the rhetoric! Tell us what reforms you will actually deliver...

Simon Nixon @Simon_Nixon 

Questioner tells Varoufakis that DC is probably most sympathetic audience he's ever likely to get > true, US now home of radical leftism!

Simon Nixon @Simon_Nixon 

Clear from questions that even "sympathetic" DC audience frustrated by varoufakis lack of specificity. Think he's lost this crowd.

Simon Nixon @Simon_Nixon 

After telling us he didn't have time in 1st hour to discuss specific policies, it's clear he doesn't have time in last 10 minutes either...

 

 

Simon Nixon @Simon_Nixon 

Varoufakis: "you asked about policies but I didn't have time to go into them" - after an hour of windy waffle!

 

Simon Nixon @Simon_Nixon 

At last, Varoufakis to offer concrete policies to end crisis (in a new book to be published in 2016) http://www.publicaffairsbooks.com/book/hardcover/and-the-weak-suffer-what-they-must/9781568585048 …

Conflicting Views On Greece

Below is a selection of recent articles representing different viewpoints, all of which I have found very interesting.

Germany and Greece locked in a mutual obsession - "Instead of advancing European unity, as the euro was supposed to do, people are thrown back on themselves".

Greece needs to start playing hardball with Germany - "These dirty tricks (on the part of the Eurogroup) confirm that Athens is right not to trust the good faith of eurozone authorities".

Greece may have blown best hope of debt deal - "Prime Minister Alexis Tsipras' leftist-led government has so thoroughly shattered creditors' trust that solutions which might have been on offer a few weeks ago now seem out of reach".

Why Europe needs to save Greece - "And yet, as bad as Greece’s economy and political culture may be, the consequences of the country’s exit from the euro are simply too dire to consider. In the end, such an outcome would be the result of a political decision, and the European values at stake in that decision trump any economic considerations".

Lack of trust in Eurozone may frustrate Greek deal - "Eurozone governments have become so suspicious of the Greek government that a grand bargain to solve the debt problem may be politically out of reach".

Greece versus Germany: Dangerous liaisons - "Mr Tsipras is playing a dangerous game. By feeding Greeks’ well-developed sense of victimhood (and the historical claims against Germany have some legitimacy), he is fanning flames that could soon burn out of control. Under Mr Tsipras Greece has been squandering opportunities to make a deal with the rest of the euro zone. If he does not yield soon, he may discover that his chances have run out".

Greece's shoot-the-messenger coalition - "If this kind of rhetoric (of Mr. Tispras) persists, Greece’s European partners may soon conclude there is little reason to keep supporting a country so determined to evade blame for its own mistakes".

Eliminate Primary Surplus Requirement?

Official figures were reported today: 2014 deficit was 3,5% of GDP and primary surplus was 0,1% of GDP. This would suggest that Greece's debt service was 3,1% of GDP.

3,1% of GDP is a VERY low figure for debt service. I understand it is lower than Italy's and Portugal's (allegedly even lower than Germany's) and about the same level as Spain's.

What matters more, though, is debt service as % of government revenues. I cannot find the nominal figures but I recall that Greece's debt service was 5,7 BEUR in 2014 (cash debt service; not accrued debt service!). Total government revenues were 88 BEUR in 2013 according to ELSTAT. I cannot find figures for 2014 but I presume they were about the same. This would mean that the Greek government had to allocate about 6% of its revenues to debt service. That could be one of the lower figures in the Eurozone.

Allocating 6% of government revenues to debt service is really not all that much of an austerity challenge. Perhaps with some good (as opposed to propagandist) negotiation, Greece might even cut that percentage in half.

But let's look at the extreme case as an alternative. Let's assume the EZ would say to Greece: "We will - for a period of, say, 5 years - assume your entire debt service. I. e. we will make you new loans at preferential conditions in the amount of principal/interest you have to make. Put differently, we leave you the entire primary surplus under the condition that we will not lend you an additional Eurocent. Should you not achieve a primary surplus, that will be your own problem".

That would be one way to put the 'Greek debt problem' to rest for, say, 5 years. Greece would literally be forced to live 'within its means' (excluding debt service), as FinMin Varoufakis has promised that Greece can. If it turns out that Greece can indeed live within its means for 5 years, an overall debt restructuring with meaningful debt relief could be made then as a 'reward'.

The above would deprive the Greek government of its victimhood argument and it would give the EZ the pleasure of not having to worry about Greece for 5 years. Nevertheless, the ECB would also have to play a role in this. The ECB, too, would have to find a solution where it says "This is how much we will do for your banking sector and not a Eurocent more".

To require a primary surplus of only 0% would be a giant leap for EZ negotiators but given all the present catastrophic alternatives, it might turn out to have been just a small step.

Dismantle the Task Force For Greece?

Reuters reports that officials have told them that the new leftist government refused to cooperate with the EU Task Force for Greece (TFGR). "The Greek government is keeping contact with the task force but we don't collaborate with them," Reuters cites an official.

I do hope that there is a misunderstanding. After a recent Tsipras-Juncker meeting, it was announced that the TFGR would be restructured with the aim of making it more of a Greek task force supported by the EU instead of a perceived 'EU occupation force'. Thus, the Greek government would make itself the 'owner' of the project to reform Greece with the support of the EU. That seemed very plausible to me and I had recommended that in my various articles about the TFGR.

The new tone sounds differently. Reuters talks about an 'Athens protest against the TFGR'; about 'Athens giving the TFGR the cold shoulder'; about 'dismantling the TFGR'. 

This is too early to pass judgment on what's going on here. I have always argued that the TFGR was the best thing that could be offered to Greece provided that Greece would take advantage of these resources. Should the new government reject these resources, I would be short of ideas as to how one can further trust the competence and judgment of the new government.