Friday, September 16, 2011

Can Greece Still Avoid Default?

Once again, Greece spent days battling rumors that it is about to default. Realistically, whether and how Greece defaults comes down to a single question: what is Europe’s patience with Greece? Will the ‘troika’ hold back the disbursement of an installment if Greece misses its targets? Or will it look the other way, agree to an exemption and live to fight another day? 

The problem is this: Europe is in no better position to let Greece default now versus 18 months ago. Yet Greece is exhausting the troika’s patience. Mainly this is a dispute about why Greece is missing its targets. According to the Greek side, it is all about the recession, which is bigger than anticipated. Yet the recession does not explain the slow progress in passing reforms or the slow implementation of reforms passed. It does not explain the lack of political will to unsettle constituencies, nor does it explain the political math that politicians engage in when deciding which laws to pass and implement. 

So the Greek government and the troika are speaking past each other. While the Greek side is explaining why it is missing its targets, the troika is saying, “OK. But what about all those other things we’ve talked about?” If Greece made a sincere effort to reform and the weight of the recession somehow derailed the numbers, then it would be easy for the troika to look the other way. But with less progress on reforms, the failure to meet budget targets is harder to oversee, much less to forgive. 

The government also refuses to see how its own actions are making the recession worse. The most recent measure – effectively to levy a new property tax – was particularly depressing. It was depressing because when confronted with the inadequacy of its own measures, the Greek government chose a blatant “grab” measure over an effort to accelerate other changes. 

What changes? For one, it seems inconceivable that there is still so little progress in collecting tax arrears – a mere fraction of those would obviate the need for this latest measure. Second, the government is not moving boldly enough to shrink the public sector wage bill. If the government made progress on those two areas, it could easily lower taxes and boost household income to re-start private consumption. 

Greece is now entering a critical phase: it started with a very sincere effort to reform and an impressive fiscal consolidation in 2010. It then slowed down the reform agenda, provoking an intense reaction from those people who saw that it was shirking from its commitment to change the Greek economy and political system. Over time, the reform agenda has become more ambitious in theory but feebler in practice. 

Now, the government is faced with its own limitations and is looking to merely grab money. I have never believed that Greece’s task is impossible – yet I am increasingly convinced that the government is trying to do just enough to secure the next tranche. Cosmetic change trumps fundamental reform. In that context, the troika may still decide that it cannot afford Greece to fail. But that game will be different – to paraphrase the old Soviet joke, “Greece will pretend to reform and the troika will pretend that Greece is reforming.” The whole point of the program is to provide a framework for change - if it becomes merely a pretext for delaying the inevitable, then what good does it do for Greece?

14 comments:

  1. Greece cannot even 'pretend to reform' since the Greeks have no ethical or moral or intellectual standards. 90% of the Greek Supreme Courts' decisions are reversed - overturned - by the EU Supreme Court in Brussels. Inotherwords they are wrong 90% of the time. Any student that gets it wrong 90% of the time is just pretending. I'm afraid that the best - the only thing the Greeks can do is pretend to try to reform. They just don't have it in them to change. They like the way they are. They don't want to change because they feel they are perfect and everybody should be like them and not they like everyone else. They will pretend to try and reform themselves in order to continue to use and to get as much as they can from everybody else. The country is DYSFUNCTIONAL. No functional justice system, no functional tax system. They never did want to do things the right sane way and they made sure that it couldn't be done the correct way. Not until the EU steps in and demolishes and rebuilds correct the whole government infrastructure starting the Greek constitution, the courts, the tax system, the schools, changes for the better everything that is dumb and stupid in Greece will there be any kind of lasting 'reform' - improvement.

    ReplyDelete
    Replies
    1. Anonymous:
      If you wish to explain the dysfunctional elements within the country, pointing the finger to problematic Greek Genes will not get you there: A lesson on what ancient Greece has given to the world should convince you it’s not Greek genes that are to blame for the current mess. The answer clearly resides within the historical environment, which has simply not allowed for a more normal, democratic development, except for very recently (post 1974). Four centuries of slavery, followed by a mix of foreign special-interest interventions, military dictatorships, the destruction under Nazi occupation and the civil war, an undemocratic-minded ruling/influential elite that (with few exceptions) cares little for the common person, among other factors, have significantly obstructed the pace of progress (that includes the clientele type culture within many governments). Democracy, though developed by Greeks, is a very recent phenomenon in modern Greece (of any meaningful duration and degree) and that means lots of growing pains. The current mess is an unfortunate expression of these pains. Your message to the world is not helpful.

      Delete
  2. Almost every era and cultural stage has at some point sought in an profoundly ill-tempered frame of mind to free itself of the Greeks, because in comparison with the Greeks, all their own achievements, apparently fully original and admired in all sincerity, suddenly appeared to lose their colour and life and shrivelled to unsuccessful copies, in fact, to caricatures. And so a heartfelt inner anger constantly kept breaking out against that arrogant little nation which dared throughout time to define everything that was not produced in its own country as “barbaric” Who were these Greeks, people asked themselves, who had achieved only an ephemeral historical glitter, only ridiculously restricted institutions, only an ambiguous competence in morality, who could even be identified with hateful vices, yet who had nevertheless taken a pre-eminent place among nations for their value and special importance, something fitted for a genius among the masses? Unfortunately people were not lucky enough to find the cup of hemlock which can do away with such a being, for all the poisons they created—envy, slander, and inner anger—were insufficient to destroy that self-satisfied magnificence.

    Hence, confronted by the Greeks, people have been ashamed and afraid. It seems that an individual who values the truth above everything else might dare to propose as true the notion that the Greeks drive the chariot of our culture and every other one, but that almost always the wagon and the horses are inferior material and cannot match the glory of their drivers, who then consider it funny to whip such a team into the abyss, over which they themselves jump with a leap worthy of Achilles.

    Nietzsche - Birth of Tragedy.

    ReplyDelete
    Replies
    1. Please, just keep drinking the kool-aid. Don't put down the remote. Do you actually believe that the ridiculous ethnic slurs that you regurgitate, are true. Too bad that the rest of us can't borrow your crystal ball, Carnac. I get it, Greeks are bad people. How tidy and clever. I'm guessing that you are not Greek. I assume that you reside in one of the moral, God fearin, enlightened, humanitarian countries, that will lead us out of this "mess". I'm jealous.

      This is not an ethnic issue, it's a class war issue. Regardless of the returns, if you place enough risky bets, you will occasionally lose. No one was forced to lend Greece anything. Institutions thought that they saw an economic opportunity to exploit a weakness and they acted (why not, if you lose the bet, you can socialize the losses). Now that the (I agree) corrupt Greek government can't pay the debt, they want to collect it from the private citizens, just like in America. The government doesn't really backstop the private gambling debts, the citizens are forced to.

      Let the Euro banks fail. Let Greece default. If a government can't pay its bond holders, then it should default. That is how the system is supposed to work. The premium that is attached to the bond is a feflection of RISK. Do I need to define "RISK"? This is not the first or twenty-second time that a sovereign state has had to default. All of Europe and the US banking industry are trying to suspend gravity, so that a few wealthy males will not have to suffer the losses that THEY clearly OWN.

      Delete
  3. They just like the way they are?How can you accuse the entire nation of not adapting to reforms,when it's clearly the government that pathologically refuses to hunt down the real enemy,which is tax-evasion?

    The country is dysfunctional on a *political* level,it's ridiculous how people spew out nonsense,as though this crisis was the result of cultural mentalities.

    ReplyDelete
  4. Except that the Greeks that Anonymous 2 is talking about died 200 generations ago, and bear absolutely no resemblance to the Greeks of today.

    ReplyDelete
  5. The last thing the Greek economy needs now is more taxes. Greece is surrounded by low GDP/capita economies with more favorable tax regimes; increasing tax collection now is like pouring water on an already dying fire.

    The only thing Greece can do to restore growth fast is by exiting the Euro and making its labor more competitive vs. its neighbors. How much pain will the economy need to go through before this becomes the common realization? Apparently a lot more if people still believe that balancing the budgets by increased tax collection is the solution.

    http://bearparadigm.com

    ReplyDelete
  6. There's no sense in the average person suffering twice (once from the economy, once in his portfolio).

    There are many ways to actually profit from a potential default.

    http://seekingalpha.com/article/294309-the-less-obvious-ways-to-profit-from-a-greek-default

    ReplyDelete
  7. Some of these comments miss the point a bit.

    Greece's basic problem is a public sector that is far too large and far too protected (and, largely as a result, dysfunctional). Many Greeks aspire to getting a job in the public service (from which they can not be fired even if they do no work at all), which guarantees a good salary and an excellent pension. I am sure that part of the reason for this desire for security - a desire which seems so extreme as to verge on pathological - has to do with the country's history over the last 200 years. That history has been very unstable. The struggle to free Greece from the Turks lasted nearly 100 years. Then there were the Balkan Wars of the early 20th century. Then a decade of war in the 1940s (the German invasion, during which 10% of the population died, mainly of starvation, followed by 5 years of civil war). Add to that the fact that making a living in Greece has never been easy - most of the country is mountainous and not very fertile, and just getting enough to eat has always been a pressing convern - and you begin to understand the desire for security.

    That desire has now become counter-productive, and radical change is long-overdue. But we should try to understand where these people are coming from before we criticise too vocally.

    (I am not Greek, but I have lived in the country for several years.)

    ReplyDelete
  8. If the Euro is going to survive it has to be able to make tough decision and get rid of countries that are not suitable. Greece appears to be such a country.

    ReplyDelete
  9. Except that the Greeks that Anonymous 2 is talking about died 200 generations ago, and bear absolutely no resemblance to the Greeks of today.

    The very slander which Nietzsche refers to.

    ReplyDelete
  10. I cannot sit back and watch Greeks being slandered any longer.The only reason Greeks are against reform is because the poitical system has to be reformed first.We hard working, loyal, tax paying citizens cannot and will not take the rap for a handful of corrupt politicians who have bled this country dry.If at least ONE corrupt politician is put to trial and takes responsibility for his actions then I am sure all of Greece will applaude this and make unbelievable sacrifices.I am all for change and I think the public sector has to get a good kick up the bum, but not all of Greece works for the civil service. People here who work for the private sector work more hours than Europeans and yet get a fraction of the salary and benefits. We pay taxes yet see no schools being bulit, no hospitals giving us the proper medcal care, we don't even see roads being repaired. The political cancer has to go and it has to go fast or else we will all suffer.And btw thank you Selene, finally someone who doesn't see the Greek citizens as the root to all evil.

    ReplyDelete
  11. I quote your Heraclitus:

    "War is the father and king of all: some he has made gods, and some men; some slaves and some free."

    "Opposition brings concord. Out of discord comes the fairest harmony."

    ReplyDelete
  12. I think it is time for a default. All holders of greek debt had enough time to take necessary precaution. It will help to make sure that people think first before giving money which if applied earlier, whould have help the greek government (and others) to not have new cheap money and take necessary savings much earlier before the debit is so high. This "game" of asking more reforms, savings and cuts which then is not done has to end sometime. Also, since greeks do not back their government accepting these measures and strike or protest ongoingly, seeing an unorderly default is good for all other countries potentially in a similar situation soon to see what is the alternative (which I personally think is much worse than what is asked now) and that afterwards a country in such a situation puts it's act together instead of all the various interest groups and political parties trying to get a benefit out it if the country does not have an overall benefit. Let the politications not vote for it explain afterwards why they felt it was better.

    ReplyDelete

Note: Only a member of this blog may post a comment.