July 3, 2015: the "Greek debt" situation

The “Greek debt” situation as of July 3, 2015:

Greece: Prime Minister Urges 'No' Vote In Referendum  -  Stratfor

July 3, 2015 | 14:46 GMT

Greece's prime minister has urged voters to reject what he called "blackmail" and vote "No" when they cast their ballots in a referendum on Greece's bailout on July 5, BBC reported July 3.  In a television address, Greek Prime Minister Alexis Tsipras said Greece's Eurozone membership is not at stake, though EU leaders have said a "No" vote could lead to Greece's exit from the monetary bloc.  Moreover, EU politicians have staunchly denied Greece's claims that a "No" vote on the referendum would strengthen Athens' position in bailout negotiations. Even if Greece and its creditors reach an agreement, the referendum battle has made Greece's Eurozone membership more precarious. 

July 3, 2015 – Marc Chandler writing for Seeking Alpha

Polls for the Greek referendum suggest a statistical tie. The polls also show the vast majority of Greeks want to remain within monetary union.  Syriza is campaigning hard to for a "no" vote to reject the official creditors demands.  Ironically, there have been several defections from its far-right junior coalition partner favoring the a "yes" vote.  Syriza officials have tried playing down the momentous nature of the referendum, suggesting that a deal will be worked out immediately following the referendum.   Varoufakis has claimed that an agreement has been reached on everything but debt relief, and that a no vote would secure this.  This does not ring true and strikes me as an effort to encourage a "no" vote, by suggesting that the implications will not be so severe.  As we have noted, the official creditors have offered debt relief in the past, predicated on Greece achieving certain austerity goals. A "no" vote will not move this higher on the agenda, though a "yes" vote which sees the current government collapse could see more details in an agreement with a new government.  While many observers are focused on the sovereign debt obligation to the ECB in late July, my concern is the current situation cannot persist that long.   Clearly on a "no" vote, at its Monday meeting the ECB cannot increase the ELA borrowings.  However, it is not clear that they can on a "yes" vote.  Greek banks were already teetering on insolvency and that ongoing deposit flight, albeit slower, and the further erosion of the economy, pushes them over the edge.  The rating agency Fitch has opined that the four largest Greek banks would have already failed if not for the ELA. The Emergency Liquidity Assistance is not to prop up insolvent banks, but to help those faced with a liquidity challenge.

PTOLEMY’S THOUGHTS ON THE GENERAL SITUATION:

1.     Adoption of the common currency is like sports:  It doesn’t make character; it reveals it.

2.     Speculation as to whether the creation of the Eurozone was wise or whether Greece should have been included in the first place is vain and irrelevant.  I think that the European elites (the wealthy and the technocrats) wanted it to enrich themselves and to increase their relative power.   Notwithstanding the gloss of certain historically minded commentators, there is no irresistible and inevitable Hegelian movement toward a unified Europe.  The creation of the Eurozone at this point appears as a power grab favoring the elites.  The Greek issues are only the latest skirmish in maintaining the privileges of the European elites – that’s what “austerity” is.  Its goal is to keep the lower classes in their place.  Syriza has that right to that extent.

3.     The Greeks had to be included in the Eurozone as customers and clients.  The Greeks had to accept because they needed the wealth transfers (i.e., EU funding for the Olympic Village, the sumptuous subway, the world class airport and the freeways that access the airport).  All too human, the Greeks were tired of being poor.  As of a year or so ago they boasted the highest per capita auto ownership in the world.   Sadly, will was lacking to change course on a bloated bureaucracy and a much too extravagant pension regime – dependency was endemic - or to launch industries where an Adam Smith advantage might be identified.

4.     Ptolemy has cribbed from Stratfor a brief history of how Greece got into this predicament as follows:

  “[Greece] is struggling under public debt levels of 177 percent of gross domestic product, while private domestic debt stands at about 122 percent. In 1980, those two figures were 22.6 percent and 37.4 percent respectively, and these differences are made even starker by the knowledge that the Greek economy has grown 20 percent in the intervening years. In fact, in 2008 it was 56 percent larger than in 1980, but has since shrunk back.

“Greek public debt has grown consistently since 1980. In the wake of the oil crises of the 1970s, which hurt all oil-importing countries, the Greek Socialist government turned to public debt markets as a solution to its woes. By the 1990s Greek public debt stood at 100 percent of GDP. It remained there until the turn of the century, when Greece took the decisive step of entering the eurozone. Private debt, meanwhile, was fairly stable: In 1980, it was 37.4 percent of GDP, and in 1999 the figure was still just 38.8 percent.

“Entry into the Eurozone in January 2001 changed Greece's position completely. The common currency caused Greek interest rates to fall from 10-18 percent in the 1990s to just 2-3 percent, as Greece benefitted from the market perception that being tied to the powerful German economy guaranteed Greek solvency.

“The global financial crisis brought Greece's flimsy house of cards crashing down. As in several economies in Europe, the slowdown led to a massive increase in public debt as the government stepped in to keep the economy alive through public spending. Government deficits rose to 10 percent in 2009 and then to 15 percent in 2010. Government debt likewise ballooned, with the burden increased by the fact that GDP was also shrinking swiftly. Even though the Greek case is an extreme example, the same story — private indebtedness soaring through the eurozone's first decade and ultimately being transferred into giant public debts — was a direct result of the creation of the monetary union. Similar examples can be found across the Continent, in places such as Spain, Portugal, Ireland, and Italy.”

5.     Even before the Eurozone, the Germans had to lend throughout the Eurozone without regard to whether the poorer nations could repay in order to maintain their exports and low unemployment.  The SPD has continued to be intellectually bankrupt.  The CDU’s only goal and function is to preserve the ongoing value of German pensions.  Germany operates under a tenuous alliance:  the corporations have a free hand to operate at home and abroad as they will and with a very low unit labor cost, provided they then pay generous portions of high profits into the welfare system.  The system cannot operate unless the poorer Eurozone countries are systematically exploited.

6.     Since 2002 the ascendancy of the Asian economies and “globalization” have intervened.  The stagnation and relative decrease of net worth of the European continent have been exposed.  The economic competitiveness of the poorer Eurozone nations has continued to decline.  Looking beyond past historical borrowing and repayment issues, the problem generally is the continually decreasing standard of living of large areas of Europe and the economic decline of France, Italy, Spain and Portugal.   Greece is only the most obvious symptom of this malaise.  Greece would be in decline had it never borrowed.

7.     The goals of “austerity” and re-tooling to meet the challenges of Asian and U.S. ascendancy are contradictory.  Carefully targeted austerity has aided the economy of the U.K.  This is not the venue to discuss what the lack of austerity has done to the U.S. economy.  But if a nation or region inflates, and unit labor costs increase, the privileges of the elites are put in motion and possibly jeopardized.  Europe’s class system has a big problem with that.

8.     Syriza understands that the present conflicts – when one gets past the old-fashioned notion that borrowed money ought to be repaid – are a continuation of nothing less than the class struggle that Marx first identified.  Wolfgang Schauble knows that, too, but he stays comfortably within his allegations of genetic Mediterranean profligacy.

9.      Whether Greece is ousted from the Eurozone or not, and no matter when, its economy will be suffering for years to come.  Greece was a poor country for most of its history, and it will be so again for the foreseeable future.