As part of setting up a blog to write about Greece, I will publish all of my old articles. I was right. I was wrong, but in either case it is interesting to see how things have evolved.
July 22, 2015
Here is my current view on Greece. I have not written since the referendum and the settlement, as we needed to wait for the dust to settle.
Greece cannot survive with the settlement as currently constructed. I think everyone knows this (including the Germans), but I see no reason for the EU to entertain a debt reduction until Greece gets serious with its efforts to get its own house in order. If Greece proves it is serious and has a plan, debt relief will follow.
Greece has done the easy part … a week ago Greece passed a tax reform plan that increased the VAT and individual taxes. The parliament was scheduled to take up the issue of pensions today, but has postponed the vote. Instead the parliament will vote on legislation to bolster the banks, certain court reforms, opening stores on Sunday’s, allowing for supermarkets to have pharmacies and a few other minor tweaks to business rules.
I think the situation is too explosive to take on pensions this week. Tsipras was going to have further defections from the left and I would have expected further civil disobedience.
The vote to reform pensions (including the phase out of early retirements) will be voted on by August 20. Greece has some peculiar rules that govern this August timeframe. The parliament can enact laws based upon those in attendance and not the full parliament; allowing controversial measures to be passed during this time. It is imperative the pension measures pass or the settlement with the EU (and any hope for debt relief) will end.
The Troika is in Athens this week to meet officials to discuss a specific timetable for the implementation of reforms (the new VAT went into effect yesterday). The main focus is on the privatization of state-owned assets. As of today there is no plan and no timetable. The EU has insisted on E50 billion of asset sales, with E25 million of the proceeds slated for the recapitalization of the banks. There are several assets that have been identified for sale, including the trains, the second part of the port of Piraeus, the Astir Palace and the DEPSA pipeline. One obvious question is whether or not the projects will move forward with the current bidders or whether the process will be restarted. Ultimately, this will be determined depending on whether the Troika wants the best price or the fastest conclusion. The other issue is that there are not E50 billion of assets to sell, unless the government seizes the non-performing loans from the banks.
I cannot overemphasize the problems with the banks. A E25 million recapitalization of the banks is simply throwing “good money after bad”; E100 billion will not fix the banks. The banks are insolvent; there is no mathematical formula that fixes the banks because the faster you pour money into the banks, the faster they lose it. The banks believe they will simply be allowed to raise equity through a massive rights offering, but who is going to invest? One theory is that the bank ownership will the transferred to Taiped (the same group that is in charge of privatizations). Another theory is that the non-performing loans will be transferred from the banks to Taiped. In any event, the issue remains the non-performing loans. The banks are not willing to write-off loans and without the write-off of loans, no capital is coming into Greece. The only solution remains a government take over of the banks and wiping out all equity and bondholders. The government should then package and sell the bad loans and use the proceeds to pay down debt. If the government does this and allows more lenient rules for cross-border banking and new banking licenses for credible, capitalized investors, this economy can improve quite quickly.
I remain optimistic and realistic. We have been correct so far, but that may just be luck.
