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.
June 14, 2015
Friends,
The Greek roller coaster continues. Because it is a roller coaster, it is also a circle and therefore it has no end. Although the coaster passes through the “station,” riders are not allowed to get off. It is sort of like the Eagles song, “Hotel California” … you can check-in anytime you want, but you can never leave.
Several months ago it appeared that Greece was heading for a default, that was followed by what appeared to be serious negotiations, then a settlement appeared imminent and then inexplicably, the Greeks were granted an extension (yes, I know that technically the Greeks were entitled to extend), the Greeks became emboldened and now we are headed for a default on June 30.
It is easy to blame the Greeks for this mess, but they have been aided quite effectively by the incompetence of the IMF and the Germans. The fact that the Europeans cannot agree among themselves what they want from Greece makes this akin to dividing up Europe after WWII among the Allies and the Russians. I think that battle is still ongoing.
Assuming that Greece defaults, nothing happens. As long as Greek pensioners and public employees are paid, nothing changes. Current estimates are that Greece has nine months of cushion to continue paying pensions and wages.
The problem for Greece is that while they can continue on without a serious risk of public unrest, their “do nothing” strategy is beginning to take its toll on the private sector. The government is not paying any bills … it is not paying for goods and services and this is increasing pressure on businesses throughout Greece. Unemployment, which had finally gone below 25% has crept back to 26.6%. The banks, which are all bankrupt and unable to provide capital, would rather have idle plants and businesses rather than settle for less than what they are owed. Companies are not paying the banks, even if they have the money; tax collection is ineffective.
Of course everyone outside of Greece blames Tsipras and Varoufakis for the recent problems at the negotiating table, and while I am no fan of Varoufakis, Tsipras’s strategy has been effective (intended or not). He has managed to avoid any settlement and at the same time remain popular among the Greeks, including a decent portion of the middle and upper middle class. Part of the reason for this, is that the competing parties of New Democracy and Pasok are devoid of any leadership. Tsipras is able to control the more conservative parties, who will agree to any settlement, and can abandon the far left wing of his own coalition, when it serves him. If elections were held tomorrow, Tsipras would win again.
If I were a betting man, I would have “bet the ranch” that Tsipras would have taken a settlement ten days ago and immediately declared victory and called for elections. He would have been easily reelected with a slightly different coalition, allowing him four more years as Prime Minister.
Today, I am scratching my head. It would not surprise me in the least if Greece defaults for the reasons mentioned above. In fact, I see little if any benefit for Greece to settle. If a Greek default causes economic instability in Germany, and the rest of Europe, who cares? Certainly not the Greeks.
So when and how does this end? Well, first, there are two Greeks, the sovereign Greece and the Greek economy and they are more separate than one might think.
Sovereign Greece will settle only when the benefit to the rest of Europe equals the pain of Greece. The amount of Greek debt (and its cost) must be cut. That can be accomplished in a number of ways, including the payment of reparations from Germany to Greece (don’t laugh). The Germans can call it whatever they want, but Germany is going to make some payment to Greece (or accept some of Greece’s debt). Pensions will not be cut, but the age for retirement will gradually be increased. Wage and other concessions will be accomplished through the privatization process. The VAT tax will increase and past due taxes will be collected, but there will be no real change in tax rates.
As for economic Greece, the banks should be consolidated into two banks and those banks should be nationalized. Banking laws in Greece should be liberalized allowing for new banking licenses and competition from foreign banks. Once the banks are nationalized, bad loans will be written off and sold. The net result of this will be to allow a massive influx of foreign capital to enter Greece. The Greek economy will grow, unemployment will decrease sharply and the ratio of debt to GDP will come into line with the rest of Europe.
Of course, these are the thoughts of someone crazy enough to believe in the future of Greece, so you must take this with a grain of salt, but the question we all need to ask is this … what happens first? Does Greece run out of money before European interest rates go up? Do not answer that question so fast. What happens to European rates if the U.S. raises rates? Things in Europe could get worse before Greece runs out of cash.
Watch me be wrong and Greece settle this week.
David
