Tuesday, July 9, 2013

Looking Back at the Greek Bailout

I just finished reading Neil Irwin's book, "The Alchemists," who are Mervyn King, Ben Bernanke and Jean-Claude Trichet, portrayed by the author as the Three Musketeers saving the world from financial cataclysm.

The chapter on Greece made me go back and think about the chronology of events to the latest news today, namely that the EU has to make continuing contributions to a Greek bailout, which has currently consumed 248 billion euros, according to the WSJ. The recounting of events for this crisis makes good reading.

Greece didn't fit the profile of a good member country to adopt the euro.  Its economy was relatively small, had low levels of per capita income, and a business environment rife with corruption, institutional cronyism, and an ineffective public sector. Greece joined the eurozone through a clever bit of financial deception.

In 2001, Goldman Sachs arranged a series of currency swaps for the Greek government, which according to the EU's rules at the time, allowed the country to report a much lower level of public debt on the books, which in turn allowed Greece to meet the debt/GDP criteria for admission.  Eight years later, this tactic was no longer approved by the EU rules.  MIT Ph.D. Mario Draghi was at the time the Vice Chair of Goldman Sachs International.  Greece's entry into the eurozone was tainted from the very beginning, and the EU had to know this, although Draghi now disavows any knowledge of this particular transaction.

Irwin tells the story of George Papacontstantinou (Ph.D., LSE), the Greek finance minister of the Panhellenic Socialist Movement party, who was working on a 2009 budget which had assumed a deficit equal to 6% of GDP.  As voters were going to the polls October 4, 2009, the deficit was moving toward 8-10% of GDP, because the government was spending well above the budget and deliberately going slow on collecting tax revenue.  As Dylan wrote, "You don't need a weatherman to know which way the wind blows."

On October 7, 2009, Papaconstantinou got a call from George Provopoulos, the Governor of the Bank of Greece, who was the only one who really understood the financial position of the Greek government.  Provopoulos said the the Greek government budget deficit was running up the debt/GDP ratio in excess of 12.5%, or more than double the level projected a few weeks before.

The actual debt/GDP ratio for 2009 came in at 15.7%, the highest ratio in the world at the time, according to the author.  As for the Greek government, Irwin says, "...the Greeks were cooking the books," but sovereign debt investors continued to be complacent.

Fast forward to today.  The member nations of the eurozone, having been described by economists as too heterogeneous at the inception, have broken down into a fluid core and a periphery.  Even within the core, the German economy continues to stand apart.

Eurozone members, through the increasingly intrusive bureaucracy in Brussels, have already accepted a high degree of micromanagement over their national commercial enterprises.  During the Greek crisis and its aftermath, the ECB violated its own founding treaty, Maastricht, in order to directly purchase sovereign debt; the treaty expressly forbade using ECB facilities to fund deficits. Of course, like politicians everywhere, both sides parsed whether the letter or the spirit of the treaty were broken.

No matter, because when Mario Draghi spoke the comforting words that he would do everything within his mandate to save the euro, financial markets were buoyed, he had become the head of the most powerful institution in Europe.  Together with the IMF and the European Commission, a troika of bureaucrats now wields the power to micromanage the taxation and expenditure policies of member states.

The European Commission is now responsible for putting out its own questionable forecasts for the economies of its member states.  Writing about the outlook for Greece, the winter forecast suggests that domestic final demand will finish its sixth year of percentage decline from the prior year.  The report somehow suggests that Greek exports will grow as a result of its increasing competitiveness due to labor market reforms and improved work rules.  This defies all logic, as very little has actually been done to date, and Greek exports to other EU countries have been relatively unchanged over the years of the crisis.

If you thought that we had left the situation of lurching from crisis to crisis, the Journal reports,
"And Greece, the euro zone and the IMF have yet to complete a deal that calls for public-sector payroll cuts affecting 12,500 state workers and other measures before Monday's Brussels meeting, officials in Athens said Sunday."
The Greek unemployment rate was 25.7% in 2012, and according to the EU forecast it should end 2013 at 27%.  According to the Greek economic statistics, there has been some progress in indicators like compensation expense per unit of output.  The troika chiefs and the heads of state in the eurozone need to start being honest with other and with the markets, because the current state of affairs is certainly not indicative of any benefits to a full-fledged political union.

As Jacques Rueff, an advisor to Charles de Gaulle, is reported to have said,
"L'Europe se fera par la monnaie, ou ne se fera pas."  
Right now, the common currency continues on shaky ground. 

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