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Greece's Bailout Programs Are Not Working
Submitted by Erico Matias Tavares via Sinclair & Co.,
Greece's bailout program is not working. After receiving hundreds of billions of Euros in new loans to stave off a sovereign default, Greeks are on the verge of electing a new government that may throw Eurozone politics into turmoil.
From the outset, this was always going to be a tricky one for European bureaucrats and lenders. Restoring the solvency of a state which historically had great difficulties in collecting taxes from its citizens was not going to be easy. Moreover, the crash exposed fundamental flaws in the Greek economy, which at the time turned out to be a leading indicator for other Southern Eurozone countries.
With the world still reeling from the Great Recession, in 2010 Greece applied for a rescue program as its funding costs soared once the fragility of its finances could no longer remain hidden.
It can be argued that if debt balances had been restructured there and then to levels where they could actually be paid off over an extended period of time, together with unpleasant but sensible fiscal policies – as we shall see, taking into account important differentiators of the Greek economy – the cost of the bailout could have been much more manageable.
Instead, what the Greeks got was even more debt – so much in fact that a restructuring program had to be implemented just a couple of years later – together with a strict austerity program to quickly restore the country’s fiscal position, eventually leading to rising waves of unemployment and general discontent. Greece’s sovereign debts now represent almost 180% of GDP, a jump of some 20 percentage points from the post-debt restructuring levels of 2012.
The Eurozone and the International Monetary Fund have provided an eye popping €254 billion in loans to Greece since 2010. More than half has been used for debt servicing, and another 19% to recapitalize the domestic banks. Only about 11% of the total was used by the government for non-financial items. Greek taxpayers thus underwrote the whole deal but only got a fraction of the funds, at a time of severe government cutbacks and never ending tax hikes.
It is hardly surprising that they are close to a breaking point. The radical left-wing Syriza party is now in pole position to win the elections on January 26, campaigning on a promise to write off at least a third of Greece’s total debt and alleviate the austerity measures.
How things will play out in Greece and abroad is anybody’s guess. But it is important to consider the factors which have contributed to the current state of affairs.
Greece’s Brutal Adjustment Process
We have written previously on how the substantial real exchange rate appreciation of Southern European countries since the creation of the Euro contributed to the 2010-11 Eurozone crisis.
The real effective exchange rate is a weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation. As it appreciates, the goods and services of that country become more expensive in the international market. Faced with the prospect of losing market share, it can seek to devalue its currency to offset the higher inflation differential at home.
However, it is only price level differentials that matter within the Eurozone because the nominal currency is the same between trading partners. In other words, to improve its competitiveness, a member state cannot get any help from its exchange rate; it can only do so by bringing costs down.
This construct of course was devised to prevent waves of competitive devaluations between trading partners. But in Greece's case it actually stacked the odds against the success of the bailout policies.
Why? Because a critical characteristic of the Greek economy was overlooked, or at least greatly undervalued.
Let’s look at the evolution of the real effective exchange rate in a selected group of Eurozone countries since 2000.
Real Effective Exchange Rate Index in Selected Eurozone Countries (2000 = 100)
Source: EuroStat.
As shown in the graph above, by 2009 Greece was only outranked by Italy in terms of its real effective exchange rate appreciation. This overvaluation is particularly noticeable in relation to Germany, which actually deflated within the Eurozone throughout this period (any wonder that their exports have held up?). This left Greece in a very uncompetitive position, becoming increasingly reliant on external credit. When foreign lenders closed the tap in 2010, the game was up.
Therefore, Greece had to quickly find ways to regain competitiveness. It could have resorted to the old fashioned way: devaluing its currency, meaning taking a sabbatical from the Euro (and would have certainly pushed the Drachma value of its debts even higher). Since this was not on the table, the alternative was to massively suppress costs and wages.
The resulting adjustment has been nothing short of brutal, rapidly converging to Germany’s levels in just a few years. In contrast, its Southern European peers actually reversed that adjustment process after the crisis (and might have to pay for it at some point in the future...).
And here’s why this adjustment mechanism was particularly difficult for Greeks.
In a country where everybody earns the same, say, €1000, if they have to cut earnings by 20%, people can moan and groan but will still be able to buy groceries and fuel. But in a country where a few people earn €5000 and the majority €500, that 20% cut will disproportionately impact the poorest, which will now be forced to make critical choices for their survival.
Poverty Rates in EU Countries: 2011
Source: EuroStat.
As shown in the graph above, Greece has one of the highest poverty rates in the European Union. In 2011, 21% of Greeks (901,194 households numbering 2.3 million individuals) lived below the relative at risk-of-poverty threshold. It is also one of the most unequal countries in terms of income distribution.
With these characteristics, Greece was simply not equipped to endure a lengthy deflationary process with no help from its currency. At some point something had to give.
And that is where we are today.
It remains to be seen exactly what policies will be pursued by the new government. Perhaps the real effective exchange currency has already deflated sufficiently to give the economy a meaningful shot at growth under much lower debt loads.
It seems, however, that quite a bit more will be needed.
A Catalyst for Improvement?
Can this massive shock to the system provide the stimulus to implement much needed reforms and changes to improve Greece's overall competitiveness? This is indeed the question, because if the country is able to grow strongly, its ability to pay down debts and restore hope for the future without relying too much on financial engineering and devaluations would increase accordingly.
In fact, there is a great scope for improvement on many measures. And that is actually a big part of the problem.
After being a member of the European Union for decades, it is shocking how poorly Greece ranks in terms of key competitiveness variables; which is why another debt restructuring per se (nor, for that matter, another round of quantitative easing by the ECB) will not get that economy out of trouble – although it should provide some critical breathing space.
Here's a quick snapshot of institutional strength metrics as per the latest World Economic Forum report (out of 144 countries):
- Global competitiveness ranking: #81 [Note: there are only 34 OECD countries]
- Judicial independence: #70 (after Zambia)
- Diversion of public funds: #81 (after Armenia)
- Property rights: #82 (after Gabon)
- Ethical behavior of firms: #99 (after Ukraine)
- Political favoritism: #109 (after Brazil)
- Transparency of government policymaking: #120 (after Hungary)
- Efficiency of legal framework in settling disputes: #126 (after Myanmar)
- Wasteful government spending: #131 (after Egypt)
- Burden of government regulation: #136 (after Kuwait)
See what we mean by "shocking"? What is thus required is a fundamental change at all levels of society.
To put what is needed in perspective, here's what a former Portuguese Consul in France and Great Britain had to say about Greece when reflecting upon the situation of his own country:
“We are in a comparable, correlated state to Greece: the same poverty, the same political indignity, the same lowness of character, the same public corruption, the same usury, the same spiritual decadence, the same administration with grotesque sloppiness and confusion.”
That Consul was José Maria de Eça de Queirós, the Portuguese literary giant (author of “The Maias” and other classics). When was this first written?
1872.
Will the Greeks finally make it this time around? We surely hope so; for them and their creditors.
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Gotta hand it to the Bilderbergers... With so many 'puppet governments' to churn through every day to keep the debt hamster wheel spinning, I guess some knave must be doing some work...
I disagree. Greeces bailouts are working exactly as they are supposed to. They were never about helping the Greek people, or shoring up their finances. It's just another bank bailout. The big European banks all hold billions in greek debt as an asset , which is trading at face value. If Greece defaults, those bonds tank, ruining the illusions of the solvency of those banks , and collapsing their financial system. The bailout money is just so they can keep paying the interest on their debt. So , essentially, European taxpayers in other countries are being forced to pay the private banks all over the world so they don't take losses on stupid bets they made.
Ye olde "internal devaluation."
HA, HA!
JOKES ON YOU!
They need to get Krugman over there to torch some cheese and break some plates.
"The bailout money is just so they can keep paying the interest on their debt."
Dude ~ That's EXACTLY what I was saying.
The choices these days are:
1. We shove this bailout money down your throat
2. We destabilize your government coalition and force the bailout money down the next puppets throats.
How do say “ay gamisou troika” in Belch?
That is the language in Belguim, isn’t it?
"They need to get Krugman over there to torch some cheese and break some plates."
OPA!!!!
***************************
"Greece's bailout program is not working."
Ya' think?...
Have you noticed that the mainstream can never refer to Syriza as 'Syriza', but always as radical leftist Syriza?
ie - it's radical to default on odious debt?
Greece's bailout program is not working
no shit einstein...
Eínai éna polý malákes ...
Énas Éllinas boreí na kalései kápoia álli ellinikí? énas malákas , allá kaneís állos den boreí .
Kaló mesiméri .
;-D
MISERABLE FAT BELGIAN BASTARDS ~ I think
Good one.. likely too many waffles.
..and Carol Cleveland was hot back then.
But, it's actually bailout debt. So they're servicing debt with debt and declaring a positive GDP along the way. It's like taking out a second mortgage to service your credit card debt, and declaring that your net worth increased that year.
NOT WORKING!?!? I always though the cure for too muich debt was ... more debt?! It's a bizarro world out there.
Bingo Greenskeeper! You nailed it.
And German interests are holding the bag for the lion's share of those 250 billions in debt.
The story of Greece is a tragicomedy of farcical proportions:
1. The EU political dirigistes installed the Euro "common currency" as their next step in the political unification of Europe. This was a development for political reasons, as a means of uniting the people of the various nations in thinking as Europeans first and not as citizens of their own countries. Economists and financial experts were hardly consulted.
2. Bankers looked upon the unified Euro zone as a tacit guarantee that the European Central Bank would guarantee all debts by all Euro zone governments, and started lending at the same rate to all Euro nations at basically the same rate they would charge to the most credit-worthy.
3. Politicians in the PIIGS gloried in promising social benefits and economic development funded by borrowed money. Their cronies and voters lapped it up like hungry cats. This all amounted to a credit-fueled political and economic drunken binge. Greece even splurged on the Athens Olympics on borrowed money. The bankers of Germany and France were only too happy to supply the money like booze sellers sell champagne for a party.
4. France and (especially) Germany liked the Euro system because it made it easy to sell their wares to the PIIGS who now could buy with the money they could borrow at low interest rates. German industries and French farmers made piles of money from sales to the PIIGS- mostly recycled money lent to the PIIGS by French and German banks.
5. In the USA, the Federal Reserve accelerated monetary expansion via low interest rates, from about 1990 on, to the point that central bank interest rates are now near Zero (ZIRP), to keep the great financial house of cards/Ponzi Scheme going. The Clinton Administration in the US completed Financial Deregulation (begun under Reagan) by cancelling Glass-Steagall, legalizing Citibank and sending Wall Street on its financialization binge that ended with the collapse of 2008. Central banks then doubled down on monetary expansion to plaster over the financial collapse by pushing down interest rates and printing more money.
6. In 2009-2010, Europe caught the contagion from the US meltdown and it became all too clear that the PIIGS could never pay off the money they had borrowed as Euro members. Bankers in France and Germany panicked and called on Merkel, the EC commissioners Barroso and Von Rumpot ("the Honchos") to save the banks. The Honchos forced the Greeks to accept a "bailout" of their debt by the "Troika" - the International Monetary Fund, the European Central Bank, and the European Union (IMF, ECB and EU). The "bailout" money went mostly to the French and German banks in exchange for the Greek bonds and Greek bank IOUs they were holding. The bonds went to the IMF and ECB. Some have been passed off to sucker "investors". The Greek people still owe the money and are expected to pay off the bonds, with interest. Ditto in the rest of the PIIGS. Iceland rejected the idea of a "bailout", and the Iceland government said to the bankers: "You created the mess, you own it."
7. Austerity was imposed on the Greeks to prevent the government from spending money on social programs, medical care, etc., and thus to ensure that more of the Greek government budget would be applied to paying off the bonds. Ditto in Spain, Portugal, and Ireland.
8. The people do not like austerity. They don't like sleeping on the streets and having no jobs or medical care. Good thing they are so undernourished or they would be more effective in rioting. But they tend to vote for politicians that promise to repudiate austerity and debt repayment.
9. In the attempt to sell the idea that the EU economy has been "recovering" from the 2009-2010 meltdown, the ECB and EU nation central banks have adopted ZIRP (and even NIRP - negative interest rates on bank deposits), and bond buyers have bought into the financial fairy tales by bidding up new bond issues in the Club Med countries and pushing down interest rates on their sovereign bond issues to ridiculously low rates (as if there were absolutely no chance of default or haircuts).
10. Now that the risk of "Grexit" reappears, the Germans say there is now no risk to German banks from a Greek default. Why? Because the German banks have sold off their Greek bonds to the Troika.
11. Auntie Merkel is dead set against any further help for Greece. This is rich since Germany reaped huge rewards selling manufactured goods to Greece, paid for with money borrowed from German and French banks. Now that the German banks are safe from their reckless lending practices, she can refuse further aid to Greece.
12. The EU has not recovered from the 2009-2010 recession, and is sliding further into depression. A Grexit or bond default may still shake the European financial world and New York and London's City may catch the contagion this time, so everyone is trying to whistle past the graveyard.
13. The sanctions/counter-sanctions game between the US/EU and Russia is a very risky game for the EU since it cuts the EU off from (what was) its fastest-growing export market, and Russian firms still owe many $Billions to Western financial institutions. Russia is also the supplier of about 30% of the oil and natural gas used by the EU, and those supplies might suffer major disruptions if the Ukraine pipelines were disrupted or if Russia cut off supplies in response to an escalation of the financial war against Russia. The EU has no quick way to replace natural gas supplies from Russia. If Russia feigns a "hiccup" (a hint that it will default on payments on debts to Western financial institutions and cut off gas and oil exports to the EU), expect Wall Street, London City, Juncker, and the ECB to have nervous breakdowns.
14. Russia and Gazprom have shaken the EC by redirecting South Stream to Turkey and announcing that the gas now going through Ukraine will be shut off and redirected to Turkey once Turk Stream is built. If the EU wants the gas, it will have to connect to the new gas hub at the turk/Greek border. Russia has now mischievously informed Greece that Russia will cancel its sanctions against Greek food exports if Greece leaves the EU.
15. The gas hub at the Turk/Greek border may embolden Greece to tell the EU that if it wants access to the gas from Russia, it will have to write off the bailout debt.
16. Syriza's policy of cancelling austerity and increasing government spending is a dreamy left fantasy - unworkable unless it can find some new source of sugar-daddy funding. Perhaps China and Russia could be persuaded to ante up cash in return for some islands or military bases.
17.What strategy should the EU leaders adopt? Depends?
A useful summary. Thanks Al.
1. no, the EUR was always an end for itself. the "political unification" crowd liked it, but never really understood it
2. yes. this was highly visible when the eurozone gave more yield, and American money market managers piled in to hungrily collect some of it. they just wished it
3. yes. but the Squid helped, by cooking the books, remember?
4. a bit too simple. you forget to mention the number one reason for the EUR: the dollar
5. and this push effects the whole world, including the eurozone. at this point, if we had various currencies, we'd have more problems, including an intra-european currency war. thanks, but no, thanks
6. a bit simplified, here. note that Greece does not pay interests on three quarters of it's debt, until 2023. and we all know it will have to be restructured
7. how about "balanced budgets"? if you want to spend more then you make, you have to convince someone to lend, don't you?
8. undernourishment? are you sure you aren't projecting?
9. no, ZIRP is imposed by the FED, on nearly the whole world. NIRP does hurt banks, though, so the FED does not do NIRP
10. correct
11. ask the common German on the street
12. the key word is "may". lots of things now could have big consequences
13. that's the problem with civil wars, wars and... annexations
14. what's your point? it does not affect the whole EU, btw
15. eh, that's not a given at all. as much as the UK leaving
16. perhaps, though I must admit their finer points about the existing Greek budget priorities have some merit, imho
17. "depends" is most of the times one of the best strategies
Exactly
The main difference between your playing lotto and theirs is Euro mafia´s illegal agreement of guarantees from third party sovereign nations. On the other hand should a major political shake up take place, guarantees can be refused similarly as Greece it´s loans. In the first case guarantee underwrites(ministers) could also face high treason charges for acts against their own constitution.
So Greece was loaned $250BB in 2010 to get out of their mess. When you consider all the follow-up heads of state meetings that were held to "fix" Greece, their debts should have just been forgiven so we wouldn't have to waste so many national resources reconvening ad nauseum to do nothing. Train wreck.
#Greece
Greece's Syriza party is set for a comfortable victory in Sunday's general election, according to opinion polls that show the radical leftists consolidating gains in the final days of campaigning.
more:
http://tersee.com/#!q=greece&t=text
If they write down the debt does the Euro debt as an asset banking scam come crashing down?
It simply does not matter.
The problem is no longer political and the people at the top will be able to sway the situation "only so much". Repetition grows tiresome but that doesn't mean it isn't necessary. I suppose that holds true because of the delta that exists between what people think they understand and what they truly understand.
Look at the stats above concerning the standing of the country. It is in complete shambles.
Impossible. Were the powers that be to willingly write off Greek debt, what about Ireland, Spain, Portugal, and Italy?
and mr panos thanks you.
Assuming that the top two finishers are anti-EU and pro-EU, the key will be who finsihes in third and fouth place -- as the vote will be split so widely that a coalition will need to be formed. The key will be who is in the coalition and what needs to be promised in order to bring themm in.
Of course its not working, the money is paid the the Greek government, not the people. The money is consumed by the bloated payrolls of the well-connected relatives and cronies of those in charge. And finally, the citizens' boycott of tax remittance is making the government MORE reliant on bailout money. Starve the beast, the Greek citizens have the right idea.
US debt today is $18.1 trillion and rising at $1 trillion a year and unfunded liabilities are at least $130 trillion and rising at $8 trillion a year. That works out to be $1,270,000 per taxpayer and rising at $70,000 per taxpayer per year. There is no chance that US handles its debt and unfunded liabilities save by hyperinflation or default.
Debts are already out of control in most nations in the West but the free and fair media will never mention this fact.
"From the outset, this was always going to be a tricky one for European bureaucrats and lenders. Restoring the solvency of a state which historically had great difficulties in collecting taxes from its citizens was not going to be easy".
"tricky"? If you mean impossible, then yes! They can not, will not repay said debt, not going to happen.
Just one example of the many fiat chrades going on around the world!
Go on and rip the bandaid off already!
Meet the new finance minister of Greece:
http://www.bloomberg.com/video/feb-28-greek-deadline-is-artificial-syriz...
He may or may not be the new Finance Minister . BUT, and it is a big BUT.
He is the overseer of the Banksters United International, big and old friend of GAP (former Prime Minister of PASOK Party) and Kyriakos Mitsotakis (Son/Grandson of old Prime Minister of New Democracy Party ) Old Feudal Family Mafias, I would go as far as to say that, they are bigger than their brethren in Sicily and South of Italy, as they had Been, THE GOVERNMENT.
He is a so called a Finance genius (genius, genius, genius of Mr. Panos), nothing could be further from the truth, He is a Charlatan and only spouts what is told to say, from his Masters.
Greece needs to, figuratively, be taken out behind the barn and shot.
Leave the Euroslavery and be your own country, for good or ill.
I think Greece is better off leaving the Euro and hooking up with Russia and the Chinese.
Want to see the shit hit the fan?
The above needs to happen.
Like any club, once the new members are pretty much getting fucked over by the senior members you know the future ofthe club is in trouble.
Ya think???
The worst possible outcome is decades of pain with austerity before defaulting.
Default and make new friends in the East.
I am sure it will be a great propaganda coup for China and Russia and they will be much more generous than the Western banksters.
The propaganda value will be huge, I am sure they will pay handsomely for it.
Soon they can pick up Spain, Italy and Portugal.
The united West will never be the same again.
Greek Syriza party says EU anti-Russian sanctions damage European stability
The approach deepens!
http://x2t.com/GreRus
They refused to take a hard line on the GS endorsed and fabricated LIES that got Greece in the EU and this is what you get.
Rather then blackmail the new Greek government, they will try to bribe it.
the chosenites taught the greeks about interest and the rest is hisssssss tow rheeeee
Diebold in Greek is...?
I'm going long Greek donkey carts
Greek Rickshaw....for Mr. Panos to carry around Schnitzelface vacationers.
Of course I picked Greece this year as our EU trip in April. I really hope they hold off on the riots until, say, May?
Thanks Greece!
It is obvious that Greece is a third world country by now. The question is why were they ever accepted in the EU let alone the Eurozone, and are those responsible going to be held accountable for it. Not that I have any less contempt for the EU.
I'm not sure its a matter of acceptance, I don't think they will be permitted, peacefully that is to leave.
Maybe...everyone loves the underdog ? Its tough when GS comes in and makes your books look so good even though you are starting behind.
Fiat finance allows for this.
Interesting times.
I am sure nobody in the EU knew that. The GS bullshit was done only to give people excuses. Everyone knew that Greece was always a deadbeat. Think about it, Greece, Germany same currency. WTF
I was reading an Italian Newpaper (google translator) concerning the Syriza party and its principal leader who commented that they didn't want to leave the EU and believe that Greece and in the EU was in the national interests. Maybe it's posturing before their elections. Further, the guy screams about "austerity," which is just another term for not enough wealth redistribution and public debt creation, but reading the other night some EuroStat data shows the Greek debt to GDP is risen to approximately 60% as of last year. That's up from the low 50's 10 years ago. Where's the "austerity?"
I don't see a real problem here. After the Greeks elect the "radical" party to power, I'm certain that a coup of some sort will appear out of nowhere ushering in a US/EU friendly government.
Greece has more power than it realizes. It could default on its loans and force the European banks to take their losses. This wouldn't help Greece very much, but it could be a Lehman event for European banking.
Will the Greece's new government have the courage to demand a better deal? I tend to doubt it. I think the ECB will throw Greece a small bone or two and the new government will show that it is basically no different than the old one.
"It could default on its loans and force the European banks to take their losses."
At this point in time it are the European tax-payers, not the banks.
Q. What's a Grecian urn?
A. Fuck all.
Keep Talking Greece reports that a UK based NGO calculated that only 10% of the 2 bailouts totaling 250 billion Euro went to Greek society, just as this article says. The rest went to bailout lenders that loaned money to Greece in the form of debt repayment and interest. So the IMF, EU and ECB bailed out banks and other lenders that made bad investments. True capitalism, I don't think so.
http://www.keeptalkinggreece.com/2015/01/18/where-did-greeces-bailout-mo...
They also report that mobile phone listening devices were found in the vicinity of ND and Syriza party headquarters. Some secret service at work here.
http://www.keeptalkinggreece.com/2015/01/20/daily-ta-nea-traces-of-mobil...
Lovely Folks the Greeks just as thick as pig shit.
If you put a Pole and a Greek together you'd get a hardworking cheerful half-brained average joe, just ripe or cherry picked for Goldman Sachs manipulation.
Of course it is not working. What Germany is doing to Greece, with this crazy scourged earth austerity, is what The Treaty of Versailles (June, 28 1919) did to Germany.
Its gonna be so Great to see all this SHIT go down........