Wednesday, May 16, 2012

Dr Nick Skrekas:Ungoverned Greece putting eurozone in danger



by Dr Nick Skrekas

While a Greek team walked away with a European basketball trophy on Sunday night, the country’s posse of party leaders could not be corralled by the president of the republic. A week after a national election there is no administration in sight.
The inordinate post-election deadlock is something the debt laden country can ill-afford as it struggles with the gravest crisis in a generation. Punters can’t even place a bet on if and when Greece will be forced or voluntarily exit the euro because international bookmakers are about as reticent as the Athenian political elite.
On Sunday morning President Karolos Papoulias took the very last turn at a constitutional mandate to form a workable multi-party coalition. And just like the three most elected party leaders who took their priority turn from Monday onwards, the effort ended in nothing more than trading insults.
The two parties that had a duopoly on power in the post-junta era are now impotent to call the shots because of their electoral drubbing. Conservative New democracy and socialist Pasok were shocked to collectively get only 32% of the vote, since in their heydays they commanded 80% of all ballots cast.
The status quo party system built on nepotism, dead hand state-ism and crony client-ism has been delegitimised because it has saddled the country with an Olympus-size mountain of odious debt, plunged pensioners into poverty and condemned younger generations to join the brain drain overseas. The economic and social abyss has shattered the patronage and lineal voting patterns to bits.
The conservative and socialist mainstream parties came first and third but despite a 50 deputy bonus in the 300 seat parliament they need one or at best two left parties to form a realistic administration. Defections, fragmentation and the appeal of smaller independent parties have not produced a workable political compromise.
The Coalition of the Radical Left (SYRIZA) won’t join an ecumenical government because they prefer a unilateral rejection of the bailout memorandum, preferring the role of effective main opposition. This surprisingly second ranked party is also eyeing polls suggesting its electoral prospects would rally further in a repeat vote.
Meanwhile, the Democratic Left fears that it will be demolished in time if it gives a “left alibi” to the pro-memorandum forces of the conservatives and socialists. Its pro-European leader Fotis Kouvelis argues he can only participate in an wide ranging ecumenical coalition, and has no mandate to sanction more cuts and taxes.
Below the radar, no party wants to be seen causing an unpopular and divisive repeat ballot, since Greeks demanded cooperation and consensus building. No one is blinking but few Greeks are enjoying the brinksmanship.
A last shot to avoid another election cycle by June 17 is slated for Monday evening Athens time, but it too seems destined to fail. Syriza leader Alexis Tsipras has already rejected the invitation. Barring an improbable U-turn by the Democratic Left, the country will be in limbo for another month while ceremonial oversight will be exercised by a superior court judge.
A month is a very long time in Greek party shenanigans, but there is no guarantee that a second election will produce a workable coalition. This heightens the risks for the country’s ability to draw down on the agreed 130 billion euro second bailout to avoid bankruptcy and a chaotic exit from the eurozone for which it is entirely unprepared.
Greeks do not yearn for a new Drachma since 80% of those recently polled would rather remain in the block. However, they despise much of Europe’s and the IMF’s one sided zeal for scorched earth austerity. Voters are concerned about the strings attached in remaining in the euro since some believe they would not be worse off but more independent with a national currency. Others believe Greece can call the shots because its lenders have too much at stake. These hypothesis may be put to the test soon.
The political buzz word is “renegotiation” because few believe in the veracity of European solidarity. The whole EU project seems elitist, punitive, and damaging to their living standards. The horizontals cuts to pensions and tax hikes have plunged the economy further into a tailspin, turning a five recession into a depression over the last two years.
Today, one third of Greeks live below the poverty line. There are more than one million unemployed and one in two youths are without a job. The social fabric has been stretched to breaking point, almost in lab rat fashion, to see how far a developed democracy can be pushed. Worse still, as forecast by many, the toxic medicine crushed economy activity, shrunk tax revenues and made paying down debt even harder. Some conspiracy theorists contend it was by design and not by mistake.
There is little appreciation for the fact that since May 2010 the country has only avoided full implosion because of bailout funds. It’s a risky miscalculation to assume backstopping European and global tax payers will write Greece a blank cheque.
EU leaders and core country taxpayers are very frustrated that Greece still can’t get its books in order, pass and then implement reforms and clean up waste and corruption. It is not a coincidence that 78% of Germans polled demand that Greek aid be cut off if a new government doesn’t commit to frugality and reform.
Unfortunately, Greeks do not separate the failed toxic austerity recipe from some of the supply side structural reforms, sensible privatisations, necessary streamlining bureaucracy and the implementation of a stable and equitable tax and more certain and speedy legal system.European convergence of Greece to the core has failed on issues of transparency, competitiveness and innovation. The country must design and commit to a new model for a sustainable economy. In light of the sound bite policy debate and little faith in leadership, Greeks are throwing out the convergence baby with the austerity bath water.
A wake up call for many political sides is that the country only has sufficient funds for about six weeks, and that is only because a 4.2 billion euro aid tranche will be coming through. There will be enough funds to cover a foreign law bond redemption worth about 435 million euros to prevent Greece being officially the first developed nation to call a default on Tuesday. Europe is intentionally holding back on one billion of the tranche until June when it is needed, to reinforce the point that the currency club is a two-way street.
The reality that there is no legitimate representative party for the Troika to negotiate with is not lost on commercial life. Regrettably, the 49 billion euros earmarked for local banks recapitalization which has already been delayed will be on hold until a credible government can kick start the process. Business conditions are dreadful since banks having suffered a massive Greek bond haircut have little liquidity and can’t lend. The credit life blood of the economy has seized and bankruptcies are surging.
But what is not lost on left leaders is that the international lenders are demanding more of the same overdose of austerity. The country has committed to three billion euros in cuts this year and new draconian 12 billion euros of new austerity over 2013 and 2014. Europe should not forget the May 6 ballot was the first time the country put the bailout and the austerity to a plebiscite.
The schedule was that this program of cuts be detailed for the Troika by end of June. Given the utter failure of the troika program, Greece deserves more time to accumulate these savings and ameliorate the pain to the most vulnerable. A focus on the ultra-wealthy finally paying their share is needed not just financially but for social justice.
Talk in Europe that a Greek exit could be smoothly managed with no collateral damage is unrealistic. In northern European capitals and central bank board rooms discussions and contingency plans are being drawn up for a Greek euro-exit. While the banking sector has already suffered and is more prepared for the fallout after taking a 74% haircut to slice 104 billion euros of the national debt, the official sector may also be whacked.
The cost of a full Greek bankruptcy would come with a massive price tag and would include the sovereign debt, the Bank of Greece debt and the commercial banks. The hit would conservatively be north of 300 billion euros for the ECB, the eurozone, the EFSF, the IMF and inevitably the tax payer.
Worse still, a euro-exit would set a very nasty precedent, lead to a market attack and bank run on the weak periphery of Europe. The core of Europe now has more than 2 trillion euros of periphery assets so the stakes are high. That means adding countless more billions from the core to ring fence the currency block. The rating agencies would quickly issue downgrades across the whole zone and destabilize the continent. Sentiment will be hammered and that could result in recession on the old continent and turbulence on global markets.
While the Troika have realized some of the error of their dithering, delayed and flawed policies, the debate will circle around cutting their losses as opposed to throwing more good money after bad. They also fear if Greece renegotiates that other trouble nations will be lining up to do so as well costing a heap of cash.
Inevitably to save the eurozone the paradigm has to shift to growth which complements fiscal prudence over longer time frames. Austerity alone has proven a failure and new president in France is likely to talk more sense into a growly unpopular Merkel.
The north must realize that inducing shock treatment recessions will come home to roost in their economies as well. Concession will have to be made on issuing common infrastructure project Eurobonds, allowing the ECB to act as a lender of last resort like the Fed, and ramping up the EFSF bailout fund to convincing committed amounts. A more multilateral EU assisting countries like Greece with military sending and issues of immigration would help prevent extremist elements, if not some more structured transfer union.
In Athens the average man on the street has to understand that Greek politicians cannot overplay their hand and a return to the Drachma would be met by massive short term painful dislocation. A further jump in unemployment, poverty, hyperinflation and an exit from the whole European Union when capital controls are put in place to prevent a downward devaluation spiral. Leaving the union would mean losing aid worth about 3% of its GDP every year. Such catastrophes do not bode well for social cohesion and the threat of chaotic disorder is real.
Greeks have not been told the whole story. The country can never go back to the bad old days of debt fueled illusive prosperity and the romanticism about a drachma return is not a pain free magic bullet and will mean isolationism from influential international forums.
Eurozone countries seem increasingly prepared not to pull the plug on Greece until a government or new elections precipitate and administration. However, the irresponsible promotion of the view that Greece can get the cash without conditions ignores the high risk cost benefit calculus.
The worst possible outcome is if by June 17 no new government can be formed and that will put democracy in Greece in peril and may signal the unraveling of the European project.
Then the myths will quickly dissolve in actions.


(My article published Monday, 14 May 2012 at 5 am Greek time on Crickey for those who cannot access it. All comments welcome.)

Tags: Greece, Greece debt crisis, greece economic crisis, greece election, Greek debt

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