Why can’t Greece just agree to the creditor’s terms?

Talks between Greece and its creditors collapsed over the weekend with both parties appearing intransigent. The sticking point is pensions. Greece spends 16% of GDP on pensions and the IMF wants Greece to cut this. Greece. refuses. Why does the Greek state have this large pension burden in the fist place?

The answer is Greek pensions are of the “defined benefits” tax and transfer variety. The state taxes the current working generation and transfers the money to pensioners. It’s a passthrough mechanism, not an investment fund. As the economy has collapsed, tax revenues from the active economy have dropped and the pension burden is harder to bear. It’s a very similar situation to Detroit.

That might conjure up a bloated state sector with stalinist factories building tanks or a comically uncompetitive airline. OK, Greece had these two. They’re gone. For the most part though the high pension burden IS NOT indicative of a state sector that needs purging. The majority of pensioners were either private employees such as bank tellers where the state is acting as their collective insurer, or they were relatively uncontroversial state employees such as teachers and bus drivers.

Why are Greek pensions organised this way? Why aren’t they stock market investments like in the Anglo-Saxon world. For a start, the Anglo-Saxon model is a lousy deal for all income groups except the very wealthy. If you assume continuity of a sovereign state, a tax-and-transfer scheme limits downside better than market investments. The Euro ended monetary sovereignty for Greece, so for pensioners that was a miscalculation.

Secondly Greek capitalism (the portion of the economy in publicly traded companies) is too small to support pensions. Greek pension funds would have had to invest internationally. That would have been quite a leap of faith, and the pension funds did not. Another miscalculation, but understandable, I think. You have to remember people who are now pensioners put their trust on the continuity of the Greek state decades ago.

Alright, so if Greece doesn’t have the money to pay the pensions why doesn’t it cut anyway? What other outcome could one hope for? Well, if Greece left the Euro it could once again print money to partly fund pension obligations. This generates inflation, as was common before the Euro, and inflation acts as an indirect tax. It also causes currency devaluation, which makes imports expensive relative to domestic goods. Guess what: Greek pensioners consume more food and services (domestic goods) than iPhones.

A much better outcome would be for Europe to shoulder some of the social burden of these pensions. Why should they? For the same reason the US has federal food stamps that people disproportionately consume in Detroit. The “unruly” Greek government would much more readily agree to fiscal conditionality in the Euro if it wasn’t solely responsible for the welfare of its citizens. Remember these are people who bet on national sovereignty decades ago, then it was taken away with the Euro and the Europe that transpired is now unwilling to honor their benefits.

European integration would have gone much more smoothly if harmonisation of social welfare across states had been part of the project sooner (or at all). This doesn’t mean giving Swedish benefits to Greek pensioners – you get what you pay for. But it is at least arguable that Europe as a whole should not cut a nation’s pensioners out of their own modest level of benefits.

Greece and its creditors: What has been happening

Since March The Institutions have been refusing to roll over Greece’s debt, claiming that Greece is failing to comply with a program. As long as a deal is not struck they demand that Greece pays off maturing loans as they come due. No country can do that. If Greece doesn’t run out of money in a week or two, it’ll run out later. Every time Greece submits a plan, the creditors reply “No, do as we said originally”.

I feel it’s a mistake to continue this false negotiation and make significant concessions or distressed asset sales, only to postpone a forced bankruptcy by a few days or weeks.

Instead, Greece must send to The Institutions a bankruptcy plan now rather than layer. Since the creditors are not cooperating, in a few days Greece will go bankrupt like so. If the institutions still don’t cooperate, Greece could maybe agree to go bankrupt another way. Tsipras must say this and mean it. In a negotiation you must be clear what you’ll do if the other side doesn’t cooperate. You must have accepted that outcome. To go into a negotiation otherwise is to surrender.

I think a reasonable bankruptcy plan is that which SRIZA set out in its electoral program, removing the concessions that were agreed later and are now seen to be pointless. It’s not clear if bankruptcy will push Greece out of the Euro or whether the Greek State can go bankrupt in the Eurozone like a corporation, leaving the banks in the care of the ECB (like Detroit). I think SYRIZA needs to figure out what the post-bankruptcy recovery plan is, and act accordingly.

Τι συμβαίνει με την Ελλάδα και τους Θεσμούς?

Απο το Μαρτιο, Οι Θεσμοί με το επιχείρημα οτι η Ελλάδα δεν έχει συμμορφωθεί σε πρόγραμμα αρνούνται να ανανεώσουν (roll over) τα δάνεια. Ζητούν λοιπόν όσο δεν επιτυγχάνεται συμφωνία η Ελλάδα να τα εξωφλεί. Καμμιά χώρα δεν είναι σε θέση να κάνει μια τέτοια εξώφληση. Για την Ελλάδα αν δεν εξαντληθούν τα χρήματα σε μια βδομάδα θα εξαντληθούν αργότερα. Σε κάθε πρότασή μας οι Θεσμοί απαντούν “Όχι, κάντε όπως σα; είπαμε απ την αρχή”.

Βρίσκω λάθος να συνεχίζεται αυτή η δήθεν διαπραγμάτευση και γίνουν μεγάλες παραχωρήσεις και ξεπουλήματα για να πάει μια διαδικασία βεβιασμένς πτώχευσης λίγο πιο μακρυά.

Αντίθετα θα πρέπει ο Τσίπρας, πρίν την καταληκτική ημερομηνία, να στείλει στους Θεσμούς ένα σχέδιο πτώχευσης. Αφού δεν συνεργάζεστε, το Ελληνικό κράτος σε λίγες μέρες θα πτωχέυσει έτσι. Αν εξακολουθείτε να μη συνεργάζεστε τότε ίσως μπορούμε να συμφωνήσουμε να πτωχεύσουμε αλλοιώς. Και αυτό πρέπει να το εννούμε. Οταν μπαίνει κανείς σε μια συμφωνία πρέπει να είναι συμφιλιωμένος με το τι θα κάνει αν η άλλη πλευρά δε συνεργάζεται. Αλλοιώς παραδίδεται.

Νομίζω οτι ένα ικανό σχέδιο πτώχευσης είναι αυτό που ο ΣΥΡΙΖΑ ήδη προτείνει στο λαό και στους θεσμούς, ίσως αφαιρώντας τα σημεία παραχώρησς προς τους θεσμούς αν αυτό είναι πια άσκοπο. Ασαφές είναι αν αυτό μας βγάζει εκτός Ευρώ ή το Ελληνικό κράτος χεωκοπεί μέσα στο Ευρώ, σα να ήταν εταιρεία, ενώ οι τράπεζες μένουν μέλλημα της ΕΚΤ. Ο σύρζα πρέπει να εκτιμήσει ποιό απ τα δύο σενάρια προτιμά ανάλογα με το πώς σχεδιάζουμε να κινηθούμε για να συνέλθουμε μετά.

How to understand Greece’s negotiations with its creditors, part 1

Greece: We can’t pay the interest on our debt because the principal is high, the rate of interest is high, and our income is much too low thanks to the income-reducing austerity measures imposed by our creditors.

Creditors line so far: Prioritize paying creditors above anything else. We don’t care about the cumulative damage it does to your economy.

Greece with Syriza: We refuse to do that any more. Besides, can’t you see it’s pointless? We have less and less income to possibly pay you with.

Creditors after election: Well we can’t remove the debt principal from the books because debt is money and European nations’ money would have to disappear.

OK, these are good opening positions for negotiation. Greece is asserting you can’t collect from a business you’re running into the ground. Central bankers are asserting that “Europe’s money is our balance sheet” and you can’t remove debt from the assets side of the balance sheet without something bad happening to the liabilities (money) side.

What next? Compromise I expect. Either central bankers accept that balance sheets with liabilities exceeding assets are OK for central banks, or they’ll figure out a way to make old debt a token asset that generates little or no current account obligations. The first would be easiest, but the economic Zeitgeist is against it so I expect the latter. Some sort of indefinite near-zero real interest rollover as is the case with US or Japanese debt.

To clarify for the concerns of northern European folk:
No-one really expects a nation to pay back its debt. It’s not a project to build a highway, or little of national debt is like that. Nations borrow more or less indefinitely and the amount of debt may rise and fall but that’s an investment concern like the stock market rising and falling in valuation. Generally debt is supposed to rise slowly, and to pay it all back is a bad thing because it removes bonds from the investment market. Neither is Greece expected to pay back northern Europe nor are northern European taxpayers on the hook to pay Greece’s bill to someone. Sovereign debts are not like auto loans.

Rather, sovereign debts are like stocks or mortgages. They’re assets in the banking system. Greece essentially borrowed into a bubble and in 2010 was revealed to be a bad asset. Greece’s economy is worth less than it’s mortgage, so to speak. Bad call, maybe reckless, but it’s the truth. Since then the bad asset that’s Greece’s debt has been passed around until it ended up in Europe’s central banks, the way bad assets in the US ended un in the Fed. That’s OK, it’s partly what central banks are for. No one is going to liquidate a central bank because its liabilities exceed its assets. Except the ECB, if they decide to. But that would be dumb.

So what the negotiation is about is seeking one of two outcomes: Either agree in banking circles that having big holes in the balance sheets of central banks is OK, in which case they can write off a big chunk of debt and put the remaining amount back on the investment market on a sound footing, or figure out a clever way to keep the debt on the books so the books look neat but the debt generates no real interest or pressure on the real economy. The first is emotionally cleaner and revives the economy, and it’s what Syriza wants. The latter buries the problem until it dies of old age and is the Japanese approach. I like Japan…

Here’s why I’m voting SYRIZA

I’m in Greece, partly so I can vote in the upcoming Greek elections where the leftist euro-reform party SYRIZA is expected to win. SYRIZA would probably win without me, but I felt it was important to come and vote for this important event. From the tone of the media inside or outside Greece you get the impression that a SYRIZA victory represents some kind of Euro disaster. On the contrary, I feel a SYRIZA government in Greece (or another one like it in Spain or Italy, this is about policy not people) is a bold step towards the solution. I regard it with optimism, even jubilation. Let me tell you why.

Disclaimer: I’m close to some SYRIZA candidates, policy thinkers, or MPs so I may be biased.

First why am I voting in Greece? I don’t live there. It would make more sense for me to vote in the UK where I live and pay taxes, but I don’t get the privilege. I guess native Britons are afraid I might vote for someone worse than David Cameron. Our concept of EU citizenship is still half-baked compared to America so we vote for national elections in our country of origin. We’ll fix it, but until then we have EasyJet democracy. In any case, I don’t feel strongly about voting on Greek affairs. I feel it’s important to vote, via Greece since that’s where I have a vote, for changes in Europe.

At a basic level I feel a duty to avert a bad outcome and push for a good one. If you recall, two elections ago the extreme right scored well in parliamentary elections in Greece. A surprising result that showed rising intolerance, fear, and naive insularity in Greek society. I find it abhorrent. At the same time you saw the Front National in France and Britain’s UKIP, which I see as equally negative but better at hiding behind a veil of respectability, gaining ground. SYRIZA is the polar opposite of these parties. In a climate of extreme right-wing euroskepticism, I feel it’s imperative to vote for leftist euro reform in Greece, Spain, or elsewhere. So that’s a defensive reason to turn up and vote.

The other reason, and the main one, is I don’t want an EU president and finance minister elected only by Germans, running the EU in a way that only suits Germany. Ms Merkel is our de-facto EU president. It’s clearly not Mr Hollande or Mr Juncker. Mr Schäuble is Europe’s finance minister. Whether German citizens like it or not, these officers set policy for the Eurozone, not just for Germany. They run the Eurozone in a way that serves the interests of narrow or short-sighted mostly German capital while driving real economies especially in the south into depression. This is wrong, and we need to use the democratic process to change it. Because of institutional inertia we non-Germans can’t vote for the Eurozone’s de-facto president and finance minister. Eventually these will be elected EU-wide but now, urgently, we must force our German-elected EU leaders to change their policies.

The way to do this is for the governments of peripheral countries to confront Ms Merkel and Mr Schäuble with the failure of their policies. This is what SYRIZA intends to do. It’s not an anti-Europe or anti-Euro party but it has to say, realistically, that current EU policy towards the periphery is not working. Greece’s economy is in depression and it’s debt is unsustainable, as it has been since 2010. Debt restructuring and expansionary monetary policy are needed to end the crisis. A growing consensus of economists agree, so we witness establishment papers like the FT urging the same policies that SYRIZA favors, for pragmatic economic reasons.

What will happen if SYRIZA is elected and starts renegotiating debt and austerity measures with Berlin? I think mainly compromise. EU institutions will have to accept balance sheet losses, which can easily be covered by monetary expansion. Greece will have to live within its means day to day, which given the big drop in incomes since 2010 is now possible. SYRIZA is new so it can enact better tax policy, touching previously untouchable classes, and in return can reasonably ask the EU for welfare assistance towards the poorest citizens. On election night the markets will jitter and possibly overreact, but forcing a Grexit is in nobody’s interest. In the long run markets agree with SYRIZA’s program and EU-wide policies such as quantitative easing that it aligns with.

A win for SYRIZA will be an important event for Europe, not because Greece is important but because some peripheral country needs to stand up for a change in EU policy. It could be Spain or Ireland, but looks like it’ll be Greece. Far from that being a disaster or some new chapter in the Euro crisis, I think it’ll be a triumph of the democratic process and post-crisis Europe’s finest hour.

Greek debt crisis, as of summer 2011

Here’s an update as to what is happening with Greece. First, some numbers from the 2011 Greek budget:

  • Total revenue: €128 billion
    • Real revenues from taxes etc. €55 billion
    • Aid from the EU €3 billion
    • Borrowing from the market, including rollover €70 billion
  • Total expenses: €128 billion
    • Real expenses such as pensions, health etc. €63 billion
    • Debt rollover and interest payments €65 billion

And another pair of interesting numbers

  • Interest rate charged by the market for German bonds, 2 year maturity: 2%
  • And for Greek bonds: Around 25%, rising

So, what does all this mean?

Real deficit

In summary the Greek state is like a business that takes in €55 bn in sales but pays €63 bn in salaries and what have you, so it makes a real loss of €8 bn, or 14%. To recover, the state needs to increase revenue by extracting more taxes or running profitable businesses, or it must cut the amount that it pays to the Greek people, or some combination thereof. If it doesn’t the Greek state will run bankrupt anyway, abruptly cut expenses to €55 bn, and go on living in a hand-to-mouth way.

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The Greek financial crisis

Pavlos’s Thoughts – Episode 2 – The Greek financial crisis

Talking post (podcast). Click to open as MP3.

Key points:

  • The core problem is that the Greek economy is unproductive in structure and ethos.
  • Greece will probably have to default against the debt market, if not now then later.
  • It would be better if the EU dealt with the issue instead, by taking over and restructuring some debt.
  • The EU should probably create a framework to deal with national solvency in a consolidated way.
  • Fortunately the Greek economy has poor coupling, and could be protected temporarily by price controls.
  • In the long run the solution is to make Greece more productive by fixing exactly that – creating high coupling of innovative firms with the international economy. The best way to do that is probably to create international economic zones, which work in English by Western rules.

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