Greece: Getting Even More Expensive

Includes: ERO, GREK
by: Acting Man

10 Billion Here, 10 Billion There …

The Greek government is to consider fresh cuts to its still bloated public sector. A tragedy! Finally, the size of a government in Europe may actually shrink. We can already hear the wailing and gnashing of teeth from the port of Piraeus to the snow-decked peaks of the Alps up North.

Please note that this dreaded event has not happened yet, in spite of all the verbiage that has been spilled about 'austerity'. What has happened instead, is that both government spending and government income from taxes have risen by leaps and bounds across the EU. In spite of their higher tax revenues, most governments continue to be fiscally incontinent. Their attempts to cut spending are the functional equivalent of gathering up water with a sieve – in fact, apart from three exceptions, they are all spending like drunken sailors. Greece's options in this regard are somewhat more limited, because a good chunk of its spending nowadays is being paid for by tax cows residing elsewhere, courtesy of the 'troika'.

This doesn't keep Greece from continually missing its ' fiscal targets' and keep asking for more money – in spite of having saddled private sector bondholders with a 70% haircut not once, but twice! Of course, one must keep in mind that a large percentage of Greece's bonds were owned by its own banks and banks in Cyprus. In Greece this has meant that the monies the banks lost were replaced with 'bailout' funds, so ultimately there was no haircut for the banks. In Cyprus something analogous happened, except that bank depositors – many of whom were suspected of dwelling in Russia – were asked to pay their share of the bailout. In a way this was a salutary event, because it served as a good reminder of the permanent de facto bankruptcy of fractionally reserved banks. On the other hand, the population of euro-land is probably too busy either trying to survive (in the crisis countries) or getting dumbed down by shows on TV (elsewhere) to care much – so far, anyway.

Now it turns out that Greece may actually need another 10 billion euros, cuts or no cuts. Der Spiegel reports:

"The Greek recovery may be facing yet another hurdle. According to a report by German daily Süddeutsche Zeitung, the beleaguered country needs another massive influx of money if it is to avoid insolvency. The paper cites an unnamed official at the European Commission as saying that the "financial gap" could be as large as €10 billion.

The news comes at a difficult time for Greece and its relations with Germany. German Finance Minister Wolfgang Schäuble is set to visit Athens this Thursday for consultations with his Greek counterpart Yannis Stournaras and with Prime Minister Antonis Samaras. Schäuble is highly unpopular in Greece for his consistent insistence on austerity. And with German elections looming in September, it seems unlikely that additional aid money for Athens will be forthcoming anytime soon.

That, though, could create further problems for Greece. The International Monetary Fund — part of the troika of lenders keeping Athens afloat — is only allowed to provide aid to countries whose finances are guaranteed 12 months into the future. Otherwise, it must withdraw funding. Should that happen, countries like Germany and Finland, who have made their own participation in the bailout contingent on IMF involvement, could withdraw as well.

Concerns that Greece could be in need of additional assistance are not new. France, for example, recently called for direct EU assistance for wobbly Greek banks. In addition, Greek Economy Minister Kostis Hatzidakis told German daily Die Welt earlier this month that he expects Europe to agree to another debt haircut for the country, a conjecture with which he is not alone. Indeed, senior economists in Schäuble's own ministry told the daily Frankfurter Allgemeine Zeitung on Tuesday that a further reduction in the country's debt load is necessary.

"There will be a significant cut," Jörg Rocholl, president of the European School of Management and Technology and a member of an advisory council for the Finance Ministry, told the paper. "Greece's ability to shoulder its debts has not been guaranteed." The anticipated funding shortfall is partly a function of Greece's economy remaining stuck in recession as well as the slow pace of the country's privatization program and other reforms."

(emphasis added)

The short version, with the important bits thrown in:

bla bla bla, another 10 billion, bla bla bla, evil Schäuble and IMF may withdraw funding (who are you kidding?), bla bla bla, banks STILL wobbly, need more money, bla, bla, debt haircut number three is coming! bla bla, bla…it's the fault of 'austerity'!

This is truly cringeworthy stuff. Why didn't they all just shrug right at the beginning and say: "OK; Greece is bankrupt. What can you do? It's no big deal. It's been bankrupt in 90 of the past 180 years. We've all survived its serial bankruptcies without problems before. Let's do so again."

But no – instead Greece has been plunged into a never-ending economic crisis, its creditors have lost their shirt anyway (twice already, with the third time approaching fast), and it has turned into a bottom-less pit, a kind of black hole that sucks in money that is then never seen again, because it evidently leaves the known universe as soon as it is thrown in. The ineptitude at display in the so-called 'rescue' of Greece is simply stunning. The people responsible for this must either be the biggest bunch of morons ever assembled on this planet, or they are evil demons that have been sent from hell.

Government revenues and spending in the EU 27. As we always stress, so-called EU 'austerity' is a complete myth. Their combined spending declined ever so slightly in just one year, when the markets really put pressure on them. They've made up for that by accelerating it just one year later. Whatever 'austerity' is about, it is certainly not about shrinking the State. For more charts in the same vein, see this article by Martin Masse, a researcher at the Institut économique Molinari in Paris, who has just written about this very topic. A topic which has become the equivalent of a dead horse in these pages we might add, one that we must keep beating. At least we're no longer the only ones doing so – via Eurostat.

Let's Go On Strike

The Greeks themselves have a time-tested, if slightly odd way of reacting to their nation's plight. Apparently the many surplus to requirements bureaucrats feel strongly that someone owes them a living. If it is not the Greek state, then it must be Wolfgang Schäuble. To make their feelings known, they have decided to go on strike again. There is always a danger when civil servants go on strike – it could easily happen that they are not missed by anyone. What then? There are currently 600,000 civil servants in Greece, who preside over what one might charitably call 'total chaos plus corruption'.

Of course, it must be acknowledged that losing one's job in an economy with a 27% unemployment rate is a scary prospect. We don't want to make light of the very real problems these people are about to face. However, it is in large part because Greece is home to an incredibly complex and corrupt bureaucracy that its economy is in such dire straits. When it takes 10 months and bizarre, Kafkaesque running battles with tens of different bureaucracies to get a simple permit for an internet business that one can get in the U.S. within 24 hours (and the U.S. are no longer the paragon of the free market they once were we might add), then it is time to admit that something is seriously wrong.

"Indeed, when EU leaders approved the latest tranche of aid money for Greece earlier this month, they elected to spread it out over several months so as to increase the reform pressure on Greece.

The results of that pressure are coming to a head on Wednesday, with parliament set to address the slashing of thousands of public sector jobs by the end of this year. To protest the measure, labor unions on Tuesday staged their fourth general strike of the year, paralyzing the capital with peaceful marches. While it is widely expected that the Antonis [sic! ed.] government will be able to pass the measures demanded by the EU and the IMF, his margin for error is tiny. One party recently left his coalition in protest at ongoing austerity, leaving Antonis with just a three seat parliamentary majority.

And public employees will be doing their part on Wednesday to remind parliamentarians of their opposition to austerity. Athens is seeing further protests with mayors from around the country marching on parliament as municipal police officers staged a demonstration as well."

The people writing for 'Der Spiegel must be chums of Antonis Samaras, since they keep referring to the 'Antonis government' above. As to the idea of 'increasing reform pressure on Greece', we ask one more time: who are you kidding?

We are also continually wondering what people actually mean when they 'oppose austerity'. What austerity? Admittedly, Greece and Portugal (and Poland for some quirky reason), are the only countries in the EU that have indeed seen a decline in government spending – a decline so small, you almost need a magnifying glass to see it on a chart. But let's face it: these governments are bankrupt. So what is actually the choice? If they didn't get funded by bailout money, they could spend even less, since no private sector lender would have the guts or be foolish enough to lend them any more money, at least until the usual short attention span syndrome strikes again.

By the way, here is someone who should perhaps think hard about the impending 'haircut number three'. Apparently a hedge fund led by Paul Kazarian has decided to buy 10% of the currently outstanding Greek government debt for $3.8 billion. A 70% haircut would transform this small fortune into a slightly smaller fortune of $1.14 billion. It would be a bit like visiting the casino actually. Once again though, it would be a salutary event in a way. It would prove that contrary to the assumptions of lenders to governments, they are not safe just because governments have arrogated the right to obtain their income by political means to themselves. Sometimes it is not enough, especially when the people expected to pay reside in a different territory.

There can be no great harm in strikes by public sector workers and mayors. In fact, when they are not working, they can at least not do much harm. Apparently though, in Greece these occasions are used for general strikes, 'paralyzing the capital' as noted above. That is definitely economically harmful and Greece needs such economic setbacks like a hole in the head. Why the unions would call for these strikes is slightly beyond us as well. Shouldn't they be more concerned with getting the country back on its feet rather than inflicting even more damage? After all, the strikes are utterly senseless; they cannot possibly change anything – on the contrary, after the strikes the government will be even more broke than it was before them.

Unsound Money Is No Solution

Some people argue that Greece should leave the euro as it could then devalue – as if economic prosperity could be restored by destroying one's currency. 'Devalue' means of course nothing but 'inflate'. The citizens of Greece however regularly confirm in surveys (with majorities of 80%) that the one thing they definitely do not want is a return to the drachma. This is, by the way, how citizens all over the eurozone think: in the crisis countries, they all want to retain the euro, because they regard it as a far sounder money than the currencies they have relinquished. They trust the ECB far more to keep the currency's value intact than they would ever trust their own central banks, and rightly so. In the former 'hard currency' nations like Germany, the euro has a far more difficult stand: in those countries, the currency that was given up in favor of the euro is regarded as sounder than the euro, so people are pining for its return.

This may actually be the most valuable lesson from the crisis: everywhere citizens want sound rather than unsound money. Not even the false promise of government 'inflating away' the economic troubles can entice them to change their mind on this topic. Can there be any doubt as to what they would prefer to use for money if the money monopoly of the State were rescinded?