The following is a guest post by Polyvios Petropoulos, a former university professor of economics and management in the US.
Petropoulos contends that, since the IMF charges a maximum rate of 3.5% in other interventions, one would expect at least the same terms for Greece. However, Greece is not receiving those terms. It is being told to undergo extreme austerity measures in order to receive a 5% loan which will cover borrowing needs for the next year only.
Petropoulos wants to change the discussion and offer a game plan he believes is reasonable. Despite the use of "bankster," a term which Credit Writedowns does not use, this is a good alternate view of the Greek situation.
Greece should not accept the part of the IMF/EU "package" which is being offered by the EU if the EU does not lower the interest rate to 3%, or at most 3.5%, as that is the maximum rate charged by the IMF. It is as if you can borrow from a stranger at 1.50%-3.50%, and your partner is asking you for 5%. Moreover, the calculations of several economists with respect to the so-called "snowball effect" indicate that if Greece borrows at a rate of 5% or more, her debt as a % of GDP becomes unsustainable. The interest rate, as has been shown by a number of economists, should be lower than the growth rate of GDP, and of course a Greek GDP growth above 5% is not very probable in the near future.
Apparently, the Greek government could have not waited to activate the so-called "bailout mechanism" (although “lending” is in my view a more precise description, rather than bailout) after the German elections on May 9th, which would have been preferable for obvious reasons. Greece should initially ask the IMF for its part of the lending (and anyone else who can lend her at the same rate as the IMF), and she should then ask Germany for its share (and other countries which must have the approval of their parliament) after May 9th. Greece should not give in easily to "Frau Nein" regarding the interest rate. This is a "poker" game played by this lady and her sympathizers (Axel Weber, Otmar Issing, etc.), but Greece also has a strong "hand": Somebody has said that if you owe a little bit of money, you have a problem. If you owe a lot, your lenders have the problem. One issue is of course the risk of contagion of the initial crisis, which will probably spread to other peripheral countries of the eurozone (I prefer calling them GISPIs), and then all across the eurozone, and eventually throughout the world, because –as it is now well understood- Greece is not the only country that has a large deficit and public debt. Another issue is the financial damage which will be suffered by German banks (among others) by a possible restructuring of Greek debt, and their bailout cost for the German government will be huge, much larger than the requested loan to Greece. Not to mention the threat of leaving the euro, returning to the drachma, currency depreciation, default, etc. The Greek Prime Minister should put these “guns” on the table, even if he does not intend to use them.
I do not wish to dwell at length on the responsibility of Germany (and the entire eurozone) for the rapid deterioration of the Greek crisis, the rise in spreads, the panic in the markets and the party of the speculators. Greece should remind her partners of the structural failures of the EU and the eurozone, the intra-European imbalances (for example, for Germany to export and to have a smaller deficit than Greece’s the Greeks should import their products and have a greater deficit as a result) and, finally, it is a well-established fact in economics that in a monetary-trade union most economic variables (such as exports, competitiveness, deficits, debt, etc.) of the countries in the union are bound to diverge over the years. Strong countries will get stronger and the weak weaker. Thus, the necessary solidarity is not a good-Christian-act, but an unavoidable necessity for maintaining the union. Nor should Greece let the Europeans forget that she has made two gifts to the eurozone: she has contributed to the depreciation of the euro, making eurozone exports cheaper, and she has helped EU leaders realize what leading economists have been saying for years, namely that a monetary union without common economic-fiscal policies and without solidarity cannot exist.
Those Greeks who demonize the IMF offer a poor service to their country. IMF is not a "bogeyman". And indeed, as proclaimed by well-known economists and former IMF officials (such as K. Rogoff, S. Johnson, etc.), the IMF has been offering loans on softer terms in recent years. See e.g. conditions imposed by the IMF on Romania and other countries. But one thing is certain: Greece should not accept the imposition of additional austerity measures for 2010, as “Frau Nein” has recently suggested. For 2011 and 2012, it’s a different story. It will depend on the results of the severe austerity measures already taken, which should be apparent by the end of 2010. Unfortunately, it is true that these harsh measures have not yet been applied with the rigor and speed they should have. And of course a deficit below 3% of GDP by 2012, when this threshold has now been exceeded even by Germany, is almost impossible for Greece to achieve, without strangling the economy of the country and its people, and should not have been promised.
However some steps to liberalize the labour market should not be taboo, particularly as the current restrictions are not being complied with in practice in most cases, nor can they be policed. On the contrary, such measures as freedom to fire employees with no restrictions and the abolition of a minimum wage-salary will improve the competitiveness of Greek firms and the economy (by reducing the average labour cost per unit of output), which is at the root of the Greek crisis, and will increase employment as well, as surely no government can possibly reduce wages in the private sector by decree, as some people are suggesting. But the government should indeed slash drastically expenditures of the sinful and bloated public sector. And Greece does not need more than 10 ministries at most. Also, if Greece sells half of the public properties (and I am not talking here about islands or monuments, as some Germans have suggested…), the country may pay off a third of its debt. Growth and economic export-oriented development should not be forgotten, because obviously it affects the denominator of the two fractions of deficit/GDP and debt/GDP. Regarding the numerator of the first fraction, which is revenue minus expenditures, the difficulty of course is to reduce those expenditures and to increase those revenues, which do not reduce private consumption and investment. Without going into a theoretical discussion here, this is related to the “negative multipliers” in some cases. And of course, people with low salaries and pensions should not be burdened further. Privatizations and other structural measures are also urgently needed. If the government does not watch out for these issues, then the economy will enter into the well-known vicious spiral. And I am afraid this is what the recent tax bill may do, which although it may well be in the right direction, some adjustments are needed (which of course I cannot deal with here).
Unfortunately, proposals such as the creation of a European Monetary Fund, or Insurance Fund, or the issuing of European bonds, etc. have not been adopted yet, due to indecision and lack of solidarity on the part of certain European leaders. However, there are other funding options that Greece could also consider:
- Option A: The Greek government may issue bonds at a reasonable interest rate. They will be offered to Greek banks, and the banks will deposit them as collateral at the European Central Bank, withdrawing from the ECB inexpensive cash with which they will then pay the Greek government for the bonds.
- Option B: The Greek government can issue bonds in Yen (which are of course convertible into any other currency) to be guaranteed by the JBIC (Japan Bank for International Cooperation), at a low interest rate, as dozens of countries have done, including Turkey.
- Option C: As a last resort, there is the possibility of voluntary rescheduling of Greek debt, thus moving the loans, which expire in the short term, further away in time. This is NOT equivalent to default, as some commentators have suggested. In fact, a well-known UK bank has done this, without any problem.
Finally, the Greek government should deal with the vicious orchestrated attacks by certain international media and their paid commentators, the various lobbies and politicians, handsomely compensated by investment “banksters” who work together with some hedge funds, their blogs and think tanks, and those credit rating agencies that are being paid by companies and countries being evaluated by them. The lies and half-truths about Greece published daily are incredible, and they certainly add to the panic in the markets. “Country runs” (like what is now happening to Greece) are similar to “bank runs”. No bank or country can cope under these circumstances. All these inaccuracies should be answered on behalf of the government. (To be clear: I am not denying the responsibilities and mistakes of successive Greek governments, but Greece is not alone in this mess, and Truth should be respected above all.)
Moral deficit - not moral hazard - is at the root of the recent economic recession, which is now gradually becoming a severe sovereign credit crisis of global proportions.
Comments are appreciated.