Today the Troika (the IMF, the ECB, and the EU) is visiting Greece to check whether there has been any "progress" with the bailout program and the conditions Greece has to fulfill (to be concluded late August). However, the issue with Greece is what the meaning of "progress" is, exactly.
In a narrow sense, fulfilling the terms of the bailout program, there certainly hasn't been enough progress. Greece has failed to attain some 210 targets imposed by the Troika, according to The Telegraph. If the Germans need any reason to pull the plug on Greece, they are spoiled for choice.
And indeed there are rumblings out of Germany that patience has worn out. The Germans also seem to believe that a Greek exit would pose a manageable problem. We can only hope they're right, but we're not at all reassured about that. With Spanish and Italian yields rising to ever more unsustainable levels, we can do without it, to put it mildly.
It's almost certainly the case that keeping Greece in the euro is cheaper than forcing it out, but apparently, examples must be set when bluff is called.
While Greece has brought much of the problems on itself in the past decade, one can have some sympathy with its current (considerable) plight, and to some degree, we can also understand that the Greek patience with the Germans has run out.
That's because it's easy to blame it all on the Greeks, but the more important issue is whether the strategy that Greece is forced to adapt is actually working. Is there anyone who actually think it is?
Yes, they're missing many targets. But many of them are missed because the economy simply keeps deteriorating ever faster. Here is the ever excellent Evans-Pritchard, from the Telegraph:
The Troika originally said that Greece' economy would contract by 2.6pc in 2010 under the austerity regime, before recovering with growth of 1.1pc in 2011, and 2.1pc in 2012. In fact, Greek GDP has been in an unbroken free-fall. It did not grow last year. It contracted a further 6.9pc, and is now expected to shrink 6.7pc this year. This was entirely predictable - and was predicted by many critics - since Greece faced an IMF-style austerity package without the usual IMF cure of devaluation.
And, predictably but rather depressingly, today the Greek Prime-Minister came out and said that the slump will be deeper still. The results of that are predictable. If GDP falls, tax receipts fall with them and the public debt/GDP ratio climbs further, resulting in:
Economists calculate that Greece may need a third rescue package worth up to 50bn euros. [BBC].
The truth is simply two-fold, as noted by Evans-Pritchard:
- The Troika has misjudged the scale of economic decline over three years by 12pc of GDP.
- The collapse has been exponential. Greek GDP is contracting faster than they can reduce debt.
Greece is to a certain extent a special case. Its state apparatus functions less well than in other eurozone countries and it has a serious problem with tax collection that is deeply ingrained. Apparently, the Greek government is planning a tax amnesty. While this is simply admitting reality:
there are 2.5 million unaudited tax filings stretching over a decade [Kathimirini in FT Alphaville]
But it is likely to undermine tax morale further as it makes a fool out of honest people and tells tax payers that if you hold out long enough, eventually you'll stand a pretty good chance escaping.
Nevertheless there are wider lessons here. Much of the same dynamic is visible in other peripheral countries that have slammed on austerity measures in the midst of an economic slump.
Unlike the adherents of the "expansionary austerity" theorem hoped, this hasn't restored confidence, got bond yields down to manageable levels, or got economies growing again, with the exception of some Baltic countries (but at a very large price).
Instead, we can see much of the debt-deflationary dynamic wreaking havoc in Spain, Portugal, Ireland and Italy. Countries that are forced into too much austerity when their economies are already shrinking and/or the private sector and banks are deleveraging isn't a recipe for success.
These countries cannot devalue, they cannot offset the fiscal drag with monetary stimulus, they cannot stem the capital outflow or break the vicious cycle between banks and sovereigns. They're simply trapped into something very akin to the Gold Standard in the 1930s, which had similarly devastating deflationary consequences that are feeding upon themselves.
The IMF, in an Article IV Consultation Report (pdf), has admitted as much, in unusually frank language, summed up by Liam Halligan:
The IMF is now insisting on full-scale eurobonds - a genuine, loss-sharing banking union - and "sizeable" ECB money-printing on top of covert QE that has already happened. [Liam Halligan]
Basically the IMF is saying that more needs to be done, much more. Whether that will happen in the required time frame in which Spanish and Italian yields are rising by the day and before patience with Greece seems to run out seems quite doubtful. We fear the worst. It's fasten your seat-belt time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
