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A LETTER ADDRESSED TO THE GREEK PRIME MINISTER

Dear Mr. Prime Minister
Dear Mr. Minister of Finance
 
With the sincere intention to help, let me say the following:

1. Apparently, you could not have 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 9 / 5, as would have been preferable for obvious reasons. Fine. Greece should now first ask the IMF for its part of the lending (and anyone else who can lend her at the same rate as the IMF), and then ask Germany for its share (and other countries which must have the approval of their parliament) after 9 / 5. Do not give in easily to "Frau Nein" regarding the interest rate. This is a "poker" game played by this lady with the support of hard-liners ( such as A. Weber, O. Issing, J. Starbatty et.al.), but Greece has a strong "hand": Keynes 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 the contagion (or domino effect) of the initial crisis to other peripheral countries in the Eurozone, and then across all of the Eurozone, and eventually all over the world (because we are not the only ones who have large deficits and public debt). It is also the financial damage which will be suffered by German banks (among others) by a possible restructuring of our debt, and their bailout by the German government will be huge, much larger than the requested loan to Greece. Not to mention the threat of leaving the euro, return to the drachma, currency depreciation, default, etc. Put these loaded guns on the table, Mr Prime Minister, even though you do not intend to use them! 

2. You should not accept the part of the IMF/EU "package", which will come from 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 prominent 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 several economists, should be less than the growth rate of GDP, and of course a Greek GDP growth above 5% is not very probable over the next few years. (I would be glad to place at your disposal such studies.) 

   
3. 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. You should remind Greece's 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, Greece should import German products and have a greater deficit as a result) and, finally, what is a proven fact in economics, that in a monetary-trade union most economic variables (exports, competitiveness, deficits, debt, etc.) of the countries in the union will diverge over the years. Strong countries 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 you let the Europeans forget that Greece has made two gifts to the Eurozone: She has contributed to the depreciation of the euro, making Eurozone exports cheaper, and has helped EU leaders to realize what leading economists have been saying for years, namely that a monetary union without common economic-fiscal policies and without solidarity cannot exist.
 
4. 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: You should not accept the imposition of additional austerity measures within 2010. For later, it could be. It should depend on the results of the austerity measures until the end of 2010, the harsh measures that have already been taken, but unfortunately they 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.
 
5. 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 will improve the competitiveness of Greek firms (by reducing the cost per unit of output), which is at the root of the Greek crisis, and will increase employment, without surely being able to reduce wages by decree in the private sector, as some people (including members of the troika now negotiating in Greece) have suggested. But do slash drastically expenditures of the sinful public sector. And Greece needs about 10 ministries at most. Also, if you sell half of public properties, you may pay off a third of the debt. And do not forget growth and development, which affects the denominator of the two fractions of deficit/GDP and debt/GDP. Regarding the numerator of the first fraction (income minus expenses), the difficulty of course is to reduce those costs and to increase those revenues, which do not reduce consumption and investment.
Without going into a theoretical discussion, this is related to the “multipliers” in some cases. And do go ahead with pension and health care reforms. But of course, you should not burden further the people with low salaries and pensions. Because if you do not watch out for these issues, then the economy will enter the well-known vicious deflationary spiral ... And I am afraid this is what your recent tax bill may do, which although it may well be in the right direction, some adjustments are needed (but of course I cannot deal with this issue here).
 
6.
Unfortunately, proposals such as the creation of a European Monetary Fund, or Insurance Fund, or the issue 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 options we should 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 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. (An English bank has done this, without any problem.)
 
7. And finally, the Greek government should deal with the vicious orchestrated attacks by certain international media, their paid commentators, the various handsomely compensated lobbyists, particularly of American investment banks that work together with some hedge funds, their employed blogs and think tanks, and some rating agencies who are being paid by companies and countries being evaluated by them ... The amount of lies and half-truths against Greece published daily is incredible, and 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. Why don’t you hire someone to answer all these inaccuracies on behalf of the government?
 
Thank you.
 
Poly
vios Petropoulos
Former American university professor.



Disclosure: Not relevant

Disclosure: Not relevant