Secret IMF report – Greece needs debt relief far beyond EU plans

(Reuters) – Greece will need far bigger debt relief than euro zone partners have been prepared to envisage so far due to the devastation of its economy and banks in the last two weeks, a confidential study by the International Monetary Fund seen by Reuters shows.

The updated debt sustainability analysis (DSA) was sent to euro zone governments late on Monday, hours after Athens and its 18 partners agreed in principle to open negotiations on a third bailout programme of up to 86 billion euros in return for tougher austerity measures and structural reforms.

« The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM, » the IMF said, referring to the European Stability Mechanism bailout fund.

The fund released the document on Tuesday in Washington after it had been seen by Reuters and other news organizations.

A senior IMF official said late on Tuesday that the debt relief would give Greece a chance to recover and would be needed if the fund was to stay involved with any new Greek program.

« I don’t think this is a gimmick or kicking the can down the road, » said the official, who spoke on condition of anonymity. « This is a dramatic measure to take the entire European stock (of debt) and reprofile it, » so the country has a chance of « getting some growth back. »

European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept « deep upfront haircuts » on their loans to Athens, the report said.

It was leaked as German Finance Minister Wolfgang Schaeuble disclosed that some members of the Berlin government thought Greece would have been better off taking « time-out » from the euro zone rather than receiving another giant bailout.

IMF Managing Director Christine Lagarde attended weekend talks among euro zone finance ministers and government leaders that agreed on a roadmap for a new bailout. An EU source said the new debt sustainability figures were given to euro zone finance ministers on Saturday and were known by the leaders before they concluded Monday’s deal with Athens.

The IMF study said the closure of Greek banks and imposition of capital controls on June 29 was « extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA ».

European members of the IMF’s executive board tried in vain to stop the publication of that earlier study on July 2 just three days before a Greek referendum that rejected earlier bailout terms, sources familiar with the discussions told Reuters.

Greek Prime Minister Alexis Tsipras and his former finance minister, Yanis Varoufakis, seized on the IMF study as vindicating their argument that the proposed bailout was unsustainable and that Greece was right to demand debt relief.

The latest IMF study said Greek debt would now peak at close to 200 percent of economic output in the next two years, compared to a previously forecast high of 177 percent.

Even by 2022, the debt would stand at 170 percent of gross domestic product, compared to an estimate of 142 percent issued just two weeks ago.

Gross financing needs would rise to above the 15 percent of GDP threshold deemed safe and continue rising in the long term, the updated IMF study said.

Moreover, the latest projections « remain subject to considerable downside risk », meaning that euro zone countries might have to provide even more exceptional financing.

In the laconic technocratic language of IMF officialdom, the report noted that few countries had ever managed to sustain for several decades the primary budget surplus of 3.5 percent of GDP expected of Greece. As soon as Athens had swung into a small surplus before debt service last year, the government had failed to resist political pressure to ease the target, it noted.

The IMF study also appeared to challenge the assumption by some European officials that Greece will be able to meet some of its financing needs from the markets in 2018.

« Borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades, » it said.

(Editing by Paul Taylor, Toni Reinhold)

Greece’s Proposals to End the Crisis: My intervention at today’s Eurogroup

By Yanis Varoufakis


The only antidote to propaganda and malicious ‘leaks’ is transparency. After so much disinformation on my presentation at the Eurogroup of the Greek government’s position, the only response is to post the precise words uttered within. Read them and judge for yourselves whether the Greek government’s proposals constitute a basis for agreement.

Five months ago, in my very first Eurogroup intervention, I put it to you that the new Greek government faced a dual task:

We had to earn a precious currency without depleting an important capital good.

The precious currency we had to earn was a sense of trust, here, amongst our European partners and within the institutions. To mint that precious currency would necessitate a meaningful reform package and a credible fiscal consolidation plan.
As for the important capital we could not afford to deplete, that was the trust of the Greek people who would have to swing behind any agreed reform program that will end the Greek crisis. The prerequisite for that capital not to be depleted was, and remains, one: tangible hope that the agreement we bring back with us to Athens:

is the last to be hammered out under conditions of crisis;

comprises a reform package which ends the 6-year-long uninterrupted recession;

does not hit the poor savagely like the previous reforms did;

renders our debt sustainable thus creating genuine prospects of Greece’s return to the money markets, ending our undignified reliance on our partners to repay the loans we have received from them.

Five months have gone by, the end of the road is nigh, but this finely balancing act has failed to materialise. Yes, at the Brussels Group we have come close. How close? On the fiscal side the positions are truly close, especially for 2015. For 2016 the remaining gap amounts to 0.5% of GDP. We have proposed parametric measures of 2% versus the 2.5% that the institutions insist upon. This 0.5% gap we propose to bridge over by administrative measures. It would be, I submit to you, a major error to allow such a minuscule difference to cause massive damage to the Eurozone’s integrity. Convergence had also been achieved on a wide range of issues.
Nevertheless, I will not deny that our proposals have not instilled in you the trust that you need. And, at the same time, the institutions’ proposals that Mr Juncker conveyed to PM Tsipras cannot engender the hope that our citizens need. Thus, we have come close to an impasse.
At this, the 11th hour, stage of the negotiations, before uncontrollable events take over, we have a moral duty, let alone a political and an economic one, to overcome this impasse. This is no time for recriminations and accusations. European citizens will hold collectively responsible all those of us who failed to strike a viable solution.
Even if some, misguided by rumours that a Greek exit may not be so terrible or that it may even benefit the rest of the Eurozone, are resigned to such an event, it is an event that will unleash destructive powers no one can tame. Citizens from all over Europe will target not the institutions but their elected finance ministers, their Prime Ministers and Presidents. After all, they elected us to promote Europe’s shared prosperity and to avoid pitfalls that may harm Europe.
Our political mandate is to find an honourable, workable compromise. Is it so difficult to do so? We do not think so. A few days ago Olivier Blanchard, the IMF’s Chief Economist published a piece entitled ‘Greece: A Credible Deal Will Require Difficult Decisions by All Sides.’ He is right, the three operative words being ‘by all sides’. Dr Blanchard added that: “At the core of the negotiations is a simple question. How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?”
That Greece needs to adjust there is no doubt. The question, however, is not how much adjustment Greece needs to make. It is, rather, what kind of adjustment. If by ‘adjustment’ we mean fiscal consolidation, wage and pension cuts, and tax rate increases, it is clear we have done more of that than any other country in peacetime.
The public sector’s structural, or cyclically adjusted, fiscal deficit turned into a surplus on the back of a ‘world record beating’ 20% adjustment

Wages fell by 37%

Pensions were reduced by up to 48%

State employment diminished by 30%

Consumer spending was curtailed by 33%

Even the nation’s chronic current account deficit dropped by 16%.

No one can say that Greece has not adjusted to its new, post-2008, circumstances. But what we can say is that gigantic adjustment, whether necessary or not, has produced more problems than it solved:
Aggregate real GDP fell by 27% while nominal GDP continued to fall quarter-in-quarter-out for 18 quarters non-stop to this day

Unemployment skyrocketed to 27%

Undeclared labour reached 34%

Banks are labouring under non-performing loans that exceed 40% in value

Public debt has exceeded 180% of GDP

Young well-qualified people are abandoning Greece in droves

Poverty, hunger and energy deprivation have registered increases usually associated with a state at war

Investment in productive capacity has evaporated.

So, the first part of Dr Blanchard’s question “how much of an adjustment has to be made by Greece?” needs to be answered: Greece needs a great deal of adjustment. But not of the same kind that we have had in the past. We need more reforms not more cutbacks. For instance,
We need to adjust to a new culture of paying taxes, not to higher VAT rates that strengthen the incentive to cheat and drive law-abiding citizens into greater poverty

We need to make the pension system sustainable by eradicating unpaid labour, minimising early retirements, eliminating pension fund fraud, boosting employment – not by eradicating the solidarity tranche from the lowest of the low of pensions, as the institutions have demanded, thus pushing the poorest of the poor into greater poverty and conjuring up massive popular hostility against another set of so called reforms

In our proposals to the institutions we have offered:
An extensive (but optimised) privatisation agenda spanning the period 2015-2025

The creation of a fully independent Tax and Customs Authority (under the aegis and supervision of Parliament)

A Fiscal Council that oversees the state budget

A short-term program for limiting foreclosures and managing non-performing loans

Judicial and civil procedure code reforms

Liberalising several product markets and services (with protections for middle class values and professions that are part and parcel of society’s fabric)

Elimination of many nuisance charges

Public administration reforms (introducing proper staff evaluation systems, reducing non-wage costs, modernising and unifying public sector payrolls).

In addition to these reforms the Greek Authorities have engaged the Organisation of Economic Cooperation and Development (OECD) to help Athens design, implement and monitor a second series of reforms. Yesterday I met with the OECD’s Secretary General Mr Angel Gurria and his team to announce this joint reform agenda, complete with a specific roadmap:
A major Anti-corruption Drive and relevant institutions to support it – especially in the area of procurement

Liberalising the construction sector, including the market and standards of construction materials

Wholesale trade liberalisation

Media – electronic and press code of practice

One-Stop Business Centres that eradicate the bureaucratic impediments to doing business in Greece

Pension System Reform – where the emphasis is on a proper, long-term, actuarial study, the phasing out of early retirements, the reduction in the operating costs of the pensions funds, pension fund consolidation – rather than mere pension cuts.

Yes, colleagues, Greeks need to adjust further. We desperately need deep reforms. But, I urge you to take seriously under consideration this important difference between:
reforms that attack parasitic, rent-seeking behaviour or inefficiencies, and

parametric changes that jack up tax rates and reduce benefits to the weakest.

We need a lot more of the real reforms and a lot less of the parametric type.
Much has been said and written about our ‘backtracking’ on labour market reform and our determination to re-introduce protection for waged workers through collective bargaining agreements. Is this some left-wing fixation of ours that jeopardises efficiency? No, colleagues, it is not. Take for example the plight of young workers in several chain stores who get fired as they approach their 24th birthday so that the employer hires younger workers in their place to avoid paying them the normal minimum wage which is lower for employees under the age of 24. Or take the case of employees who are hired part time for 300 euros a month, made to work full time and threatened with dismissal if they complain. Without collective bargaining, these abuses abound with ill effects on competition (as decent employers compete at a disadvantage with unscrupulous ones) but also with ill effects on pension funds and public revenues. Does anyone seriously think that the introduction of well-thought out collective bargaining, in collaboration with the ILO and the OECD, constitutes ‘reform reversal’, an example of ‘backtracking’?
Turning briefly to pensions again, much has been made of the fact that pensions account for more than they did in the past; as much as 16% of GDP. But consider this: Pensions have shrunk by 40% and the number of pensioners is stable. So, expenditure on pensions has fallen, not risen. That 16% of GDP is due not to spending more on pensions but, instead, to the dramatic drop in GDP which brought with it a similarly dramatic reduction in contributions due to the fall in employment and the rise of undeclared labour.
Our alleged backtracking on ‘pension reforms’ is that we have suspended the further reduction in pensions that have already lost 40% of their value when the prices of the goods and services that pensioners need, e.g. pharmaceuticals, have hardly moved. Consider this relatively unknown fact: Around 1 million families survive today on the meagre pension of a grandfather or a grandmother as the rest of the family members are unemployed in a country where only 9% of the unemployed receive any unemployment benefit. Cutting that one, solitary pension is tantamount to turning a family into the streets.
This is why we keep telling the institutions that, yes, we need pension reform but, no, you cannot just lob off 1% of GDP from pensions without causing massive, fresh misery and a fresh recessionary round as this 1.8 billion multiplied by a large fiscal multiplier (up to 1.5) is withdrawn from the circular flow of income. If large pensions still existed, whose curtailment would make a fiscal difference, we would do it. But the distribution of pensions is so compressed that savings of such a magnitude would have to eat into the pensions of the poorest. It is for this reason, I suppose, that the institutions are asking us to eliminate the solidarity pensions supplement to the poorest of the poor. And it is for this reason that we counter-propose proper reforms: a drastic reduction, almost elimination, of early retirements, consolidation of pension funds and interventions in the labour market that reduce undeclared labour.
Structural reforms promote growth potential. But mere cutbacks in an economy like Greece’s promote recession. Greece must adjust by introducing genuine reforms. But at the same time, going back to Dr Blanchard’s answer, the institutions need to adjust their definition of growth-enhancing reforms – to acknowledge that parametric cuts and tax hikes are not reforms and that, at least in the case of Greece, they have undermined growth.
Colleagues have remarked in the past, and may do so again, that our pensions are too high compared to their older people and that it is unacceptable for the Greek government to expect them to foot our pension bill. Let me be clear on this: We are never going to ask you to subsidise our state, our wages, our pensions, our public expenditure. The Greek state lives within its means. Over the past five months we have even managed, despite zero market access and zero disbursements, to repay our creditors. We intend to keep doing so.
I understand that there are concerns that our government may slip into a primary deficit again and that this is the reason the institutions are pressing us to accept large VAT rises and large pension cuts. While it is our view that the announcement of a viable agreement will suffice to boost economic activity sufficiently to produce a healthy primary surplus, I understand perfectly well that our creditors and partners may have cause to be sceptical to want safeguards; an insurance policy against our government’s possible slide into profligacy. This is what lies behind Dr Blanchard’s call for the Greek government to offer “truly credible measures.” So here comes an idea. A “truly credible measure”.
Instead of arguing over half a percentage point of measures (or on whether these tax measures will have to all of the parametric type or not), how about a deeper, more comprehensive, permanent reform? An automated hard deficit brake that is legislated and monitored by the independent Fiscal Council we and the institutions have already agreed upon. The Fiscal Council would monitor the state budget’s execution on a weekly basis, issue warnings if a minimum primary surplus target looks like being violated and, at some point, trigger automated across the board, horizontal, reductions in all outlays in order to prevent the slide below the pre-agreed threshold. That way a failsafe system is in place that ensures the solvency of the Greek state while the Greek government retains the policy space it needs in order to remain sovereign and able to govern within a democratic context. Consider this to be a firm proposal that our government will implement immediately after an agreement.
Given that our government will never again need to borrow from your taxpayers or from the taxpayers standing behind the IMF, there is no sense in a debate between member-states that compete on whose pensioners are poorer, instigating a race-to-the-bottom. Instead, the debate moves on to debt repayments. How large should our primary surpluses be? Does anyone seriously believe that the growth rate is independent of the primary target set? The IMF understands fully that the two numbers are linked endogenously and that this is the reason why Greece’s public debt must be looked at at once.
Our large debt overhang should be thought of as a large unfunded tax liability. While it is true that the EFSF and GLF slices of our debt are long-dated and the interest rate is not large, the Greek state’s unfunded tax liability, our debt, features a lumpy component that impedes investment and recovery today. I am referring here to the 27 billion of SMP bonds still held by the ECB. This is a short-dated unfunded liability that potential investors in Greece take a look at it and turn back because they can see the funding gap this part of the debt creates instantly and because they recognise that this lump of 27 billion on the ECB books stop Greece from taking advantage of the ECB’s quantitative easing at the very moment when this program is unfolding and is reaching its maximum capacity to come to the aid of countries buffeted by deflation. It is a cruel irony that the country most afflicted by deflation is the one that is excluded from the ECB’s anti-deflation remedy. And it is excluded because of this 27 billion lump.

 proposal on this front is simple, efficient and mutually beneficial. We propose no new monies, not one fresh euro, for our state. Imagine the following three-part agreement to be announced in the next few days:

Part 1: Deep reforms, including the automated hard deficit brake that I mentioned.

Part 2: A rationalisation of Greece’s debt repayment schedule along the following lines. First, to effect an SMP BUY-BACK Greece acquires a new loan from the ESM, then purchases the SMP bonds back from the ECB and retires them. To underpin this loan, we agree that the deep reform agenda is the common conditionality for successfully completing the current program and for securing the new ESM arrangement that comes into operation immediately afterwards and runs concurrently with the continuing IMF program until the end of March 2016. Short-term funding relies on the outstanding disbursement from the current program and medium to long term funding is completed by the return of the SMP profits, coming up to 9 billion out of the 27 remaining billions, which go into an escrow account to be used in order to meet Greece’s repayments to the IMF.

Part 3: An investment program for kick-starting the Greek economy funded by the Juncker Plan, the European Investment Bank – with which we are in talks already – the EBRD and other partners who will be invited to participate also in conjunction with our privatization program and the establishment of a development bank that aims at developing, reforming and collateralizing public assets, including real estate.

Does anyone truly doubt that this three-part announcement would dramatically change the mood, inspire Greeks to work hard on hope of a better future, invite investors to a country whose asset prices have fallen so dramatically, and give confidence to Europeans that Europe can, even at the 11th hour, do the right thing?

Colleagues, at this juncture it is dangerously easy to think that nothing can be done. Let us not fall prey to this state of mind. We can forge a good agreement. Our government is standing by, with ideas and with the determination to cultivate the two forms of trust necessary to end the Greek drama: Your trust in us and the trust of our people in Europe’s capacity to produce policies that work for, and not against, them.

Greece still facing demands it cannot agree to, says Varoufakis

Greece’s finance minister Yanis Varoufakis said his country is still facing demands from creditors that it cannot agree to.He said Greece’s commitment to stay in the euro zone was absolute but it would not accept any solution to its debt crisis that it considered “unviable”.

As European leaders scramble to secure a deal just days before Athens has to meet a crucial repayment deadline, Mr Varoufakis told RTE Radio: “As a debtor I have duty not to take on more loan tranches unless at some point these debts will be repaid.”

“So when I’m asked to put my signature on the dotted line of an agreement which is clearly unviable I’m not going to do this.”

He claimed political leaders, including the Irish Government, were being kept in the dark regarding the various proposals his government was bringing to the table and as a result their perspectives were being skewed.

“What they hear is what the institutions tell them,” he said, noting the hardline stance taken by some leaders in the negotiations.

“If your finance minister and I were to sit down and I were to explain my proposals….Michael Noonan would agree that they are very reasonable,” Mr Varoufakis said.

He claimed Greece had undergone five times the level of fiscal consolidation that Ireland had in the last five years.

“We have actually squeezed out of our public sector expenditure almost everything except low wages and low pensions.”

Because of this huge consolidation effort – what he described as a “gargantuan dose of austerity” – the Greek economy had shrank by 27 per cent and was continuing to shrink.

“So when the institutions come to us and they insist that we should have more consolidation, more cuts, more austerity to the tune of 2.5 per cent of GDP, I put to you it is impossible to effect this without increasing taxes.”

“I am against increasing the corporate tax, but then again I am against raising the tax on hotels and against cutting the pensions of people who live below the poverty line,” he said. “These issues are putting me and my government in an impossible position, having to make a bad choice among really hard, difficult bad choices”.

He indicated his government might accept a deal involving some form of rescheduling of Greece’s debt rather than a write-down as it has been seeking.

Greece needs to reach an agreement over reforms to its economy with its creditors – the IMF, the European Central Bank and European Commission – before they will release the latest €7.2 billion instalment of bailout funds.

Without the money it will be unable to make a €1.5billion payment due to the IMF next Tuesday, potentially triggering a catastrophic financial collapse that could see it forced out of the euro.

Tanaiste Joan Burton said nobody is opposing anything in relation to the Greek deal.

She said negotiators on Greek side need to explain their position clearly and how their proposals will be delivered.

Ms Burton said: “There has been a lot of ‘now you see it now you don’t’ on these negotiatons. There has lot of papers flying around.

“Lets have a clear set of proposals, let’s have a reaction to them and let’s make a deal that can enable Greece to stay in euro zone and one the Greek Government will deliver on.”

Ms Burton said Greece is suffering a humanitarian crisis and the Government faced some very difficult issues.

The Minister for Health Leo Varadkar said the Greek proposals are “heavily focused” on tax.

He said he wondered whether that was the right course for the country.

Mr Varadkar said there needed to be” a degree of realism from Government authorities”.

Germany’s EU Commissioner Guenther Oettinger, meanwhile, said Greece’s exit from the euro zone will be inevitable if Athens and its lenders do not come up with a solution within the next five days.

. “We will do everything up until the 30th so that the Greeks show they are prepared to reform,” Mr Oettinger told Deutschlandfunk radio. “A ‘Grexit’ is not our aim but would be unavoidable if there is no solution in the next five days,” he said.


Eurozone Ministers Admonish Greece for Slow Progress on Overhauls 

By James Kanter New York times

RIGA, Latvia — Eurozone officials sharply criticized the Greek government on Friday for moving too slowly on steps to overhaul the country’s economy that they say would be necessary to get debt relief and to avoid a default.

The comments, expressed as finance ministers assembled here in the Latvian capital, were some of the strongest signs yet of rising concerns about the economic situation in Greece and the commitment of the country’s finance minister, Yanis Varoufakis, to address it.
“I’ll be quite frank — it was a very critical discussion,” Jeroen Dijsselbloem, the president of the Eurogroup of eurozone finance ministers, said after the meeting. “We had hoped to hear a positive result,” he added, but “we are still far from that.”
Mario Draghi, the president of the European Central Bank, which is one of Greece’s biggest creditors, warned that “time is running out” for resolving the Greek standoff.
Hans Joerg Schelling, the Austrian finance minister, told reporters that the standoff with Greece “cannot continue like this” and that he was growing “annoyed.”
Peter Kazimir, the Slovakian finance minister, said, “We talk, talk, and the substance is missing.”
A potential default by Greece is the biggest near-term risk to the European economy, which has begun a tentative recovery after a prolonged sovereign debt crisis that nearly sank the euro at the beginning of the decade. Yet the meeting on Friday yielded no concrete plans to accelerate the talks, and Mr. Varoufakis gave no sign of yielding to pressure.
“We are striving to come to an agreement with the institutions regarding promises and a plan that we can take to the Greek people, and that we can ask the Greek people to fall fully behind,” Mr. Varoufakis told a news conference after the meeting.
The frustration with Greece is boiling over more than two months after the international lenders gave Athens until late June to present plans for reforms that would both ease austerity and overhaul its economy.
The lack of agreement on those plans means European lenders will not release the next allocation of bailout money — a 7.2-billion-euro, or $7.5 billion, payment — to keep the Greek government running and avoid a potential default.
Mr. Dijsselbloem said it was up to Mr. Varoufakis and his government to present more ambitious proposals, noting that the next scheduled gathering of the Eurogroup would be on May 11, a day before Greece must pay €750 million to the International Monetary Fund as part of its loan agreements.
There was “a great sense of urgency around the room,” acknowledged Mr. Dijsselbloem.
As negotiations have continued between Greece and representatives of its creditors in recent weeks — meetings separate from the periodic gatherings of the finance ministers — the two sides are said to remain divided on significant issues. Greece has insisted that it cannot cut pensions any further or accept creditors’ demands for a budget that would require a relatively high primary surplus — a surplus when debt repayments are not taken into account.
Greek officials have insisted that these issues are “red lines” that cannot be crossed, and Mr. Varoufakis underscored them in his comments to reporters in Riga.
Some of the antagonism between the Eurogroup and Greece stems from continuing disagreement over whether lenders can conduct fact-finding at Greek ministries in Athens, to verify the true state of the country’s finances, for example, rather than meeting in hotels with Greek officials.
A Finance Ministry official in Athens on Friday, speaking only on the condition of anonymity because of the political tensions surrounding the discussions, said that the Greek government was “not bluffing” in opposing tough measures and was intent on protecting the country’s interests.
Mr. Varoufakis, speaking separately to Greek reporters in Riga on Friday said that the country had submitted a new, revised list of reforms at a discussion between deputy finance ministers this week — but that the document had not been presented to the Eurogroup for procedural reasons that he derided as unnecessarily complicated. He accused eurozone officials of “undermining tactics” and “negativism” and said the climate in Friday’s meeting had been tense, although he denied reports by some news media that officials had verbally attacked him.
Mr. Varoufakis told the Greek reporters that the country was prepared to push the deadlines on the debt deliberations: “There is a negotiation where you have 30 days to reach a deal with someone. Why do it on the 20th day when you can continue and push for something better on the 21st? Or the 22nd? You keep going until the 30th.”
But Mr. Draghi of the European Central Bank, appearing alongside Mr. Dijsselbloem at their news conference, warned Greece: “Time is running out.”
“There can’t be an agreement if people don’t have an adequate process to assess, quantify policy measures,” Mr. Draghi said.
As the crisis drags on, one big concern is the ability of Greek banks to stay afloat. Mr. Draghi said that the European Central Bank’s emergency financing for Greek banks should continue as long as they were “solvent and have adequate collateral.” But he also warned that “a change in the environment” could force the central bank to make that financing more expensive for the Greek banks.

Greece Hires US Investment Bank Lazard To Advise On Country’s $270B Debt Burden To Europe


The Greek government is enlisting U.S. investment bank Lazard Ltd. to advise on its $270 billion debt burden ahead of negotiations with international lenders. The move comes as tensions are building in Europe over Greece’s ability to pay off its four-year bailout plan obligations, the Financial Times reported Saturday.

In a statement, newly elected Greek Prime Minister Alexis Tsipras said he was confident “we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole.”

Tsipras’ far-left Syriza party rose to victory last weekend after exploiting a widespread anti-austerity sentiment in Greece, sparking fears among European leaders of a Greek default. In the days since the elections, leaders have alarmed creditors and investors by pledging to freeze privatization initiatives, rehire government workers and roll back existing austerity measures. Euclid Tsakalotos, a spokesperson for the Greek government, reportedly said it is « unrealistic » to expect Greece to repay its debt in full.

Greece’s hiring of Lazard indicates the Tspiras administration is preparing for harsh talks with the « troika, » the group overseeing the Greek bailout plan and comprised of the International Monetary Fund, European Central Bank and European Commission, the Times noted. The trio imposed strict austerity measures as a precondition of the financial rescue plan in the wake of the 2008 financial crisis, but many Greeks oppose the measures as the country grapples with severe unemployment and sputtering economic growth.

« No one side is seeking conflict, and it has never been our intention to act unilaterally on Greek debt, » the prime minister said. He added bringing Lazard on board « in no way entails that we will not fulfill our loan obligations to the ECB or the IMF. » Lazard advised Greece on its original bailout in 2012.

German Chancellor Angela Merkel expressed impatience with Greece. On Saturday, she ruled out the possibility of debt forgiveness for the new Greek government, and she insisted the debt-stricken country should abide by the original bailout agreement. Merkel said she did « not envisage fresh debt cancellation » for Greece, she told the Hamburger Abendblatt newspaper.

Greece still has a debt of about $335 billion, or 175 percent of its gross domestic product, even after private creditors slashed billions from the country’s debt in a 2012 renegotiation.


Greece: Two Takes on the Eurozone Crisis by Steve Hanke

Written by Steve Hanke on march 14, 2012

Steve H. Hanke , professeur d’économie appliquée à l’Université Johns Hopkins, est Senior Fellow et directeur du Projet des Devises Troubled au Cato Institute.Steve H.Hanke est un économiste américain connu pour son important travail sur les tableaux de change, la dollarisation, l’hyperinflation, et d’autres sujets en économie appliquée.

Q: Since the start of the Eurozone crisis, member states in the so-called “periphery” of the common currency area have focused on fiscal austerity and structural reform as a means to restoring debt sustainability. Will these steps be enough to stabilize their sovereign debt markets?

A: No, I don’t think so. Member states haven’t delivered on much in terms of fiscal austerity and certainly not structural reform. Fiscal austerity should be about reducing the size of government… governments are bloated and spending way too much in Europe. Austerity should be almost entirely focused on reducing government expenditures and obviously not on increasing taxes. But there’s a lot of tax increase noise within the so-called austerity programs in Europe, so they just have it all wrong. And, in any case, they haven’t delivered much.

As far as structural reforms go, there have been almost none that have actually been implemented, even in Greece. They’ve talked a lot, and spent most of their time blaming markets or the outside world — the Germans, the Dutch, the Finns, and so on — for the problems that they’ve gotten into. So there’s a lot of finger pointing going on and talk about structural reforms, but they’re half-baked.

And when I say structural reforms, what do I mean? What they have to do is put in place growth-friendly policies and get government out of the way. And that means they have to have something like Presidents Reagan and Clinton did in the United States; they have to reduce government expenditures and reduce regulation and red tape. But they’re not in that business in Europe. Their assessment is: we have a crisis because markets failed and we have to regulate markets more now so that they don’t fail in the future. This is just upside down because the crisis was caused by government failure — mainly the European Central Bank and the Federal Reserve Bank of the United States. These were the great enablers and engines that allowed for the blow-up of the bubble that ultimately burst in the fall of 2008, although there were problems in Europe even in the summer of 2007.

So essentially in both the fiscal austerity and structural reform realms, the packages that they’ve been talking about are really almost fatally flawed. And they haven’t even delivered on what they said they would deliver on in the first place. They’ve been wasting their time moving from one meeting to the next and jumping from one fire to the next. They lack the “vision thing.” The long and the short of it is: will these steps toward fiscal austerity and structural reform stabilize the periphery’s sovereign debt markets? The answer is: of course not.

Q: How do you see the crisis evolving in the periphery and the Eurozone as a whole?

A: Well, we have a problem here, and it’s the following. We just had a restructuring of Greek debt, and we’re getting the so-called second bailout coming into Greece. To some extent, the political elites are breathing a sigh of relief because there wasn’t an explosion that went off. And they’re moving on to electoral campaigning in both France and Greece — they’re now in full election mode. But if you look at Greece, the money supply there is contracting at a fantastic pace — over 16% per annum. So Greece’s economy is going to implode. All the calculations about debt sustainability and other things they’re talking about… you can just throw them into the garbage can. None of them are going to come true because the Greek economy is going to continue to shrink dramatically — you can just see it in growth and the broad money measure (M3). The point here is that money matters, money will dominate; forget the fiscal austerity packages and structural reforms. Money in the short-run will completely dominate the economy. So there are huge deflationary forces at work right now in Greece and as I’ve said since February 2010, the Greek economy is on an implosion course.


Now, where do we go from here? We are set up to have a real collision. It will ultimately occur and there will be a lot of tension along the way. That is, the political elites view the euro as a political project to unify Europe. On the other hand, we have the economic realities of the Eurozone in which the southern countries have become very uncompetitive for a variety of reasons. Mainly, there have been a lot of wage increases in the public sector and, on top of that, Italy has a somewhat unique situation because, since it adopted the euro, there have been essentially no productivity increases. So not only have they had wage increases, but no productivity increases. They’re very uncompetitive in all those southern tier economies.

In the coming decade, economic forces will congeal to get the system back to equilibrium — and this isn’t a policy thing, it’s just the nature of the monetary union. The Eurozone will move in the direction of equilibrating itself and will get the southern countries to be more competitive or on some kind of par with the northern countries; you will have relatively high inflation in the north and deflationary pressures in the south. That’s one scenario, and it’s the most likely economic reality that will evolve.

But of course this will mean that that economic reality will be on a collision course with the political elite. High inflation in the north and low inflation, or deflation, in the south is a formula for continued problems and anxieties in both the north and the south. So the elite will try to do bailing out, patching up, band aids, you name it… but of course it’s going to cost the taxpayers in the north a lot. So it won’t be very popular with the average working man who has to pay taxes, but that is what the political elite will try to do. In my view, they will continue to distribute bailouts even if there’s moral hazard and all the rest of these dangerous implications. The political agenda is set, and it’s to have a unified Europe. This is going to run into a buzz saw of economic realities that are largely driven by deflationary forces in the south and inflationary forces in the north.

Q: Is there still a heightened risk of contagion from Greece or other periphery countries to Eurozone financial institutions and “core” economies?

A: Yes, there’s no question about it. Greece in a few months could be the verge of blowing up again because the economy is imploding, which I think will happen and the markets do too. Markets have priced in this new debt that has been swapped for the old debt at very low rates. The market clearly doesn’t think they’re going to be paid. So market participants, with their own money at risk, think there’s a high probability that Greece will not pay and I completely concur with that. Only I think it’s probably going to be worse than the market thinks.

Q: European leaders have agreed to a wide range of measures aimed at promoting fiscal sustainability and addressing macroeconomic imbalances. Do you think these steps will accomplish their goal of preventing a repeat of the crisis?

A: No, I think the agreements aren’t worth the paper they’re written on. It’s like the Maastricht Treaty, which was broken almost immediately by France and Germany. When it comes to treaty infractions, I don’t know if the “police” would pick up the wayward parties. And I’m almost certain that there would be no prosecution, in any case.

I think the whole system… and I’m not talking about the euro itself because the euro itself isn’t really the problem, and never has been the problem. The whole system, and the whole grand structure integrating Europe has been turned into a set of rules and treaties and so forth that has essentially morphed into a kind of doomsday machine.

Q: Prior to the crisis, many perceived the euro as emerging alternative to the dollar as an international reserve currency. Could the euro reprise this role and even become more attractive than it was prior to the crisis?

A: There has always in world history been a dominant world currency. The U.S. dollar happens to be the dominant currency now, and it’s always very hard to challenge the top dog. The life of a dominant currency on average — and this is going back about 2,700 years — is about 300 years. So this would suggest that the U.S. dollar is probably, in statistical terms, going to be in the saddle for a while longer. That said, of course, today it’s always relative — one unattractive currency against even more unattractive currencies. So, if U.S. monetary policy stays as bad as it’s been since 2003, and the world retains the kind of international non-system that we have, I think the U.S. dollar is somewhat vulnerable.

But the problem is, who are the challengers? They talk about the euro, but the Eurozone is an economic basket case. And then you’ve got the Chinese yuan; some people are talking about that, but the Chinese yuan isn’t even a convertible currency yet. Even the Russian ruble is convertible. You can’t challenge a dominant currency with an inconvertible one. So, I think in the foreseeable future there’s a lot of conjecture and musing about the dollar’s international role, but I think we’re stuck with the dollar.

Q: Would the introduction of Eurobonds change this assessment?

A: Eurobonds for the euro area as a whole would probably enhance the euro and make it a more viable challenger. Now, whether it’s a wise idea or politically even feasible… those are another set of questions. But given the question you asked, my answer is that a Eurobond would enhance the international role of the euro.

Q: Do you think an intermediate step toward a Eurobond, such as closer fiscal coordination or limited fiscal integration would still have that effect?

A: I doubt it. The credibility of European economic policy, policymakers, and European elites is so low that any kind of intermediate step would be frowned on and not taken very seriously. I think they would really have to do the real deal. And that gets back to my first point about fiscal austerity and structural reforms in Europe. They’ve done almost nothing, especially with structural reforms. There have essentially been no structural reforms to liberalize the economies in Europe and take some of the red tape and intervention out of the system. I just don’t see that vision in Europe.

The only place that we saw that was in Germany under the Schroeder government. Schroeder pushed through reforms and liberalized the labor market. And that’s one reason the German engine is humming along, because of Schroeder’s Agenda 2010 program. It may be possible elsewhere — I don’t want to be completely negative here. But I don’t see that kind of talk and initiative on the horizon in Europe.

Q: Do you see the Eurozone crisis affecting the U.S. recovery over the next year?

A: There is one scenario that is very ominous for the United States, and that’s if Greece blows up and things are thrown out of kilter in Europe. Then, Europe’s growth would really go into negative territory and the U.S. dollar would soar. If the U.S. dollar soars like it did after the Lehman blow up… actually from July 2008 until February 2009 the dollar went up almost 30% against the euro. That huge strengthening dollar meant that commodity prices collapsed and things were very unstable as a result. If you’re getting into that kind of scenario, it would be good for people holding dollars, bad for commodity prices, and probably bad for the U.S. economy. So it’s conceivable that Europe could throw up a lot of dollar-euro instability and that’s bad.