FYI | Feb 09 2012
By Greg Peel
Around a decade ago, Argentina defaulted on its sovereign debt following two desperate debt restructures. Russia defaulted on its debt in the late nineties and hasn't looked back since. Right now, the EU is desperately trying to keep Greece from defaulting for no other reason than it shares the common eurozone currency. On this morning's (our time) developments, it may well now default.
There are two elements to the current “Save Greece” push. One involves an agreement on the details of the debt restructure and the other an agreement between Greece's political parties to accept the new austerity measures required by the EU-ECB-IMF troika. This morning's news from Athens is that after the latest seven and a half hour session of talks between the parties, agreement has not been reached. “Greece is sliding closer to default,” the AFP service proclaims, “and possible expulsion form the European Union after missing its third deadline in a week to deliver on its pivotal austerity package”.
Writing last night before this latest news wire, London Daily Telegraph commentator Ambrose Evans-Pritchard suggested that “it makes little difference whether or not Lucas Papademos secures triparty agreement today – or soon – for a debt deal”. Evans-Pritchard has been noting a few home truths.
In the month of January, the Greek government's VAT collections were down 18.7% on January 2011. The plunge comes despite an increase to 23% from 13% on food and drink VAT imposed in September as part of an earlier austerity requirement. Net tax revenues have fallen 7%. “Nobody can seriously blame tax evasion for this,” notes Evans-Pritchard, “It has happened because 60,000 small firms and family businesses have gone bankrupt since the summer”.
From some reason that has left economists around the globe shaking their heads, the new austerity plan put forward by the troika includes forecasting that Greece's GDP will fall by 5% in 2012 but be back to growth by 2013. Surely they can't be serious. The Greeks were the great ancient proponents of logic. How can severely slashing government spending result in economic growth in such a space of time? The Americans are also arguing about budgets, but the Fed has been flooding the US with funds and may yet go another round. The UK has cut back on spending but the Bank of England continues to quantitatively ease. Across the developed world, central banks are pouring money into economies. The ECB is pouring money in too, but realistically to save the banks. The banks won't on-lend that money – they'll simply recapitalise. Just look at the US experience.
Iceland's government fell after the GFC, so did Ireland's. Portugal's has fallen, Greece and Italy both have new “technocrat” prime ministers, and Romania's government fell on Monday. Polls in Greece suggest the popularity of the incumbent government is at 8%, down from 47% when elected. Greece's sympathetic New Democracy Party is down to 18%. The anti-Merkel Greek “hard left” in its various forms, notes Evans-Pritchard, is boasting 35% support. Greece will hold a general election in April.
The big debt rollover is due in March. If a restructuring deal and the troika bail-out package are not secured by then, Greece will default. The opposition parties have apparently been unable to agree on one simple element of the required austerity measures – cuts to auxiliary pensions over a threshold of E150 per month. They have thus in theory agreed (having tweaked) on a 22% cut to the minimum wage, a 15% cut to complimentary pensions and an extra 15% cut for public utility pensioners. What politician wants to be seen as the one who has agreed to such measures? Even before today, and indeed for two years now, the Greek people have been striking and rioting in the streets over successive and ever stricter austerity enforcements.
Even if the Greek debt and restructuring deals suddenly go through at the eleventh hour, and default is avoided in March, what happens after April? There will undoubtedly be a new government in Greece, elected on a platform of “go and get stuffed”.
“April,” suggests Evans-Pritchard, “is the inflexion point”.
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