Is Greece's Economic Recovery Now In Ruins?

Is the "cradle of European civilisation" once more being made a scapegoat for the Euro Area's continuing problems?

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  1. δεῖ δ’ αὐτὸν ἐς φάρμακον ἐκποιήσασθαι - He must be chosen from among you as a scapegoat. Hipponax

    The sub title of this post should have been "how Greece saved Europe and died", but possibly the meaning might have been misinterpreted, and anyway the worst might yet not happen. What intrigues me about the whole current situation is the way Greece seems to be constantly condemned to live out its own mythology.
  2. Greek culture and historiography is replete with references to the figure of the pharmakos, or scapegoat. Indeed the pharmakos ritual, in one culture or another, is probably as ancient as human experience itself. In classical Greece, or so the texts tell us, in times of crisis some poor unfortunate schmuck was singled out to serve as the whipping boy. The poor wretch was first beaten with fig branches, then led throughout the community to receive the verbal abuse of the assembled throng prior to being either sacrificially killed or permanently banished. The whole process has normally been interpreted by anthropologists as the means of purifying a community of some kind of pollution. The source of the evil is first accumulated in the victim - the scapegoat - who is then sacrificed in order that it may be extirpated.

    The nineteenth century British classicist Jane Harrison described the situation as follows:
  3. The resonance of this strand of mythology with recent developments in Europe is not hard to discern. Greece has come to incarnate all that is bad in the Euro Area, it has been transformed into the rotten apple that endangers the rest of the barrel. It needs to be set apart, if need be even expelled. Hypocritically or otherwise some even say it would be in the country’s best interest to meet this fate, to have Grexit forced on it as an act of kindness, in a way which is reminiscent of the argument that terminating the scapegoat’s suffering was effectively putting an end to a condition that was, if anything, "worse than death".

    The line in the sand that has been drawn around the country which was once the cradle of European civilization is slowly but surely becoming an impermeable frontier. The next step should be "capital controls" is something we often hear. Extraordinarily those who are most praised for being "not like Greece" frequently run far higher fiscal deficits, while the transgressor country remains cut off from, even from ECB bond buying.

    Looked at from a bit more distance it isn’t that hard to argue that if Greece hadn’t existed it would probably have been necessary to invent it. Amongst so many squabbling parties Greece’s presence has served to unite, to let the others know who they are by enabling them to say who they are not. Whatever his shortcomings, the fact that Finance Minister Varoufakis found himself in an 18 to 1 minority in Riga speaks volumes: Greece is the tie that binds.

    It has been necessary that Greece existed for Europe to save itself. Twice. The first time was when the country’s debt was consciously NOT restructured in 2010, provoking an impossible fiscal adjustment on the country which was inevitably followed by an ultra-deep recession. This decision, as is often noted, allowed Europe’s banks to be saved, while all the other struggling countries had their economies talked up, simply on the basis of not being "Greece". Indeed the much vaunted European Banking Union is very much a by-product of the Greek travails, as was Draghi’s currency saving promise. Without the threat of contagion from Greece to support the case for it would this have ever been made?

    And now, before our eyes, history is being repeated: the second time just as much a tragedy as the first one was. Greece is being starved of cash, while everyone else is having their debt supported (without any conditionality) and their interest payments contained by ECB QE bond buying. Fiscal deficits targets in countries like France, Spain, Italy and Portugal have been relaxed, and in any event no longer attract the investor attention they once did. Everyone wants to ride the Draghi wave, not push back against him. And how exactly was QE pushed so easily through an otherwise deeply divided ECB governing council? It couldn't possibly be because those who were most opposed to it were also those most in favour of forcing Grexit, could it? Could there have been some kind of "unholy alliance" between hawks and doves since QE put in place the essential "cordon sanitaire" firewall, even while many denied deflation risk was a problem: a firewall which would be absolutely essential to monetary union security should the worst come to pass in negotiations with the new Greek government?
  4. The Cost Of Not Finding A Solution


    Everything has a cost, or so the story goes, especially time. In the Greek case we now know an additional item on the mounting bill: the country is back in recession. The issue is who - apart of course from the long-suffering Greeks themselves - will pay the extra costs of the latest imbroglio.
  5. It is now clear that Greece's economy has been going backwards over the last 6 months, and that the economy has now fallen back into recession. GDP fell by 0.4% in the last three month of 2014, and by a further 0.2% in the Jan - March 2015 period. As a result at the end of March Greek GDP was only 0.3% above the year earlier level. This is a lot lower than expected in IMF forecasts, and - perhaps more importantly - well out of line with what is needed to maintain the 2022 debt sustainability targets on which continuing Fund support for Greek programmes depends.
  6. Indeed "Greece is so far off course on its €172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt", Peter Spiegel wrote in the Financial Times on 4 May 2015. The reason for this is obvious: IMF regulations prevent the Fund continuing to make tranche payments to countries where there is a foreseeable financing shortfall during in the coming twelve months. The worsening in the Greek economic outlook and the consequent reduction in the revenue outlook effectively guarantee this shortfall.

    But the sort of debt write-off the IMF is demanding of its European partners goes much deeper than that. Future IMF participation in any new Greek programme after June is also in doubt because without additional pardoning the debt will not be on a sustainable trajectory in terms of the objectives set down and agreed upon in November 2012. So you reach a point where extend and pretend hits the proverbial fan. You can, of course, do more extend and pretend till the next time it happens, but at this point the IMF seems reluctant to do so. On the other hand austerity-type spending cuts which only make the economy smaller and the growth path lower simply don't help in this context, since what they give with one hand (debt reduction) they take away with the other (in the form of lower GDP).
  7. The background to the current stand-off is to be found in the debt targets the Eurogroup agreed with the IMF in November 2012 and which effectively made the current programme possible. Given the latest recession these targets are clearly now not attainable. On the other hand Greece is totally bust, so the only way the negative effects of the negotiating gridlock can be paid for is by someone else "coughing up" (or rather "pardoning" debt). This someone will need to be the Euro partners (who else is there), and the longer the stand-off goes on the higher the cost. Naturally the other alternative would be allowing Grexit, but arguably the cost of Grexit would be much higher to the Euro partners, and by a large multiple.
  8. The issue of the growing IMF/Eurogroup divergence came to general public attention over the weekend when an IMF internal memo was leaked to Channel 4 News (UK). The key point in the memo, which is hardly news, is that Greece is running out of money. “There will be no possibility for the Greek authorities to repay the whole amount unless an agreement is reached with international partners," referring to a series of June repayments to the IMF amounting to roughly 1.5 billion euros.
  9. This impression is also confirmed by details of the letter that the Greek Prime Minister Alexis Tsipras wrote to International Monetary Fund Managing Director Christine Lagarde at the start of May (see details in this Kathimerini article) to inform her that Athens would not be able to pay the 750 million euros due to the Fund on May 12 unless the European Central Bank allowed Greece to issue more T-bills. It appears that at the time of writing the letter (which also went to EU Commission President Jean-Claude Junker and ECB President Mario Draghi) Mr Tsipras was not aware he could temporarily use the 650 million euros held on reserve at the Fund to make the payment, which he subsequently did. It's not unreasonable to assume that it was the IMF itself who advised him on this.

    The inter-institutional tensions are evidently reaching a critical stage, although in fact the issue has now been knocking around for some weeks, as Simon Nixon reported in the WSJ on April 22.The IMF, he said, "appears to have blinked".
  10. The general impression being given is that the IMF is contemplating a much lower bar for agreement, and then possibly disengagement from any post June programme. The Euro partners are evidently anxious to avoid this outcome, but they are caught between a rock and a hard place.
  11. On Or Off The Hook?


    In order to understand what is going on between the Eurogroup and the IMF it is necessary to go back to a 2013 document entitled: The Third Review Under the Extended Arrangement Under the Extended Fund Facility (what a mouthful that is, henceforth the Third Review). In particular the following paragraph in that document off a key:

    The macroeconomic outlook, debt service to the Fund, and peak access remain broadly unchanged and euro area member states remain committed to an official support package that will help keep debt on the programmed path as long as Greece adheres to program policies. Capacity to repay the Fund thus depends on the authorities’ ability to fully implement an ambitious program. It continues to be the case that if the program went irretrievably off-track and euro area member states did not continue to support Greece, capacity to repay the Fund would likely be insufficient.

    Now all of this may sound - at least to the uninitiated - like a load of old bureaucratic mumbo-jumbo, but actually there are a number of key statements here which may help to put the current internal Troika tiff in some sort of broader and more intelligible perspective.

    The cited paragraph talks about three issues: the macroeconomic outlook, the commitment of euro area member states to support Greece and keep the debt on the programmed path as long as Greece adheres to the programme's requirements. It also warns of the danger that should the programme go "irretrievably off track", and euro area member states not give the necessary support then the country's capacity to repay the Fund would clearly be insufficient - ie the IMF would be left holding the can, and Fund employees would be faced with the complicated task of explaining to its non-European members why losses had been incurred.

    Crudely put the position is this - as long as the IMF continue to write reviews stating the Greek programme is on track then the euro area member states are on the hook to cover any shortfall in Greek debt performance in order to make the 2020 and 2022 targets (see above) achievable. This is a commitment they undertook during negotiations on the second bailout agreement.

    On the other hand, if the IMF were to start producing reports stating that the programme was off-track because of Greek non-compliance, rather than for example arguing that the numbers were out of whack due to faulty macroeconomic forecasts (and of course the recent economic relapse makes those forecasts even less realistic), then the euro area member states would be off the hook from additional stepping up to the plate with the result that the IMF would end-up taking a loss.

    Well the present recession makes it evident that those targets are even less achievable than they were previously, and that future debt sustainability analyses will have to reflect this. Bottom line: the IMF has a clear interest in enabling Greece to sign successfully off the current programme (due to end in 2016) and they thus have more interest in giving the country a "pass" note than the Eurogroup ministers do.This is why, in Simon Nixon's words, they are blinking, to the great discomfort of the Eurogroup partners.
  12. Bottom Line: When You're Bust, You're Bust

    A lot of attention is being paid at the moment to the idea that Greece is running out of money, and indeed there is a lot of chuckling about just how much grasp Yannis Varoufakis actually has of game theory. But at the end of the day it is also true that when you have lost everything (in the bankruptcy sense) you have relatively little still to lose. To some extent the idea that the Greek government might be deploying this strategy - known technically as coercive deficiency - was explored by Jacques Sapir back in February. In my humble opinion far too much energy may have been wasted on laughing at Mr Varoufakis (which might precisely have been his intention) and far too little invested in trying to think through what he might have been up to.
  13. If delays in negotiations mean a large bill is run up on your credit card (figuratively speaking) at the end of the day you can't pay it, so someone else will have to. This is the situation Greece is now in. If non performing loans start to rise with the new recession eventually these will have to be written off, and the bank recapitalization costs will go on someone else's account.

    The IMF memo in fact draws attention to this issue, and states that “non-performing loans are at very high levels and – going forward – the system might suffer from important stress." Indeed they go further and point out how "staff also noted a dramatic deterioration in the payment culture in the country”. This is what you would expect to find in a country steadily, and day by day, going bankrupt.

    It's no longer clear that even if progress was made in the next two weeks towards some sort of fudged compromise deal - the so called "quick and dirty outcome" that the IMF oppose - that this would be able to get the necessary agreement from all EU parties and the IMF before the June payment. That is not necessarily an insurmountable issue, but it does highlight just how near to a potential brink (or "accident") we are, and it also serves to draw attention to the point that the longer all this goes on the greater the cost for Eurogroup members. Reforms will bring a bit more growth, but only in the longer run. Whatever the package of structural reforms the Greeks sign on to it won't do that much to mitigate the effects of the hit the Greek debt sustainability profile just took.

    But then there is the other alternative - just allow the momentum of the present impasse to carry Greece straight out of the Euro Area. That would solve the problem of getting a deal, but the cost, when you come to think of EFSF and IMF loans plus ELA would hardly be negligible, not to mention the as yet unquantified geopolitical and contagion effects.
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