On the 9th May 2010 a joint team of IMF and European Committee negotiated a loan to the government of Greece. The amount of this loan and the effort required by the austerity programme is highly ambitious. In exchange for a programme of austerity to reduce the loan for Greece by 30 billion € (additional), it will receive 80 billion € in European bilateral loans and 30 billion € from the IMF in the next three years. The dominant opinion in Greek political circles supports strong cuts which will in exchange save the Greek economy from relying of the high cost of borrowing on the financial markets.
This report examines the detail of the adjustment programme of Greece and the leads to the opposite conclusion. In three years from now, Greece will face a heavier debt burden. Meanwhile, employment and economic growth and development will be sacrificed. The only thing in reality the packet achieves is an important change in the ownership of the debt, where the national debt of Greece is transferred from European bank accounts to European governments. The real proposal appears to be more an attempt to save the European banks, by freeing them from holding Greek debt which may lead to a potential bankruptcy. If the confidence of the market is not restored despite at the same time the Greek economy been pushed in to recession with double-digit unemployment and increasing poverty, what is the purpose of the rescue packet. My question, with many others, who or what is exactly being rescued?
The 110 billion € loan Greece is borrowing now from the IMF and European governments will be used (generally) to repay banks and institutional investors who are the owners of the Greek debt today. So, is not the purpose of the rescue packet related to a large transfer of debt from (generally) banks to state hands?
Banks, insurance companies and pension funds are the true beneficiaries. The probability of default on repayments and the amount of interests due should be excluded for the next three years. There is a clear European dimension to this. The main bulk (almost 80%) of Greece’s debt is not in the hands of Greek financial markets but in the accounts of the German, French and British banks. Europe and IMF don’t provide fresh financing to Greece but rather, they are protecting the European financing system from debts up to 200 billion €, that could be caused by any Greek bankruptcy.
Curiously, almost 25% of the Greek debt belongs to British (and Irish) financing field, with the rest being held by mainly German and French interests. The obvious beneficiary from the rescue packet of the euro zone governments will not be the Greek workers and pensioners who will suffer from extreme cuts and resection, but the financial centres such as the City of London and others.
Globally the fiscal austerity programme and the delay in financial report in response to the worst financial crisis and deepest recession of the last 80 years, does not provide the improvement in economical return as claim by the supporters. These policies extent the continuation of income transfer on wealth from poor people to the rich and from the industrial section to the financial, insurance and real estate sections, which dominate increasingly in the USA and Europe. In spite of the fact of these policies exacerbate deprivation of the economy and raise possibility of another financial crisis.
The claim that fiscal austerity during a recession is “economically correct”, in reality is “economically incorrect” and is designed to avoid public criticism. As far as to why, that many government circles support today this catastrophic policy, is simple: those circles are concern for the purpose of the economy, less for the interest of the workers and the poor, but rather they identify there interest with those of the Wall Street and the City, and the higher classes.
After the compliments from the IMF, EU and the ECB, from the implantation of the terms of the rescue packet, the first optimistic predictions for the “progress of the Greek economy” by banks, economists and politicians have been heard. These predictions, amongst other, foresee the end of the crisis the second semester in 2011 and the comeback of Greece in the capital markets in the same year.
Previously it was consider that Greece would not be significantly affected by the global crisis. Because of the strong economy there would be no liquidity problem but instead a problem correct management of money which was in excess, that they was no requirement to turn to the IMF for help, that they would be no need to borrow from the capital market, that they would not need help from anybody etc.
Under the leadership of the IMF, the ECB and the major European powers are deciding Greece’s future the new measures created because of the current deep financial crisis exceed the current governments manifesto in terms of improving and altering the real economy in the greatest extreme for the last 40 years.
The truth is that is not necessary to look further that the nearing shopping centre to realise that the situation won’t improve in the coming months. However it is worth having a look at the numbers of the Greek economy and to compare with those of the 50 biggest countries in the world, to see the real situation in Greece compared to them.
Starting with the unemployment data, the unemployment rate in Greece reached 12% in May against 8,5% in corresponding month in 2009. This is the largest annual increase which has ever been recorded since records were kept. Compared with May 2009, the unemployed increased by (+43,2%) against 181.784 individuals, to 602.185. Compared to April, the unemployed increased by 5.206 individuals (+0.9%). It is most likely that this situation will continue to deteriorate until the end of the summer period, as a fresh labour force will enter the labour market. The trend is expected to continue to increase as long as the crisis continues.
The devastating effects of the policy implemented by the Troika is apparent for the following facts: the decline of industrial production by 4,5% in June, a decrease in building activity by 12%, the decline of tourism revenues by 16% in June etc. In addition also a decline in tax revenue as a result of the recession that began when the Greek economy took unpopular measures imposed by the Memorandum. Particularly illustrating the failure of the policy is the increase in the spread to a level close to 810 units! Where is the stability that should be provided by resorting to IMF – EU measures? The declared stability and better terms which were the ultimate aspiration for the “chemotherapy” imposed have not manifested themselves!
With the current rate of 12% unemployment however, Greece is in the 6th worst position in the world in unemployment rates, worse than countries such as Venezuela, Chile, Peru, Indonesia, Poland, Brazil, Mexico, Pakistan and others.
Greece is also the 6th worst in the world (among the 50 largest countries) in the reduction of GDP, while inflation is the 8th greatest and certainly the greatest in Europe.
As if all this isn’t enough, the prices of the Greek CDS premiums that have to be paid for those who want to cover the bankruptcy of the country (or speculating on this possibility) is the second highest in the world only less than Venezuela (which recently was higher). Furthermore, based on the CDS, Greece is the second more likely country in the world to become bankrupt, with a possibility of bankruptcy within the next 5 years of 50%.
Where is the hope for Greece a country that sees the basic economic and financing indices to be in the international top ten negative? As examples, the debt to GDP ratio is among the highest in the world (with the potential to grow much more readily) and the deficit is also dramatically high because there is no ability to have access to borrow funds at a reasonable cost, makes Greece unable to cope with it’s obligations, including trying to stimulate development and to submit to the financial and budgetary amounts of Nations such us USA and Germany.
Unfortunately, Greece has the second highest borrowing cost in the world, behind Pakistan only and far above that of South Africa, Indonesia, India, Mexico, Poland, Hungary, Thailand and others. Thus, while for example the extremely unstable political Thailand borrows for a term of 10 years at 3,4%, Malaysia 3,89% and the (third world) Peru 5,64%, the equivalent cost for Greece is 10,15%.
The question is simple: is there a magic wand, which can be used (otherwise would have been used that we do not find in the current crisis or to get ourselves away from it) for Greece to improve their economic situation in the next 12 months? If the first signs of “improvements are indeed seen”, why does the cost of borrowing remain at the pre-support rescue package levels, which are the second highest in the world?
Financial markets anticipate, in their pricing country’s capability to meet its obligation. Greece has been forced to rely on the IMF – EU “bail out” in order to borrow funding to meet our obligation at a reasonable cost. In the process, Greece has been obliged to instigate the most severe austerity package in our modern economic history (which has also been recognised by the IMF – EU). Why, therefore, is the cost of the “bail out” so high? Surely, in recognition of Greece’s efforts the IMF – EU should be available at a more reasonable cost than 10,15%.
At this cost there is an acute danger that the resulting recession in Greece will lead to the very situation it was meant to avoid – i.e. a default by Greece with the resultant effect it will have on the Euro…
*This paper was announced at the Meeting of NGO’s with the EFC Sub-Committee on IMF and related issues on 23 August 2010 in Brussels.