Saturday, May 21, 2011

Greek Drama

We are assisting to a Greek drama with masks and rituals and an eventual sentence to death. 

Let's go to the facts, first. Greece's current debt is continuously growing at least until 2014: it will raise from €343 billion in 2010 (or a 148% of GNP) to €380 billion in 2014 (or  170% of GNP), without including the  €110 billion loan provided by the EU and the IMF. However, it is not just the debt itself, but the burden of public debt, as the amortizations are estimated to grow from  €79 billion in 2009 (33% of  GNP) to  €90 billion in 2014 (40% of GNP). Obviously, this debt cannot be repaid.

There aren't many options. One option is that Greece exits  the euro area but the price to pay would be too high in terms of repayment of the debt in a depreciated drachma; furthermore, it would be a sign of failure for the entire monetary system. Another option is 'debt restructuring' (or reprofiling, to use a euphemism) but this may create tensions between the European Central bank and European governments. IMF says that Greece does not need to restructure its debt, but it asks for further austerity measures and  privatizations. However, financial analysts know that debt restructuring  is inevitable under present circumstances and this may occur not later than 2012. The issue is how painful will be the restructuring ! 

Now comes the deus ex -machina, like in  Euripides' tragedies. The God market reappears to provide a contrived solution to an intractable problem.  Fitch, a rating agency downgraded the Greek debt to a negative rating watch, which will certainly lead to a further downgrading, the final  countdown. European governments will then have to act. The German government  did not say it officially but  it will participate to another rescue plan. The French Finance minister talks more bluntly and said yesterday that Greece is at risk of default. The final sentence is getting closer.

The truth is that French and German banks are heavily exposed and may suffer huge losses. At the end of 2010, Greece public debt is owed primarily by French  and German banks, and also by the European Central Bank in the form of collateral debts.

The main reason why German politicians rejected talks about debt restructuring - which would require banks to share some of the losses is that they know that tax payers would ultimately get the bill. If banks are hit, then the German government will have to intervene again.

We should not forget, though, the disastrous economic policies carried out by Greek governments over the past two decades. As explained by Euclid Tsakalotos, a Greek economist from Athens university,  the origin of the debt crisis is linked to the massive shift of income distribution in favour of profits since early 90s. Some bold reforms are therefore, necessary, in particular on taxation to ensure a more equitable income distribution because richer people do not, in general pay taxes or very little.  If everybody pays taxes as a proportion of actual income and assets, the tax burden on middle classes would be alleviated.
There's no happy end to the Greek tragedy. But there is a  growing reaction from people who strongly feel  humiliated. The civil society has begun to organize the protest, with the creation of a committee -led by a Greek economist, Yannis Tolios-  to pledge for debt write-off.  The idea may sound too radical, but not impracticable. Let's be honest : the debt crisis that has hobbled Greece's economy will be resolved because much of its debt is owed to other European countries using the euro as their currency. This is a strength as it unites 17 nations today but it is also the Achille's heel of the system. The problem is how quickly this will happen as it depends fundamentally on political decisions, not the strength of the banking system which continues to generate indecent profits. Our governments atre not particularly inspired by the common good which would require long term solutions, for example a fiscal union to make the whole euro system sustainable.

We need an oracle not for divination, but for wisdom. Above all, we have to restore a vision of Europe in the interest of people and workers.