“If it´s summer, this must be Greece”

And we´re on to the seventh chapter of the IMF-Greece-Germany Slapstick:

A truce between Greece’s creditors averts an immediate panic over Greek bankruptcy this summer, yet as officials and onlookers digested the deal, it became apparent that less was agreed than meets the eye.

ANALYSIS

The deal, struck in the small hours of Wednesday morning at the Eurogroup meeting of eurozone finance ministers in Brussels, broke an impasse between Germany and the International Monetary Fund that was holding up Greece’s bailout funding for this summer.

The main breakthrough, heralded by German Finance Minister Wolfgang Schäuble, is that the IMF agreed in principle to rejoin the Greek bailout effort this year with new loans. In return, Germany and other eurozone countries pledged to restructure Greece’s rescue loans in 2018 “if…needed.” That promise fell short of the IMF’s demand that Europe should decide now how it would relieve Greece’s debt in coming years.

But the IMF’s main negotiator at the talks, European department head Poul Thomsen, stressed at a news conference early Wednesday that the fund isn’t on board just yet. The eurozone still needs to tell the IMF what it is prepared to do in 2018, consenting to a menu of debt-relief measures for later use, he suggested. “We will need to assess the adequacy of the measures, and we will only go ahead if there is an assessment that they are adequate.”

Mr. Schäuble on Wednesday dismissed Mr. Thomsen’s caveats, insisting that new IMF loans were now assured. “He probably was tired then,” Mr. Schäuble told reporters.

…………………………………………………………………….

Mr. Thomsen on Wednesday hailed the IMF’s main gain: a promise by German-led eurozone creditors to undertake a far-reaching restructuring of Greek debt in 2018. “We welcome that it is now recognized by all stakeholders that Greek debt is unsustainable, and…that Greece will need debt relief to make that debt sustainable,” he said.

However, Germany previously promised the IMF and Greece in 2012 that it would offer debt relief later if needed—only to reject such a move afterward, citing Greece’s failure to implement all of its promised economic overhauls.

The latest debt promise hinges once again on Greece’s ability to complete its side of a tough bailout plan that has proved beyond the political stamina of all Athens governments so far.

Germany´s trick is to make contingent promises, when it knows the conditions will be impossible to meet!

Meanwhile, Greece´s RGDP has acquired a Bell-shaped appearance, capped below at the 1999 level!

Greece_Bell Shaped

These shenanigans remind me of a post from 5 years ago:

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

And make no mistake – that, in essence, is where the European crisis stands.

It seems it still does!

The Beatles sing about Greece & the Troika: “You say yes, I say no. You say stop but I say go, go, go. Oh no. You say goodbye and I say hello. Hello, hello. I don’t know why you say goodbye. I say hello …”

Just one example from each side of the aisle:

Yes:

A No vote would bring a new economic darkness. There is widespread agreement that the initial period would be characterised by default on Greece’s obligations to creditors, a chronic liquidity contraction and a solvency crisis in the banking sector, which would keep the banks shut. It would see a sclerotic blockage of most forms of economic activity. A further sharp GDP contraction would ensue. Whether or not the government chose to introduce a parallel currency to pay wages, pensions and other bills in the interim, a “new drachma” would be introduced. The currency would almost certainly drop sharply, most likely by about 50 per cent at first. Behind the wall of capital controls, the Bank of Greece would then print money. The risk of Greek deflation would disappear at a stroke. Banks would re-open, supported by the central bank and by a government programme to recapitalise them.

So Syriza would finally have re-taken control of Greece’s economic destiny. But it is unlikely to be successful in delivering a bright economic future, without help, for at least three reasons.

No:

This Sunday, the Greek people will finally face a decisive choice, yay or nay, to stay in the eurozone. In the humble opinion of this writer, the Greeks should reject Europe’s terms, ditch the euro, and take their chances restarting their own currency.

I’m certainly not the first or the smartest person to recommend this course. But there’s an extra wrinkle to add: Along with its own self-preservation, Greece should do it for the sake of its fellow European nations, since a Grexit might just shock Europe out of its crazed economic murder-suicide pact.

Images of Greece & Others

Contrast this chart

Beatles-Greece_1

With this

Beatles-Greece_2

Here Greece doesn´t standout at all, it´s super boom Ireland!

But Greece notches the biggest drop from the peak

Beatles-Greece_3

Dives just as deep but stays there for longer than the US during the Great Depression

Beatles-Greece_4

Comparing the “heathens” along “sacred” dimensions

Beatles-Greece_5

Beatles-Greece_6

Beatles-Greece_7

Except for the pre-crisis debt level, no great (and unsurmountable) differences

Which leads me to endorse David Beckworth´s argument in The Monetary Origins of the Eurozone Crisis;

The Eurozone crisis is one of the greatest economic tragedies of the past century. It has caused immense human suffering and continues to this day. The standard view attributes it to a pre-crisis buildup of public and private debt augmented by the imposition of austerity during the crisis. While there is evidence of a relationship between these developments and economic growth during the crisis, this evidence upon closer examination points to the common monetary policy shared by these countries as the real culprit for the sharp decline in economic activity. In particular, the ECB’s tightening of monetary policy in 2008 and 2010-2011 seem to have not only caused two recessions but sparked the sovereign debt crisis and gave teeth to the austerity programs. This finding points to the need for a new monetary policy regime in the Eurozone. The case is made that the new regime should be a growth path target for total money spending.

The illustrative pictures

Beatles-Greece_8

Bottom Line: Greece, more than the rest had (has) enormous structural issues, but the Gordian knot of monetary policy only helped strangle it!

To Yanis Varoufakis, the “EZ bed” is not comfortable!

The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.

Our creditors’ insistence on greater austerity is subtle yet steadfast. It can be found in their demand that Greece maintain unsustainably high primary surpluses (more than 2% of GDP in 2016 and exceeding 2.5%, or even 3%, for every year thereafter). To achieve this, we are supposed to increase the overall burden of value-added tax on the private sector, cut already diminished pensions across the board; and compensate for low privatization proceeds (owing to depressed asset prices) with “equivalent” fiscal consolidation measures.

The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd. The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis. Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity. There is nothing more to it than that.

Not so fast Yanis! I concur that largely, the EZ crisis was mostly an NGDP (i.e. monetary crisis). The charts show that clearly. (Note: the scale is the same in all charts)

Yanis Complains_1

Greece has not done as well as Spain or Ireland mostly because initial conditions in Greece were much “worse”. While Spain and Ireland were forcefully reducing their government debt ratios before the crisis, reaching debt ratios of less than 40% and 30%, respectively, Greece´s debt ratio remained at the 100% level.

Also, Greece had the highest structural deficit relative to potential GDP going into the crisis, so naturally, Greece had to be more “austere” than either Ireland or Spain. There´s also the fact that Greece´s credibility is extremely low!

Yanis Complains_2

Later, YV writes:

Following Prime Minister David Cameron’s recent election victory in the United Kingdom, my good friend Lord Norman Lamont, a former chancellor of the exchequer, remarked that the UK economy’s recovery supports our government’s position. Back in 2010, he recalled, Greece and the UK faced fiscal deficits of more or less similar size (relative to GDP). Greece returned to primary surpluses (which exclude interest payments) in 2014, whereas the UK government consolidated much more gradually and has yet to return to surplus.

At the same time, Greece has faced monetary contraction (which has recently become monetary asphyxiation), in contrast to the UK, where the Bank of England has supported the government every step of the way. The result is that Greece is continuing to stagnate, whereas the UK has been growing strongly.

Not quite true. In 2010, Greece´s Structural Deficit relative to potential GDP was about 50% higher than Britain´s, but I agree that Greece has experienced “monetary asphyxiation”. The UK is fortunate to have an independent monetary policy!

Yanis Complains_3

Bottom Line: If Greece was willing to “get in bed” with the likes of Germany, now it must try to become more like them, and if that´s not palatable…

Lars Christensen has a post on Yanis.