Greece Struggles To Right Economy As Refugee Influx Adds to Woes

Constance Baroudos

By Constance Baroudos, M.A.

Lexington Institute

 

The two major achievements of European integration, the common currency and the free movement of people, are in danger — and Greece is on the front lines in both cases. Even though the three international bailout loans accepted by Athens over the past six years have resulted in loss of economic control, tax hikes and high unemployment rates, Athens has made some recent progress to stimulate growth. Athens still must implement controversial reforms next year that may cause the government to lose its majority in the Greek Parliament.

Athens signed its first major deal to privatize 14 airports for €1.2 billion ($1.3 billion) with Fraport, a German airport operator. The company will pay a fixed annual rental fee of €23 million, and invest €330 million to upgrade facilities over the next four years. In addition, China Cosco Holding Co., who already operates two container terminals there as a hub for Asian exports, is the sole bidder for a majority stake of the Piraeus port expected to generate about €700 million. The second biggest Greek port in Thessaloniki is expected to be privatized next year, and binding bids are anticipated in April.

The Greek government will pay to possess 51 percent of Greece’s Independent Power Transmission Operator, which is owned by the Public Power Corporation; the remaining 20 percent will be sold to a private investor and 29 percent will float on the Athens stock exchange. Moreover, Greece’s banks suffer from nonperforming loans including mortgages, consumer debt, and company borrowing — more than 48 percent are not being repaid on time, primarily due to lack of jobs and income. As a result, Greece developed a secondary market for non-performing loans, debt receivables unpaid for a period of more than 90 days. Non-performing loans are to be managed by loan asset companies to stabilize the banking sector by providing immediate liquidity to the relevant credit institutions while assisting borrowers with restructuring debts. These moves send a strong message that the Greek economy is aiming for growth.

Considering Prime Minister Alexis Tsipras has publicly stated he does not support the reforms, these are some impressive developments, but Greek citizens are not happy. Some Greeks feel the privatization of state assets undermines growth because it sells Athens’ advantages to foreign states. Furthermore, over 60 percent of Greek citizens voted against austerity in a referendum earlier this year – the first time citizens were able to voice their opinion on the economic crisis. Instead of keeping campaign promises, Syriza, the political party in control of the Greek parliament, agreed to more austerity or risk exiting the Eurozone. Unfortunately, Greece is likely to receive only €2.5 billion from privatization deals, less than the €3.7 billion agreed to in the most recent bailout agreement. At this time, the government holds a fragile majority of three members of parliament, down from five after the September election. It will not be a surprise if the government’s majority collapses again and new elections are called in 2016.

In the beginning of next year, Athens will struggle to pass key reforms, including revamping the pension system. Greece has one of the most expensive pension systems in Europe, consuming 17.5 percent of GDP, and about one in five Greeks are over 65 years old. While pension checks are not large (the average pension is about €700, and 45 percent of pensions are below the poverty rate of €665), the pension system is suffering a deficit due to decades of tax evasion and unemployed youth not able to make financial contributions. While Greece’s creditors insist on cutting pension costs by €1.8 billion, Syriza would rather increase employer and employee contributions as pensions have already been cut over 10 times since the beginning of the financial crisis. This means there will be intense controversy over pensions in the beginning of 2016.

Fulfilling the first wave of policy changes agreed to in the latest bailout is necessary for the European Union (EU), European Central Bank, and International Monetary Fund (IMF) to conduct the first review of the Greek economy. After this review, discussions on how to restructure Greece’s €320 billion debt will follow – recall the IMF determined Greece’s debt to be unsustainable in June. Restructuring the debt could include extending the repayment due date, delaying payments, capping interest and debt service costs, and tying repayment to GDP growth, giving Greece’s economy some time to grow. Without restructuring the debt, Greece’s economy will likely shrink in 2016, and unemployment will remain high.

While the IMF and White House promote a haircut on Athens’ debt, Greece’s creditors say this is not an option. This is ironic given that Germany was the recipient of one of the largest restructuring programs in history after World War II — Greece and about 20 other countries wrote off a large chunk of German loans and restructured the remaining debt by extending the repayment schedule, and granting a lower interest rate. West Germany’s debt repayment schedule was linked to its ability to pay by tying repayment to its current and expected trade surpluses. Thus, Germany was free of difficult debt payments, trading partners were incentivized to buy German goods, and its economy was able to grow.

The European unification project has been called into question because it has currency integration without a corresponding political unity. Financial crises as seen in the Eurozone do not occur in the U.S. because it has a strong central government – the federal government provides automatic bailouts to states in trouble. After the savings and loan crisis in Texas in the 1980s, for example, taxpayers in other states paid to clean up the economic mess – these states did not ask for their money back as Eurozone members are currently asking of Greece. Hence, it is a political choice to have a debt crisis since the European Central Bank could guarantee Greece’s debt and interest rates would come down as a result. Furthermore, Eurozone members are not able to devalue their currency to make exports more attractive and increase foreign investment. Austerity has only been shown to work if countries are able to devalue their currency, like when Canada slashed its debt in the 1990s – it was able to maintain growth and reduce unemployment by reducing interest rates and encouraging private spending while devaluing its currency to encourage exports.

The refugee crisis is also placing more financial obstacles in Athens’ path. In 2015 one million migrants entered Europe, 800,000 of them via Greece. The Hellenic Republic has spent about one billion euros coping with the influx. Greece is working with the EU to create a common immigration policy and improve cooperation with surrounding countries. The Greek government is also working with Turkey to eliminate human trafficking networks, share information, and cooperate with responsible authorities like the police and coast guard.

Greece has made some progress towards growth that will hopefully lead to an increase in jobs, more tax revenues for the government, and further foreign investment in the country. After restructuring the Hellenic Republic’s debt and the economy becomes stronger, Athens may then be able to reduce taxes to increase private sector spending, and Tsipras may be able to fulfill his aim to lift capital controls by March 2016.

 

3 COMMENTS

  1. Papaeptr – ding ding ding ding ding NOW we’re talking …. you are on to something my friend – Bilderberg
    Most people throughout the world have no clue what is in store for them or for their countries.
    This Bilderberg aristocracy of purpose along with the Rothschild, Rockefeller families have but one goal – to govern planet Earth.

    Economics, law, religion creating one world entity that abides by only one set of laws and governing principles. In order to pull such a wild concept off, public opinions would have to be manufactured and controlled through the help of the media, active psyops with military and world leaders who have agreed to participate in such a conspiratorial global coup and bring the world to the edge of destruction where their plan for peace will be the only game in town and will be desired and accepted by those who have no problem in losing their freedoms and complying with a one world Military controlled by NATO.

    In order to accomplish bringing the world to the edge of destruction, there needs to be perpetual war, with more and more wars engaging around the globe and even to our homelands of Europe and the USA with the simplest war to start being terrorism. Lone rangers randomly attacking innocents with guns, bombs, biochemical devises… thats just one guy – no trucks , rockets, battalions, war machinery…. just one or two terrorists in every city…cafe’s theatres malls.

    Some would say Alexander has a tin foil hat and sees aliens. BUT then others would say why are Pentagon & NATO brass, George Soros, Alan Greenspan, European royalty, Ben Bernanke, Tim Geithner, Lloyd Blankfein, Barack Obama, Donald Rumsfeld, Rupert Murdoch,US Senators and Congressmen, and media figures attending unpublicised meetings together along with CFR, Trilateral Commission and the IMF.

    The citizens of Greece have been made the whipping posts predominantly of the Germans and French. This was not caused by lazy Greeks and bad guys always need someone to blame. Greece should, while they can tell the IMF where to stick their IOU’s and screw the EU banksters. Tourism, agriculture could sustain Greece with the help of a few marketing guru’s. I like the sound of DRACHMA … didnt it only take 300 drachmas to defeat 20,000 unfair loans?

    The New World Order (EVIL) will next to impossible to stop.
    If we know their game plans we can at least enjoy life and slow down their progress till those dreadful days are completely upon us.
    AT THAT POINT – I will expect a miracle.

    Alexander Karas

  2. A Pain in the Athens
    Why Greece Isn’t to Blame for the Crisis
    By Mark Blyth

    When the anti-austerity party Syriza came to power in Greece in January 2015, Cornel Ban and I wrote in a Foreign Affairs article that, at some point, Europe was bound to face an Alexis Tsipras, the party’s leader and Greek prime minister, “because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives.” Despite attempts by the eurogroup, the European Central Bank, and the International Monetary Fund since February 2015 to harangue Greece into ever more austerity, the Greeks voted by an even bigger margin than they voted for Syriza to say “no” once more. So the score is now democracy 2, austerity 0. But now what? To answer that question, we need to be clear about what this crisis is and what it is not. Surprisingly, despite endless lazy moralizing commentary to the contrary, Greece has very little to do with the crisis that bears its name. To see why, it is best to follow the money—and those who bank it.

    The roots of the crisis lie far away from Greece; they lie in the architecture of European banking. When the euro came into existence in 1999, not only did the Greeks get to borrow like the Germans, everyone’s banks got to borrow and lend in what was effectively a cheap foreign currency. And with super-low rates, countries clamoring to get into the euro, and a continent-wide credit boom underway, it made sense for national banks to expand private lending as far as the euro could reach.

    So European banks’ asset footprints (loans and other assets) expanded massively throughout the first decade of the euro, especially into the European periphery. Indeed, according the Bank of International Settlements, by 2010 when the crisis hit, French banks held the equivalent of nearly 465 billion euros in so-called impaired periphery assets, while German banks had 493 billion on their books. Only a small part of those impaired assets were Greek, and here’s the rub: Greece made up two percent of the eurozone in 2010, and Greece’s revised budget deficit that year was 15 percent of the country’s GDP—that’s 0.3 percent of the eurozone’s economy. In other words, the Greek deficit was a rounding error, not a reason to panic. Unless, of course, the folks holding Greek debts, those big banks in the eurozone core, had, over the prior decade, grown to twice the size (in terms of assets) of—and with operational leverage ratios (assets divided by liabilities) twice as high as—their “too big to fail” American counterparts, which they had done. In such an over-levered world, if Greece defaulted, those banks would need to sell other similar sovereign assets to cover the losses. But all those sell contracts hitting the market at once would trigger a bank run throughout the bond markets of the eurozone that could wipe out core European banks.

    Clearly something had to be done to stop the rot, and that something was the troika program for Greece, which succeeded in stopping the bond market bank run—keeping the Greeks in and the yields down—at the cost of making a quarter of Greeks unemployed and destroying nearly a third of the country’s GDP. Consequently, Greece is now just 1.7 percent of the eurozone, and the standoff of the past few months has been over tax and spending mixes of a few billion euros. Why, then, was there no deal for Greece, especially when the IMF’s own research has said that these policies are at best counterproductive, and how has such a small economy managed to generate such a mortal threat to the euro?

    Greece was a mere conduit for a bailout. It was not a recipient of funds in any significant way, despite what is constantly repeated in the media.

    Part of the story, as we wrote in January, was the political risk that Syriza presented, which threatened to embolden other anti-creditor coalitions across Europe, such as Podemos in Spain. But another part lay in what the European elites buried deep within their supposed bailouts for Greece. Namely, the bailouts weren’t for Greece at all. They were bailouts-on-the-quiet for Europe’s big banks, and taxpayers in core countries are now being stuck with the bill since the Greeks have refused to pay. It is this hidden game that lies at the heart of Greece’s decision to say “no” and Europe’s inability to solve the problem.

    Greece was given two bailouts. The first lasted from May 2010 through June 2013 and consisted of a 30 billion euro–Stand By Agreement from the IMF and 80 billion euro in bilateral loans from other EU governments. The second lasted from 2012 until the end of 2014 (in practice, it lasted until a few days ago) and comprised another 19.8 billion euro from the IMF and another 144.7 billion euro disbursed from an entity set up in late 2010 called the European Financial Stability Facility (EFSF, now the European Stability Mechanism, ESM). Not all of these funds were disbursed. The final figure “loaned” to Greece was around 230 billion euro.

    The EFSF was a company the EU set up in Luxemburg “to preserve financial stability in Europe’s economic and monetary union” by issuing bonds to the tune of 440 billion euro that would generate loans to countries in trouble. So what did they do with that funding? They raised bonds to bail Greece’s creditors—the banks of France and Germany mainly—via loans to Greece. Greece was thus a mere conduit for a bailout. It was not a recipient in any significant way, despite what is constantly repeated in the media. Of the roughly 230 billion euro disbursed to Greece, it is estimated that only 27 billion went toward keeping the Greek state running. Indeed, by 2013 Greece was running a surplus and did not need such financing. Accordingly, 65 percent of the loans to Greece went straight through Greece to core banks for interest payments, maturing debt, and for domestic bank recapitalization demanded by the lenders. By another accounting, 90 percent of the “loans to Greece” bypassed Greece entirely.

    European banking system to bring down yields in the Long Term Refinancing Operations (LTROs). Bond yields went down and bond prices soon went up. This delighted bondholders, who got to sell their now LTRO-boosted bonds back to the governments that had just bailed them out. In March 2012, the Greek government, under the auspices of the troika, launched a buy-back scheme that bought out creditors, private and national central banks, at a 53.4 percent discount to the face value of the bond. In doing so, 164 billion euro of debt was handed over from the private sector to the EFSF. That debt now sits in the successor facility to the EFSF, the European Stability Mechanism, where it causes much instability. So if we want to understand why the combined powers of the eurozone can’t deal with a problem the size of a U.S. defense contract overrun, it’s probably wise to start here and not with corrupt Greeks or Swabian housewives’ financial wisdom. As former Bundesbank Chief Karl Otto Pöhl admitted, the whole shebang “was about protecting German banks, but especially the French banks, from debt write-offs.”

    Think about it this way. If 230 billion euro had been given to Greece, it would have amounted to just under 21,000 euros per person. Given such largess, it would have been impossible to generate a 25 percent unemployment rate among adults, over 50 percent unemployment among youth, a sharp increase in elderly poverty, and a near collapse of the banking system—even with the troika’s austerity package in place.

    To fix the problem, someone in core Europe is going to have to own up to all of the above and admit that their money wasn’t given to lazy Greeks but to already-bailed bankers who, despite a face-value haircut, ended up making a profit on the deal. Doing so would, however, also entail admitting that by shifting, quite deliberately, responsibility from reckless lenders to irresponsible (national) borrowers, Europe regenerated exactly the type of petty nationalism, in which moral Germans face off against corrupt Greeks, that the EU was designed to eliminate. And owning up to that, especially when mainstream parties’ vote shares are dwindling and parties such as Syriza are ascendant, simply isn’t going to happen. So what is?

    Despite Germany being a serial defaulter that received debt relief four times in the twentieth century, Chancellor Angela Merkel is not about to cop to bailing out D-Bank and pinning it on the Greeks. Neither is French President Francois Hollande or anyone else. In short, the possibilities for a sensible solution are fading by the day, and the inevitability of Grexit looms large. It is telling that Tsipras and his colleagues repeatedly used the phrase “48 hours”—sometimes “72 hours”—as the deadline for getting a new deal with creditors once the vote was in. This number referred to how long Greek banks could probably stay solvent once the score went to 2-0.

    At the time of writing, the ECB is not only violating its own statutes by limiting emergency liquidity assistance to Greek banks, but is also raising the haircuts on Greek collateral offered for new cash. In other words, the ECB, far from being an independent central bank, is acting as the eurogroup’s enforcer, despite the risk that doing so poses to the European project as a whole. We’ve never understood Greece because we have refused to see the crisis for what it was—a continuation of a series of bailouts for the financial sector that started in 2008 and that rumbles on today. It’s so much easier to blame the Greeks and then be surprised when they refuse to play along with the script.

  3. When will the government stop punishing its constituency for the debt they have forced their people to embrace.
    In a recent article in Foreign Press an analysis was provided by one of its writers as to how the Greek Government is forced to pay the European banks debts.
    Even though Germany leads the group of banks this manufactured crisis is provided as a punitive measure for Greek interests
    The question asked is ” What have the Greek people done to deserve the austerity measures proposed by the Bildenberg group?
    When did the Bildenburg Group in which Mr Papandreou is a member- decide to take the action?
    Why did the Bildenburg Group decide to take this action and affect ten million people directly and millions of Greeks worldwide indirectly?
    How long does the Bildenburg Group expect to punish the Greek people for a solution to the debt crisis is provided?

    As I know they have already worked it out!