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1) Deal no closer following PM’s meetings in Riga I Kathimerini, Athens, May 22 <http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_22/05/2015_550300> Athens believes that Greece could still clinch an agreement with its lenders but probably at the start of June, rather than by the end of this month as it had previously hoped, following the meetings Prime Minister Alexis Tsipras held on the sidelines of the European Union leaders’ summit in Riga, Latvia. Tsipras met with German Chancellor Angela Merkel and French President Francois Hollande for more than two hours on Thursday night. He held talks with European Commission President Jean-Claude Juncker on Friday. Neither of the meetings produced the kind of political breakthrough or boost that the Greek side had hoped for, leading to officials from Athens stressing that it will be difficult to break the deadlock in talks on the country’s bailout program quickly. Tsipras said on Friday morning he was “very optimistic” of soon reaching a “long-term, sustainable and viable solution without the mistakes of the past” but Merkel and Hollande made it clear in their comments that the Greek government needs to focus on the technical deliberations taking place in Brussels so it can reach a deal before it runs out of money. . . . The German and French leaders reaffirmed during the meeting that any agreement needs to have the approval of the International Monetary Fund. Speaking in Rio de Janeiro, IMF chief Christine Lagarde agreed that a lot remained to be done for a deal. “It has to be a comprehensive approach, not a quick and dirty job,” she said of a potential deal. . . . Talks in Brussels are due to continue until Sunday and then resume again on Tuesday. Sources said that considerable distance remains between Greece and the institutions on a range of key issues. There is still no agreement on fiscal targets for this year and coming years, nor on changes to value-added tax. Lenders insist that there should be two rates, while Athens wants to retain three, as is the case now. Creditors also seem to be insisting that the government adopt the zero deficit rule for supplementary pension funds, which would lead to auxiliary retirement pay being slashed. Details also have to be ironed out on other significant issues, such as privatizations, labor reform, non-performing loans and the product market. 2) Germany's finance minister says Greece may have to invent a 'parallel currency' by Mike Bird Business Insider, NYC, May 22 <http://www.businessinsider.com/german-finance-minister-says-greece-may-have-to-invent-a-parallel-currency-2015-5> Greece may have to bring in a "parallel currency" if progress stalls in negotiations with the country's European creditors, according to Wolfgang Schaeuble, the outspoken German finance minister. Bloomberg reports that during a private meeting Schaeuble mentioned the idea of Greece's bringing in a second currency — which could be the first step to a messy exit from the eurozone. Schaeuble is seen as the major hardliner in Greece's negotiations, one who will demand extensive reforms for any money and is sceptical of the whole idea of bailing Greece out. The idea Greece would issue some sort of IOU to cover public pensions or salaries has been floated by economists in recent weeks as an emergency measure, should the country run completely out of cash. The government could issue this "parallel currency" and demand that it have the same value as the euro, but if the public didn't have confidence in it, a black market could open up. Capital Economics says this could create a "dual pricing system" in which the parallel currency is worth less than the euro, destabilising the whole economy. Several years ago, during the worst parts of the euro crisis, the threat of a Greek exit from the euro was seen as an immediate problem for the whole bloc. Other European countries feared that a Greek banking collapse could drag the rest of southern Europe with it and destroy the monetary union. This time, many finance ministers are much less cautious and regard the possibility of a potential Grexit (Greek exit from the eurozone) as much less risky for their own countries. Some German officials have reportedly suggested Greece should be cut out of the currency union like a "gangrenous leg." Here's a snippet from Bloomberg: Germany is "ready to take this brinkmanship very far," with Schaeuble in the role of "attack dog," Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, said by phone. "The risks of contagion to other euro-area countries from a deterioration in Greece is very low." Over the past few days the Greek government has suggested a deal is getting much closer. Greek Finance Minister Yanis Varoufakis even said Monday that he expected a compromise agreement to unlock bailout cash within the week. But Schaeuble and Chancellor Angela Merkel have poured cold water on those suggestions, saying much more work needs to be done. 3) Greece submerges as crisis fallout worse than emerging markets by Simon Kennedy [Bloomberg] ekathimerini.com , Friday May 22, 2015 http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_22/05/2015_550268 The Greek economy risks being more a submerging market than an emerging market. As another round of aid talks between the Mediterranean nation and its creditors ends without a deal, its economy is faring even worse than a string of developing countries which suffered traumas in the last two decades. That leaves Commerzbank AG declaring the country is in little position to pare its debt and that default or a restructuring may loom. “Just as with emerging markets in the past there is a point in time where you need to move on to the next stage rather than being paralyzed,” Simon Quijano-Evans, head of emerging market research at Commerzbank in London, said in a telephone interview. “In Greece, we need to think of next steps and be innovative.” To illustrate Greece’s pain, he published a report this month comparing how the economic fallout from its five-year-old crisis compared with the bouts of turmoil suffered in the last two decades by Turkey, Argentina, Latvia and Thailand. The result illustrates why Commerzbank sees a 50 percent chance of Greece ultimately leaving the euro area. While Athens has imposed the tightest fiscal squeeze of the five and pushed its budget balance excluding interest payments into surplus from a deficit of about 10 percent of gross domestic product in 2009, Turkey and Argentina were doing better at the same stage. Even worse, debt of around 175 percent of GDP is bigger than the 110 percent at the outset and surpasses those of all the other crisis-hit economies five years on. Turkey managed to cut its debt to 35 percent from 100 percent without defaulting. The amount of lost output is also bigger in Greece than the other economies, all of which had begun to recover by now, and its 25 percent unemployment is higher. The International Monetary Fund estimates the Greek economy will be 20 percent smaller this year than in 2009. To Quijano-Evans, such data reflect how Greece’s economy failed to improve with assistance and austerity. It also demonstrates the challenge of trying to revive an economy without a currency of its own. “Under normal circumstances, if a country adjusts its fiscal backdrop in a meaningful way and allows its exchange rate to float freely, one eventually sees that passing through into a stronger economic picture, coupled with a drop in debt/GDP,” said Quijano-Evans. Absent a return of a devalued drachma, Greece needs a bigger budget buffer as well as meaningful acceleration in economic growth and inflation if its debts are to be made sustainable, he said. Unfortunately, the economy is back in recession, consumer prices fell an annual 1.8 percent last month and politicians are at loggerheads with the international community. “Comparing Greece’s experience so far with that of EM crisis countries shows very simply that the country’s already stressed economy and electorate are unable to cope with more pain,” said the Commerzbank economist. 4) Until Europe writes down Greece's debt, the drama will continue to run by Hamish McRae The Independent, Britain, May 22 <http://www.independent.co.uk/news/business/comment/hamish-mcrae/until-europe-writes-down-greeces-debt-the-drama-will-continue-to-run-10265656.html> So the tale of Greece lurches on, with some sort of denouement expected in the next couple of weeks. It is not possible to call that outcome. Our experience of countries that get themselves into this sort of mess suggests that the situation is binary. Either the government caves in to its creditors. Or it defaults on its debts. That is what usually happens. The example closest to home of the former is the UK in 1976, when after a month of dithering, the Labour government caved in to the International Monetary Fund, reversed its policies and got a bailout. The most recent example of the latter is Argentina, which defaulted last August for the second time in 13 years. The trouble with the Greek situation is that it has in the past both caved in, and de facto defaulted, and it has done it twice. This will be the third rescue, if it goes through. Were Greece an independent country it would all have been easy. There is a template. Countries often default. There have been 11 major sovereign defaults since 2000, and more than 100 since 1800. Argentina has done so eight times, Ecuador and Venezuela 10 times. While most have been in Latin America, since 1800 Austria has defaulted seven times, Spain six, and Germany and Portugal four each. Greece has defaulted seven times, if you count as a single default the two recent rescues when it defaulted on its privately held debt but not its publicly held debt. What has changed now is that Greece is not financially independent. If you don’t control your own currency you become a sort of super-municipality. You can default on your debts, as Detroit has done, but then you will not be able to borrow any more money. So your ability to continue functioning depends on your ability to raise enough tax to pay wages and pensions, and buy the goods and services that any government needs. You are not paying any interest. You are not repaying any debts as they fall due. But as long as enough tax comes in to cover your day-to-day spending, you are still in business. Until a few weeks ago that looked like being an option for Greece. It could default but carry on as a member of the eurozone, rather in the way that Detroit can continue using the dollar. The economy was growing, albeit slowly. Unemployment, while still dreadful, seemed to have plateaued and was starting to fall, as you can see in the top graph. The country was running a small primary surplus, in the sense that tax receipts were greater than spending if you don’t allow for interest payments. I suspect that was the reason behind the swagger of its finance minister. Since then three things have happened, all of them negative. One is that growth has gone and the country is back in recession. Another is that the primary surplus has disappeared, for reasons that are not totally clear but which are probably associated with the economic paralysis that many, maybe most, Greeks feel. And the third is that people have been taking their money out of their bank accounts, in some cases literally stuffing it under the mattress. You can see this sudden decline in bank balances in the bottom graph. This closes options. The banks may be unable to pay out deposits when they fall due, for they are already relying on their credit lines at the European Central Bank and may not be able to offer collateral if their holdings of Greek government debt become worthless. So there may be capital controls – indeed that seems extremely likely, though this in effect turns the euro into a two-tier currency, with “good” euros that can cross borders and “bad” ones in Greek banks that cannot do so. That has happened on a small scale with Cyprus, so there is a precedent. On Monday the credit-rating agency Moody’s warned that there was a high probability that capital controls would be brought in. There is, however, no precedent for a eurozone country not being able to pay its employees. That has happened in US cities, a harsh reminder that the federal government does not stand behind cities, or indeed states. But it has not happened in Europe, yet. The Greek government has been slow at paying its bills, for example for imported medicines, and it has cut its pension payments. But it has always been able to meet payroll. A number of Greek politicians have asserted that they would prioritise payroll over debt service, and that is understandable. But it may not be a question of that: Greece may be unable to meet payroll, even if it pays no interest on its debt – let alone makes any repayments. So what will happen? My hunch is that there will be some sort of fudge, or at least this is the most likely outcome. There will be a deal that enables the government to continue functioning in response for concessions that it can argue are just about within its red lines. Greece will keep the euro for the time being, and there will be no further formal default. There may have to be a referendum to get popular approval for what will be an unpopular agreement. This deal will last a few months, maybe into next year. The economy will recover a little but not enough to convince the electorate that a corner has been turned. It will be a poor summer season for German tourists, the largest national group of visitors. Tourism is 17 per cent of GDP, so this is serious. Then, at some stage in the future, there will be further political revolt, and Greece and its European debtors will have to accept that there has to be a formal write-down of Greek debt, something that is legally not possible at the moment. So the denouement in the next couple of weeks will not be the end of the drama after all. 5) The Way Out for Greece Bloomberg View, May 21 by Konstantine Gatsios & Dimitrios A. Ioannou <http://www.bloombergview.com/articles/2015-05-21/reform-not-stimulus-is-the-way-out-for-greece> A widely told narrative of the economic crisis in Greece holds that it is the product of excessive austerity, imposed by arrogant outsiders who misread the situation. The only way out, the story goes, is to break the resulting recessionary spiral with a policy of fiscal stimulus. This account doesn't stand up to scrutiny and needs to be countered if the current brinkmanship over Greece's bailout is to end well. To begin, it is odd to claim that a crisis caused by a 10-year infusion of excessive cash can be cured by means of further stimulus. The theory that it can assumes that Greece lacks sufficient “effective demand,” or the capacity of consumers to purchase goods and services at current prices. Restore this and a virtuous circle of growth will follow. A single statistic should suffice to cast doubt on this assumption. Greece's gross domestic product was similar in 2001 and 2014, measured in constant 2005 prices, meaning that “effective demand” in these two years before and after the debt crisis was approximately equal. And yet unemployment in 2014 was almost triple the 2001 level. The key to resolving Greece's economic woes must, therefore, lie in something other than demand. Equally telling is that during the five years since the crisis began, Greek imports have exceeded exports by almost 60 percent. Although Greeks are certainly buying fewer foreign goods than in 2007, it is clear that insufficient “effective demand” is not the root problem here. What has been lacking is “effective supply” -- the ability of the Greek economy to produce enough competitively priced goods to sell and grow. So why has the recession been so deep and so lasting, if not because of austerity? The answer lies in what happened between 2001 and the start of the financial crisis. After the euro was introduced in 1999, Greece received more in credit than it needed every year, between 5 percent and 10 percent of gross domestic product. Populist politicians funneled this excess money to their political clients, explaining the windfall as a “development dividend” that resulted from “structural convergence” with the core euro area countries. This was a fantasy, because there was no such convergence. Yet, it was natural for the recipients of this largesse to see it as real and permanent income. Even after the crisis erupted, nobody from the political establishment had the courage to confess what had really been going on. This is why most Greeks still believe the country's “normal” level of wealth is equivalent to the 240 billion euro GDP achieved in 2008, and that every deviation must be the result either of an anti-Greek conspiracy or ill-conceived economic policies. These misguided beliefs lie at the root of the popular disillusionment with Greece's mainstream political parties, and explain the rise of the anti-austerity, anti-reform Syriza party. The misunderstanding of what underlies the crisis isn't just held by ordinary Greeks; sophisticated proponents of the anti-austerity narrative believe it, too. But it is no less wrong for that. Look at the unemployment rate, which has jumped from about 10 percent to almost 30 percent since 2010. This simply doesn't correspond to an output gap -- the difference between an economy's actual and potential levels of activity -- that could be quickly closed by stimulus. You could pump cash into the economy to increase demand and GDP still wouldn't return to its 2008 level, from 180 billion euros ($200 billion) today. There are multiple factors to explain why Greece's potential output has fallen. One is that the unemployed lack the knowledge and qualifications to work in those economic sectors capable of expanding the economy; another is that it probably doesn't have enough of the high growth, tradeable sectors necessary to boost the economy. In fact, a policy of Greek fiscal stimulus would have the perverse effect of creating jobs in Germany, China and other exporting countries that would simply sell their wares to Greece. This is why we take issue with suggestions that ending austerity would unleash the Greek economy, or that structural reform is less urgent because it takes too long and has too limited an impact. On the contrary, there is plenty of evidence that Greece has been unable to become more competitive and escape its economic doldrums, because it has failed to adopt the structural reforms needed to give it a sustainable 240 billion euro economy again. There is, however, one aspect of the complaint Greeks lodge against their euro area partners that is well founded: namely, that Greece should have been allowed to default in 2010. Had that happened, the overall debt burden on the Greek economy would be at least 50 billion euro smaller than it is today, improving the prospects for a healthy recovery. This necessary and timely default was prevented, because it would have harmed some too-big-to-fail European banks. The upshot is that in addition to all of its self-inflicted wounds, Greece is paying a hidden tax to subsidize the rescue of foreign banks. That injustice needs to be recognized and righted through debt relief. Greece’s creditors are correct when they say the only way for the economy to recover is by putting in place structural reform. Yet they are also wrong in refusing to discuss the possibility of debt reduction. A gesture on debt restructuring would not only help to relieve the Greek economy from an excessive burden, but also restore trust between Greeks and their creditors and offer an important incentive to carry through the structural reforms our country so desperately needs. _________________________________________________________ Full posting guidelines at: http://www.marxmail.org/sub.htm Set your options at: http://lists.csbs.utah.edu/options/marxism/archive%40mail-archive.com
