5 June 2015

Five things you need to read about Greece today


Greece has announced it will miss its IMF payments due today, but what does that really mean in the context of the whole saga (documented at each stage on CapX by Andrew Lilico)? Here are five great pieces that get to the heart of the issues at stake.

Marcel Michelson at Forbes has a brilliant overview of why Greece should accept austerity over a default:

“With a Grexit, Greece would not avoid having to pay its debts. In fact, all external debts in euro or dollar or other currencies would become worth more in the local currency terms and thus more difficult to honor and pay back.

Without access to international capital markets – as lenders will be reluctant to add fresh money to bad debts – the country would be truly in a big mess and it would have nobody to blame but itself.

Now compare that pain with the bitter pill of the debt deal.

The deal on the table – of which I do not know the details and cannot comment on — is at least a way to avoid a catastrophe. Talks are continuing, adjustments can still be made. It is time that Greece completes its catharsis.”

Peter Spiegel in the Financial Times has an excellent analysis of the counter-proposal the Greek government has sent to its creditors. The most radical point is that the plan involves Greece continuing with current payments at the same amount, but writing off half of the original loan. He writes:

“But because this involves a full-scale write-off, it is also unlikely to pass muster in eurozone capitals.

In summary, the document is as ambitious as it is creative. But most of it is also politically unacceptable to eurozone lenders. Other than extending maturities on the GLF loans, eurozone governments have proven singularly unwilling to countenance any debt relief — despite the fact the IMF has increasingly argued Greece’s debt is unsustainable without it.”

There’s also the question of how Tsipras’ strategy is going down back in Greece. Mike Shedlock explains how hope of a deal fell apart this week. He asks:

“Does Alexis Tsipras want Greece out of the eurozone?

The possible answers are yes, no, yes provided he can blame the Troika, yes provided his party goes along, yes provided he can stay in power, etc.

The only way to know if anyone wants a deal is if there is a deal.

If Tsipras’ goal all along was to default and place the blame elsewhere, he played his hand masterfully well. He can blame the Troika, Germany, his own party, or coalition partners. And months of delays gave everyone a chance to pull deposits from Greek banks.”

The editors at The Economist, however, are marginally more optimistic that a deal is possible. They analyse where there might be common ground between the demands from both sides:

“Though the two documents are difficult to compare, the Greek government also appears to have given ground on the need for substantial privatisations, which it initially put on hold after the January election. Already it is pressing ahead with the sale of its stake in the Piraeus port authority. And its proposals include the privatisation of regional airports, regarded as a litmus test of its intentions. Speaking after the meeting in Brussels, Mr Tsipras ruled out VAT changes that would impose the full 23% rate on energy. Yet the rival proposals for reforming VAT are not that far apart; for example, the Greek government wants a 6% rate for medicine whereas the creditors want 11%.

Mr Tsipras has long insisted that cuts to pensions are a “red line” he will not cross. Yet his proposals include a crackdown on early retirement, which is also a priority for the creditors. The biggest stumbling-block appears to be labour laws. The government wants to undo the big change implemented in early 2012, which slashed the minimum wage for adults over 25 by 22% (and for those under 25 by 32%). This move triggered a sharp fall in Greek labour costs, vital in restoring its competitiveness, which is why the creditors view the government’s plan with dismay.”

As to how this is affecting Greece itself, Yiannis Papadoyiannis writes at the Greek news site Ekathimerini that the Greek credit market is “virtually dead”. He explains:

“Banking officials say that the positive picture of the first two months of the year was due to the momentum generated in the first half of 2014 and strong expectations that the country was on its way out of the crisis. They note that the increased disbursements of corporate loans in January and February concerned applications submitted last fall, when the conditions in the economy and the market were entirely different. This has changed dramatically since late 2014, first due to the political uncertainty ahead of the general election and then to the lack of progress in talks between the SYRIZA administration and Greece’s creditors.”

Whatever the outcome, it’s clear that nothing is going to be resolved today. Expect more chaos, and watch this space.

Rachel Cunliffe is Deputy Editor of CapX.