Sunday, 13 March 2011


Is debt-ridden Greece the 'canary in the coal mine' indicative of what is to come to many countries around the world, including advanced capitalist countries where living standards are declining, the welfare state is diminished and the middle class is shrinking?

To avoid default on its public debt, in May 2010 Greece received an IMF-EU bailout package totaling $110 billion. In exchange, Greece adopted extraordinarily tough austerity measures, including laying off temporary public workers, lowering salaries of all public workers, cutting social security benefits, slashing social programs, and sharply raising taxes and utilities, while preparing to privatize public enterprises. So far, no policy measure has worked to ameliorate the very large public debt that the current regime PASOK (Socialist - in name only while in essence neo-liberal) has adopted.

On 7 March 2011, Moody’s Investors Service  cut Greek credit rating (already at junk status since spring 2010) on fears that the country will be unable to service its sovereign debt, and speculating that it will either restructure or default at some point in the next two years. An EU member that uses the euro as national currency, Greece now has a lower credit rating than Egypt, and the same credit rating as Bolivia whose public debt is 40% of GDP, projected to decline to 23% by 2013 while Greece's public debt is at approximately 150% of GDP by mid-2011, projected to increase to more than 170% by 2013. Among the industrialized countries, Japan at 200% of debt to GDP ratio is still number one in the world, while Zimbabwe is at the top of the world with debt of more than 310% as % of GDP.

That Greece, a member of the European Union, has the same public debt rating as Bolivia, one of the poorest nations in the world, and debt to GDP ratio that will be approaching that of Zimbabwe is troubling not for the euro as a reserve currency, but for the integration model predicated on the stronger members lifting the weaker ones through massive aid. Moody's rating cut also signals that Germany and France at the core of the EU economy will be sacrificing the debtor nations like Greece, Ireland, Portugal, Spain, and Belgium in order to keep the creditor nations strongly competitive on a world scale, while sacrificing the weaker members - a two-tiered EU model currently taking shape.

Living in Greece, I can attest that I too would have cut the country's debt rating to 'highly speculative', if my clients were bond investors and my goal was to protect their investments from high risks - beyond the two-year horizon on the bonds. In fact, the markets are speculating that Greece cannot avoid restructuring. Although Greece castigated Moody's, Fitch and S & P rating agencies, arguing that they failed to predict the recession of 2008 and as a result they are now over-zealous in identifying risks for investors. That is true enough, but isn't that the job of these agencies? Besides, the European Central Bank, which has intervened in the last 10 months to ease the pressure on bond rates by buying bonds, has decided to sit on the sidelines lately, while preparing to raise rates and follow a tighter monetary policy than the US Federal Reserve Bank.

A number of weeks ago, I argued that Greece was actually already in 'managed bankruptcy' and that within the market system its options were limited, including debt restructuring as Moody's is warning, default, another IMF-EU bailout package, bondholders accepting a substantial loss, demanding lower interest rates and longer repayment terms, or some combination of all of the above, depending on what Germany and France, that is to say, French and German banks agree will best work for them.

The country that enjoyed the fastest growth in the first decade of the 21st century within the EU did so on borrowed money that it did not invest to build a solid economic foundation, but squandered on consumption, especially luxuries and parasitic investments. Moreover, Greece is a country where tax evasion is between 60 and 70 percent, especially among the top ten percent of the wealthiest people who take their profits out of the country and invest abroad, and the subterranean economy small and large operations are thriving. Massive bribes for politicians, judges, trade union leaders, and bureaucrats from port officials to journalists are a prerequisite, otherwise the job cannot get done. For example, road construction in Greece costs 5-7 times higher than in Germany, but the quality is grossly inferior in comparison with German construction.

Analysts trying to explain Moody's rating cut are using the current Middle East-North African instability as an excuse to argue that Greece as a net energy importer cannot make it, thus Moody's rate cut was warranted. Actually if there was political stability in the Arab countries and crude oil was $60 per barrel instead of $105, Greece would not be much better off. The country cannot service a public debt that will be above 170% of GDP in a couple of years, because unlike Japan, Greece has a weak economic base of light industry and tourism, it is a net importer of manufactured products, and above all, unlike Japan it has a weak national capitalist class and depends heavily on foreign enterprises that take their profits out of the country instead of reinvesting them.

What will this mean for Greece, for the EU and other nations? The rapid rise of a Greek middle class from 1980 to the present will contract along with the economy. That process has started already along with the inevitable emigration of college-educated young people who cannot find employment. A  substantial segment of the rising middle class engaged in the public sector is currently trimmed to the bone in terms of salaries and personnel cuts. Taking its signals from the public sector, the private sector has lowered wages and laid off 'surplus' personnel, forcing the rest to work harder and in some cases longer hours without pay. In terms of living standards, labor/trade union rights, and status of the social welfare state, Greece is reverting to the decade of the 1970s before it was a full member of the European Community.

Portugal, Spain, Ireland, and Belgium, perhaps Italy depending on its economic prospects for 2011, are worried because of the rating agencies' tough approach toward Greece. None of the debtor nations will escape a major regression in the social welfare state, lower living standards for workers and the middle class, and downgrade of trade unions and labor rights. This scenario, however, is already a reality in the US and it is knocking on the door of the rest of the G-7 nations. The recent developments in Wisconsin, which may become a model for the country, indicate that Greece is simply an example of a worse case scenario that is also unfolding in varying degrees in many countries.

1 comment:

intrinsic value said...

With the current Japanese tragedy heightening risk aversion in the markets, there would be little chance that ECB will raise rates in the short run. Spain the least exposed to the debt problems in the PIGS category. At govt yield of 4.2%, they seem to be able to make it out of the crisis in whole.

European outlook:Intrinsic Value