Friday, 28 October 2011


When I wrote the posting regarding Argentine-Greece comparisons, I knew some of the details of the 50% haircut on the Greek debt. The so-called "haircut" is in essence a technical default, at least as far as Fitch among others see it, but it temporarily solves the problem of Greece in the following respects: Greece will be staying in the eurozone for now, it will be making sure that it continues to service its public debt, at least for the next two years, the banks are safe as long as they secure guaranteed loans, and the austerity program continues for the next ten years according to terms that the IMF and Germany have dictated. 

A number of politicians including President Sarkozy and German officials argue that Greece should have never entered the eurozone, because it did so by reporting false key statistics - the so-called 'Greek statistics' - regarding its economy and finances. This is undeniable, but what is also true is the role of Goldman Sachs involved in credit SWAPS with the full knowledge and complicity of all EU governments and of the European Central Bank. The question is why did the EU permit 'credit SWAPS' to be used in a fraudulent manner, and why did the EU not call for an investigation and why it permitted Greece to join knowing it was a high risk member? The current debt crisis, and haircut are the part of the price that taxpayers across EU are paying because governments permitted large financial firms like Goldman Sachs to make millions in profits.

Analysts agree that the details of the 50% haircut deal are not all in, and we still need to see the fine print of the broad deal on the Greek debt as well as the reinforcement of the European Financial Stability Facility (EFSF). From what we do know, it is essential to note that the haircut does not apply to the entire public debt of roughly 360 billion euros (165% of GDP) but to 210 billion. Of the roughly 100 billion haircut, Greek banks will need 30 billion in government-guaranteed loans (buffer loans) - money that Greece will have to borrow - and the pension funds will sustain losses of about 10 billion, as far as we know today. This may change within weeks, if not days.

While Angela Merker who dictated terms of the haircut has stated that she wants Greece to have aggregate public debt of 120% of GDP by 2020, or the same level as 2009, the IMF and EU are estimating that Greece will need a minimum of additional 220 billion to 444 billion euros in the next ten years. Of course, no one knows what the needs will be because it is difficult to estimate GDP growth, among other factors such as political changes. 

Let us consider that the same IMF team leader that is heading the TROIKA group for Greece today, argued just two years ago in London that Greece had a 'serviceable public debt' and there was no cause for concern. Moreover, 18 months ago the same TROIKA convincingly argued that Greece would be able to return to the private markets for its borrowing needs and that GDP growth would be positive in 2012, arguments that had to be revised substantially. 

The same TROIKA insisted a year ago that the only road to growth is austerity, and that GDP growth comes via fiscal austerity. The IMF and TROIKA now admits that it has made serious mistakes in its assumptions, but continues to insist that fiscal austerity, privatization, and sharp curbing of consumption is the road to growth - no talk of a development plan, unless of course individual companies and private investors wish to invest amid such a climate that exists in Greece.

Many who have no reason to bother with details of such international loan agreements may not realize that while the EU is now asking surplus countries like China to invest in bonds through the newly-established EFSF that is far more secure than investing in bonds of individual countries, the IMF-EU austerity dictates that the borrowers under austerity like Greece, Ireland and Portugal cannot borrow beyond the perimeters that TROIKA approves. Those who have studied imperialism know that in the 19th and early 20th century the US and Western Europe would purchase the public debt of debtor nations and then locked them in on borrowing terms, as well as trade, investment, labor and other policies.

For example, if the Greek government wishes to borrow 25 billion euros from Russia or China to build an aluminum plant - given the availability of bauxite and the widespread usage of the specific metal in many sectors from construction to manufacturing - it would have to ask for TROIKA's permission to borrow. Given that the IMF and EU oppose government-owned enterprises and advocate strengthening private enterprise, and given that there are French and other European countries interested in the aluminum business, TROIKA would vehemently object to any public borrowing for a development project. This is largely because such a move is contrary to the neo-liberal model that the IMF and EU advocate and more practically because a public enterprise would cut into the profits of existing private companies. 

This is only a tiny example of how a nation under austerity losses its sovereignty. Is Greece in a comparable position as Argentina ten years ago? In some respects it is better off so far. But the worst is yet to come and this is something that the average person knows as well as politicians. Would Greece under IMF-EU austerity be better off in 2020 than Argentina is ten years after it decided to end the austerity regime and go the route of national capitalism?

1 comment:

Anonymous said...

The Greek people have long ago proven their brilliance in the Art of continuity.

The phenomena that a sovereign people can be saved by 'few or by many' is evident here. The ability to merge qualitative concepts with quantitative precision goes without saying more.