Greece in a straitjacket

So there we have it.  Greece’s technocrat-led government finally got the Euro leaders to agree to a second bailout package to fund the government through to end-2014.    Greek capitalism is now in a straitjacket strapped on by the Euro leaders and guarded by the dreaded Troika (the EU Commission, the IMF and the ECB).  Troika officials will move into offices in Athens and check every euro coming in and out of the government to see that the targets for public spending, taxation and privatisation are kept to.  In addition, all the funds guaranteed by the Eurozone governments and raised through the emergency funding body, the EFSF, will be placed in an escrow account run by the Troika and will be doled out as and when creditors must be paid.  The Greeks will not control this account and must wait for handouts from the Troika.  It is as though a private company had gone bust and called in the administrators who now run the company, hiring and firing.  Greek capitalism is on its knees and bowed.

This straitjacket will be in place at least until 2014, but probably until the end of the decade.  As most private sector holders of Greek bonds are participating in the so-called bond swap (PSI) at a loss of 53% on the face value of the bonds they hold, around 85% of the remaining outstanding debt of the Greek government, at around E280bn, will be held by the IMF, the ECB and the EFSF, as well as by Greek state pension funds and its banks.  So most of the bailout package money will be used to pay back these loans!  What a roundtrip farce!

The reason it is happening is that the Greek government can no longer raise funds in the private bond markets except at ludicrously high interest rates.   At least, the official creditors will charge a much lower rate and won’t ask for any money back for three years.  So instead of paying 25% on bonds to the private market, Greece will pay about 3.5% a year.  But this means nearly all the funding is going to pay bond holders and very little is going to help the Greek economy recover from its deep slump, now in its fifth year.  On the contrary, the bailout package has only been delivered under the most draconian conditions.

On top of the already imposed cuts in public spending, the government was forced to agree to an extra budget for 2012, cutting spending by another 1.5% of GDP through reductions in public investment projects and defence as well as yet further cuts in pensions.  Public sector wage reductions are being brought forward, while the monthly minimum wage is to be slashed by 22% (and 32% for young people under 25 years!).  Up to 15,000 state workers will be put in ‘labour reserve’ for a year reducing their incomes to 60% and then sacked.  The aim is to cut the state workforce by 150,000 by 2015.  The government has now to run a significant surplus on its annual budgets (an excess of taxes over spending excluding interest payments) for the foreseeable future.

The problem is that these measures of fiscal austerity increase the difficulty of the economy to recover from its depression.  The IMF has still to sign up to the deal (it meets next week), but in its published debt sustainability analysis, it reckons that after the PSI, the public sector debt would still be around 168% of GDP in 2013 because of the falling GDP.  The idea is that annual primary surpluses will drive that figure down towards 120% of GDP by 2020.  But it does not take much to miss that target.  If the government does not sell enough state assets (it is planned to sell off E46bn by 2020), or if economic growth does not recover as quickly as expected, or if interest rates across Europe start to rise over the next few years, then the debt ratio could spiral upwards and not get much below 160% in 2020, which is where Greece is now.

The bailout plan assumes that the Greek people will stick to what their technocrat government has agreed and start selling off huge chunks of their country’s wealth, while at the same time imposing enormous budget cuts.   We shall see if that is the case in the upcoming elections, mooted for early April.  Current opinion polls show that the conservative New Democracy is polling just 19%, while the social democrat PASOK party is polling 11%.  Both these parties are pledged to honouring the bailout.  The opposition left parties are not and they are polling over 40% together (but they are split and bickering).

The Euro leaders know this.   They’re buying time with markets to avoid catastrophic capital flight from Greece and give them more time to work out how to shore up the likes of Portugal if and when that happens.  We shall know if they have succeeded in hoodwinking the Greek people and the markets within a month or so.