Greece is heading for default on its government or sovereign debt, as it is called. There are two reasons why it is becoming unavoidable. The first is economic. The size of the Greece’s public sector debt is now reaching 160% of GDP (annual output). That is so large that it cannot be stabilised unless the annual government deficit of spending (excluding interest payments) over tax revenues is turned into a significant surplus (called a ‘primary surplus’). The swing from deficit to surplus that the Greek government needs is now over 10% pts of GDP by 2014. There is no possibility that this can be achieved.
The government has announced yet another fiscal austerity package drawn up by the IMF and the EU designed to create a primary surplus. Public sector jobs will be cut by 15%. If you exclude the armed forces, Greece has the same number of public sector workers per head of population as Ireland. Under the package, Greece’s public sector jobs will be 10% smaller than Ireland’s. At the same time, the working week for public sector workers will be raised from 37.5 hours to 40 hours. And on top of the already implemented 20% cut in wages, there will be further pay reductions. Taxes will be raised by yet another 2-4% on average incomes and the tax threshold will be lowered to just an annual €6000. So the poorest Greeks will pay even more tax. The property tax threshold will also be lowered to include very modest properties starting at €200,000.
But none of these measures will do the trick in getting Greek sovereign debt under control because the Greek capitalist economy is now in a deep recession. The latest data for GDP growth in Q1’11 revealed a fall of 5.5% over the same quarter in 2010. And the forecasts for 2011 and 2012 are for further falls in real national output of 2-4% a year. The unemployment rate is now over 16% and over 40% for young people. Greek capitalism is on its knees before the dreaded Troika (the IMF, the EU and the ECB). With nominal GDP falling over the next two years and debt levels in euros rising, it is a mathematical impossibility for Greece’s government debt to be stabilised.
That means the Greek government cannot find the funds to repay the bonds that become due by borrowing from Europe’s banks and other financial institutions. These institutions are already unloading their holdings of Greek debt and are demanding over 25% annual interest to buy more in secondary markets. Such a rate of interest would just blow up the budget deficit despite attempts to cut it through fiscal austerity packages. That is why the Greek government is being forced to get another bailout package from the EU and the IMF. Back in 2010, it received a package worth €110bn supposedly to tide it over until early next year before it started borrowing again from bond markets. It has become clear that it cannot ‘return to the market’ next year so it needs more ‘official’ money. The EU-IMF is preparing a new package in return for yet more cuts in living standards for the average Greek household. This package will probably involve another €60bn in new money but also €30bn to be raised by selling off Greek national assets like the post office, airports, airlines and lots of real estate (not including the Parthenon yet!). And there is a tentative plan to raise another €30bn by persuading Europe’s banks to ‘roll over’ their holdings of Greek debt ‘voluntarily’.
This package will be agreed by Europe’s leaders at meetings on 20-24 June and is designed to tide Greece over until 2014 when things will be better (hopefully). But nobody really believes that it will manage that. Even by 2014, Greece is unlikely to have got control of its debt levels. More likely, it will start to fail to meet the targets on the budget deficit set by the EU-IMF over the next year (as it has done up to now). That will pose the issue for the official lenders. Will they ignore the failure to meet targets and continue to hand out the money or will they recognise the inevitable and declare that Greece cannot pay and must default?
The second reason that default will happen is that the Greek people are increasingly unwilling to suffer a loss of over 30% in their living standards just to meet government debt payments to European banks, especially as those banks were the cause of very financial collapse globally that triggered the Great Recession and got Greece into this crisis in the first place! Over the last year public opinion polls showed that the majority of Greeks were prepared to make sacrifices if it meant that Greece could stay in the Eurozone. Joining the euro was seen by most Greeks as the making of the Greek economy and they wanted to be there. Of course, most of the gains from Greece’s membership went to Greek business which lived off EU subsidies and a strong euro, while paying little or no taxes to the Greek exchequer. Corruption and tax evasion were the order of the day for the rich, the corporations and professional classes (the big scandal in Greece has been the revelation that Greek doctors, dentists and lawyers, pop stars and politicians etc paid little or no tax).
But now the leading nations of the Eurozone are driving Greek capitalism into the ground and enthusiasm for sustaining fiscal measures is fading. The latest polls show that over 80% of Greeks do not want to continue with fiscal austerity. Every Sunday, over 100,000 people have been occupying Syntagma Square in Athens. The Indignants are copying the style of the Middle East protests and the movement in Spain against the cuts and the unity of the politicians in imposing austerity. A recent survey found that 25% of of Greek people had been involved in some form of protest in the last month, or 2.2m people, double the previous levels of participation.
The ruling PASOK socialist party in government now trails the conservative New Democracy opposition in the polls for the first time since the crisis began. More revealing is that both major parties are losing ground to an array of splinter left parties. Both the leaders of the major parties have all-time low ratings. If there was an election tomorrow, no party would have an outright majority. The balance of power would be held by small left parties. Opposition to meeting the demands of the IMF-EU is growing in PASOK itself and not just from the trade unions. A split and an early election is possible in the next six months. If that happens, Greece will no longer keep to its fiscal targets and may even opt for default itself.
What would default mean? The ECB and the banks would consider it a disaster. They are the institutions that hold the majority of Greek debt. The value of that debt would plummet by at least 50%, bankrupting Greek banks and causing serious losses to other European banks and the ECB itself. If markets worried that such a default could lead to defaults in other distressed EMU states like Ireland and Portugal, then there could be a new systemic financial crisis in Europe, this time based on sovereign debt, not private credit. That is the fear of the ECB and why it opposes those in Germany who are calling for a ‘restructuring’ of Greek debt so that German taxpayers don’t have to keep paying for most of the Greek bailout packages.
For the Greek people it would be the lesser of two evils. If the Greek government negotiated with bondholders to cut its debt by 50% or more, that would remove a huge burden from the back of the Greek people and enable their sacrifices to be spent on trying to revive the economy through investment and employment rather than paying the interest and principal to to the likes of Deutsche Bank or Societe General. Greek banks would be nationalised, recapitalised and operated as a public service for loans to Greek small businesses and households, not just as buyers of government debt or conduits for rich Greeks to spirit away their wealth from Greece.
If the Greek government opted for default, they may face expulsion from the euro and certainly they would be frozen out of bond markets for a decade. Some reckon that it would be a good thing if Greece left the Eurozone. I don’t see that it benefits the Greek economy. Sure, leaving the euro and starting a new drachma currency would allow Greece to devalue heavily and so make its exports much cheaper. But that would also create a massive rise in inflation, destroying the incomes and savings of Greek households and small businesses, who would still owe money in euros. Greece would be reduced to a third world economy. Of course, if they are expelled, Greece would have to take its chances. But there is no need to go looking for it. Indeed, a Greek government should appeal to other EMU states to do something similar and dispense with meeting the demand of the banks on public debt and instead bring them into public ownership with a plan for economic revival across Europe.
Default is inevitable. But it could still be ‘orderly’. Namely, the upcoming bailout funds may enable Greece to stay out of bond markets until 2014 when economic growth in Europe could have revived sufficiently and Europe’s banks could be strong enough to take a ‘haircut’ on their Greek bond holdings. That is the hope of the ECB-IMF and the EU leaders. But the odds of such an orderly default are falling and the odds of a disorderly one are rising.