COMMENT

The Greek crisis: an economic problem, not a moral quandary

By Nick Malkoutzis

Like clockwork, crucial talks between Greece and its lenders have been prefaced by a gaggle of European politicians questioning Athens?s commitment to its bailout targets and its place in the eurozone. Accusations have ranged from a Greece being a ?bottomless pit,? to the government, in place for about two months, lacking the will to implement the troika?s program. There has even been a suggestion -- if reports are correct -- that Athens has failed to cut wages and public spending.

Misdirection, misinformation and downright lies have never been in short supply since Greece?s debt crisis began. Some of the recent comments about Greece have slotted into this regular pattern. Greece can be justly criticized about the slow pace of reforms but there is no basis for raising doubts about its efforts to meet -- albeit haphazardly -- the fiscal targets set by the European Commission, European Central Bank and International Monetary Fund.

To suggest that Greece is in a constant struggle to meet the troika?s fiscal goals because of indifference rather than due to the deteriorating state of the economy or because of the political difficulty of passing unprecedented -- by eurozone standards -- austerity measures is pure subterfuge. There is little evidence to back up such a claim. Even a cursory glance at the economic indicators proves that Greece has cut both wages and public spending. It may have fallen short in other areas, but in terms reducing expenditure, there can be no doubt that Greece is doing its bit.

Between 2009 and 2011, Greece cut its primary expenditure by 20 billion euros, a reduction of approximately 18 percent, from 112.7 billion euros to 92.7 billion. The public sector wage bill was reduced from 31 billion euros to 26.1 billion, or 16 percent. Greece?s primary deficit was 10.4 percent of GDP when the bailout began in 2010. At the end of last year, it fell to 2.2 percent. That kind of reduction does not happen without drastic cutting.

The signs so far this year are that this reduction in spending is continuing apace. Budget execution data for July was made public on Wednesday and it showed primary expenditure for the first seven months of the year at 38.5 billion euros. That?s 6.9 percent lower than at the same point last year and 5.9 percent better than the target agreed with the troika. The primary defecit stood at 3.08 billion euros at the end of June, which is 32 percent better than the target. July was the second month this year that Greece showed a primary surplus. Although this is partly due to the building up substantial arrears, other eurozone countries with economic difficulties have also seen a sharp rise in the amounts their governments owe to third parties.

Among the measures being lined up by the government to achieve the 11.5 billion euros in savings the troika has demanded for the next two years are further reductions to state sector salaries. Civil servants have already had the extra Christmas and Easter payments in their 14-month pay packet reduced substantially and it appears that these will now be phased out altogether. This represents a 14 percent reduction on its own. On top of that, one should factor in the reductions to the public sector pay scale. Pensions will also be cut for a fourth time in the latest round of austerity. Retirement pay has already been slashed by up to 40 percent. Some retirees? pensions will have been more than halved by next year, compared to 2009 levels.

In the private sector too, there is no proof of Greece failing to take the steps that are supposed to make it more competitive. The minimum wage has been slashed by 22 percent, or 32 percent for younger workers. Unit labor costs in Greece have fallen consistently over the past few years: by 1.7 percent in 2010, by 3 percent in 2011 and by 9.1 percent in the first quarter of 2012. In contrast, the average ULC in the eurozone rose by 0.8 percent last year and 1.5 percent in the first quarter of this year.

This raises questions about why some European politicians continue to portray Greece as resisting all attempts to conform. While there is a long way to go in terms of structural reform, Greece is no slouch in terms of its consolidation efforts. A recent Central Bank of Ireland report by Laura Weymes shows that Greece?s fiscal consolidation is much greater than the other troubled eurozone economies -- Ireland, Portugal, Spain and Cyprus -- and will be equivalent to 30 percent of its GDP by the end of 2014, at least three times greater than the others, bar Ireland.

There are some within Europe who are determined to build a moral case for throwing Greece out of the euro. Portraying Greeks as the eurozone?s original sinners, who have no intention of repenting and correcting their mistaken ways, makes it much easier to build a case for jettisoning Greece than trying to engage in the more complicated political and economic dilemmas produced by the crisis. In Germany especially, Greece -- a country that accounts for just 2 percent of the eurozone economy -- seems to have become a handy campaign tool ahead of federal elections in September or October next year.

Couching in moral terms what is essentially a political and economic matter is a futile exercise. In this crisis, everyone?s morality is in question -- not just that of one country or people. Also, morality tends to be somewhat of a movable feast, always dependent on timing and circumstances. Take, for instance, the fact that in 1995 Germany was vehemently opposed to an International Monetary Fund bailout of Mexico. Berlin argued there was moral hazard in providing a $17.8 billion loan to Mexico because it was simply a rescue package for American investors who had plowed money into Mexican short-term debt, or tesobonos, and were in danger of suffering huge losses from a possible default.

Fast-forward 15 years and German qualms about the moral hazard involved in providing loans to a country on the verge of bankruptcy, thereby ensuring that many of those who lent it money did not suffer significant losses, had waned. Maybe it had something to do with the fact that in 2010, the country in financial trouble was Greece and German banks were among the investors facing losses. At the time Greece signed its bailout with the EU and IMF, German investors held 22.6 billion euros of Greek public debt, out of a total exposure of 65.4 billion euros to the Greek economy, according to the Bank for International Settlements.

By the time of the so-called Private Sector Involvement (PSI) earlier this year, when holders of Greek bonds suffered a 53.5 percent haircut, German banks had largely managed to recoup their investment and nullify their exposure to Greece.

While the loan installments Greece has received over the last two years have helped cover its diminishing primary deficit -- and there are many people who receive state salaries and pensions who should be thankful for that -- the bulk of the money (more than 70 percent) has gone toward repaying existing debt, such as bonds held by European banks and the European Central Bank. It is worth pointing out that some of the ECB bonds being paid in full, such as the 3.2-billion-euro note that matured on August 20, were bought on the secondary market for an estimated 70 percent of their face value. It should also be added that the 11.5 billion euros in cuts Greece is being asked to implement over the next two years is not a figure that has been arrived at because it provides a key to economic recovery. The cuts have been calculated so that Greece can turn a primary surplus of 4.5 percent of GDP by 2014 and be in a position to repay the loans it has been receiving.

So, when European politicians talk of providing no further assistance to Greece, they are essentially suggesting Greece should not be lent money to pay back its debt, which almost exclusively lies with the official sector -- the ECB and eurozone countries -- after the PSI. The structure of the Greek bailout ensured that nobody in the official sector has lost money and the creation of an escrow account earlier this year guarantees that everyone who has lent to Greece will be repaid. In fact, when one factors in the interest and lower borrowing costs countries like Germany have benefited from as a result of weakness in other areas of the eurozone, the bailouts have turned a tidy profit. If Greece is a bottomless pit, it is the first in the world to return the money thrown into it with interest.

?So far the governments have not had a loss on any position and have received current income,? writes Peter Tchir of TF Market Advisors. ?The ECB?s SMP portfolio, as problematic as it is, has so far generated both coupon income and profits when its Greek bonds are paid back at par. This money is then transferred to the various countries.

?The IMF is receiving interest, again generating a profit. The EFSF has some sketchy risk but again, so far has been generating income without taking any credit losses. The return on cash may well be over 100 percent for some of the countries since they posted minimal cash, and the steady stream of coupon income is adding up over time.?

It is clear that moral arguments have no place in the eurozone?s current predicament. They simply lead to one side looking for someone to punish and the other for someone to blame. It is vital that Europe sets this debate aside and focuses on the political and economic challenge at hand. A crisis that is eminently solvable is instead being tackled in such a perverse manner that it threatens to erode Europe?s very foundations.

Greek Prime Minister Antonis Samaras will this week attempt to convince European leaders that his government can produce the 11.5 billion euros, or possibly more, in cuts the troika has demanded for the next two years. This, purportedly, will be a sign that Greece is making the further sacrifices needed to get its public finances under control. Yet, at the same time, the economy is shrinking faster than anyone can keep up with -- possibly by as much as 7 percent this year, the fifth year of recession in a row. In an economy where demand and investment (now half what it was at the start of this crisis) is plummeting, the levels of austerity demanded are undermining hopes of a recovery.

Greece is essentially being asked to pull even more of the rug from under the feet of its teetering economy, and risk the fragile political balance in the country, to receive further loans, which will be used to pay back existing debt. As Nomura Research Institute?s chief economist Richard Koo, who argues that the eurozone is experiencing a balance sheet recession, put it in a recent note, ?it is as though a team of doctors insisted on administering the standard treatment for one disease to a patient suffering from an entirely different disease about which they knew nothing.?

The question, as Koo says, is ?how long democracy can survive with governments and EU institutions forcing the patient to undergo treatment for the wrong disease.? European democracy is done no favors by its current tunnel vision. It is further undermined by politicians from one country using flawed arguments to speculate about whether another country should remain in the single currency, with whatever consequences that entails for the millions of its citizens. The repeated bouts of speculation are themselves undermining any chances of recovery.

?It is not consistent to urge an exhausted country to make all possible efforts to meet the targets of the IMF/euro area program, while fueling anticipations of a forced exit,? wrote the head of the Bruegel think-tank, Jean Pisani-Ferry, on Wednesday. ?Without investment and a return of confidence, Greece is bound to remain caught in a vicious circle of recession and, whatever its efforts, it is unlikely to meet its creditors? demands.?

The solutions to this crisis will not be within Europe?s grasp as long as it keeps kidding itself by dressing the problem up in moral terms. By all means ask of Greece that it reform its civil service, banking sector and economy -- it has no chance of survival it if it doesn?t. By all means ask that public spending be brought into line with the country?s financial capabilities. But don?t try to build an ethical argument for its exclusion from the eurozone. Europe has been through painful division in the past; it doesn?t need a new form of divisiveness. It needs answers to economic problems, not moral quandaries.

[Kathimerini English Edition]

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