Grexit, Greece’s exit from the euro area, is back in the news – for the wrong reasons. During this past week, the country’s creditors, the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund, finally agreed amongst themselves to set even tougher conditions in order to continue refinancing the country’s debt. They bluntly demand more suffocating austere measures from the Greek government, despite the clear success story it accomplished in 2016, with a strong primary (including interest, not principal repayment) budget surplus and tangible GDP growth. However, the real problem is not there.
In the face of it, the four creditors are worried about the ability of the country to repay them after 2018. But this is not such a critical problem. Not to forget, the three European creditors have already started easing the terms of Greece’s debt repayment by cutting interest rates down, close to zero and extending the payoff period up to 2060. On top of that, the main package of debt relief is yet to come and will be finalized most probably before the end of the year. Under it, debt present values will be further cut down by at least 30%. Then, the ECB will include Athens in its quantitative easing program and will start buying Greek debt, thus helping the country refinance itself from the capital markets. However, as we will see in a moment, what the four creditors are up to is an indirect help also to Germany not only to Greece from all euro area taxpayers.
The true story
So, without telling it, the IMF and the Europeans are not that much worried about the settlement of the sovereign Greek debt, but they are worried about the more than €100 billion of non-performing loans, which haunt the country’s banks. That is why the four creditors now demand that the Greek government as from 2018-2019 squeezes out of the Greek taxpayers another €3.6 billion every year, above and on top of the 2016 primary surplus of €3.5bn.
This will make up more or less a €7 billion of primary yearly budget surpluses. Obviously, this is much more that what the country needs in order to start repaying its sovereign obligations. Alas, those extra austere measures are once again imposed on Greece for the sake of the entire Eurozone banking system, and mainly for the German lenders. It’s exactly as in the crisis years of 2010-2012, when the country was not ‘allowed’ by her allies to default on its government debt, then owed to just a few major German and French banks. There was a good reason for that though.
At that time the western banking system had grave problems after the financial meltdown of 2008 and a Greek bankruptcy could have had demolished not only the European banks, but with them the global financial edifice. For that reason, in 2010, the IMF directors agreed to participate in the first Greek rescue program (Memorandum I), even knowing that the country wasn’t able to recover from the severe austerity conditions imposed on her. This was in breach of IMF statutes and the Fund has bitterly recognized that on several occasions.
In short, Greece in the spring of 2010, was forced by her allies not to default in order to save the Euro-German and with it the entire western financial system. Athens, in order to do this, repudiated her right to demand a restructuring of her debt from the creditor European banks, including a generous haircut of nominal values. In any bankruptcy, borrowers and lenders share the cost. Not in the case of Greece and Germany though. The reduction of the Latin American debt to US banks in the 1980s could have provided a guide to this affair (Brady Bonds), but nobody proposed it.
The same old story
Now, once more the European banking system is in a high risk position. It’s not only the Greek and the Italian banks which cannot cope with their non performing loans. Deutsche Bank, the largest German lender is equally unable to recapitalize itself in the market. Last year, the bank’s chief economist David Folkerts-Landau, said that the Eurozone banks, including of course his employer, need €150bn in total from taxpayers to adequately recapitalize. This statement was made last September. Today however, it has become evident that more German banks are in a similarly difficult position, with God knows how much more losses on non performing loans. Why did that happen? It’s the easy maritime loans the German banks hand out to support the country’s always faltering shipping companies.
Last year was a rather catastrophic era for the German shipping companies and their lenders, who were not prepared for the collapse of freights. According to Wall Street Journal, “The global shipping crisis is stoking another European banking headache, this time in economic powerhouse Germany, with multiple lenders having reported big losses on shipping-related debt.” By the way, the Greek maritime fleet on the contrary was very well prepared to confront the 2016 freight downturn. Today, it represents more than one quarter of the world ocean going fleet and accounts for more than half the European sea transport capacity. No problem whatsoever then for the Greek banks and the Greek marine from the shipping market fallout. Mind you, the Greek shipping industry provides an annual inflow of net wealth of around €10bn every year for the country. Unfortunately, that’s all the good news there is for Greece and Europe.
Always in the red but never defaulting
Yet again, as in 2010, Greece is not ‘allowed’ to default and thus negotiate with her sovereign creditors a deep haircut of her debts. Last week, the European Commission, the European Central Bank and the European Stability Mechanism said they found something like common grounds with the International Monetary Fund, and the four of them are now confronting Athens with a solid set of terms. It practically includes a fourth ‘rescue’ program with devastating anti-growth terms like more taxes, new pension cuts and incredible demands for unreasonably high budget surpluses. Until very recently, the IMF maintained a clearly different stance towards the problem of the Greek debt in contrast to the Europeans. The Fund considered the debt unviable and kept asking the Europeans to outright forgive a large part of it, in order to render it serviceable. The IMF thus maintained that after a debt reduction, there will be no need for unreasonably high fiscal surpluses, thus leaving room for growth spending.
It seems, however, that the Fund has – reportedly – come to some kind of understanding with the Europeans. The four of them are about to impose a new, more severe austerity program on Greece – a forth one (Memorandum IV) – after the present one expires at the end of 2018. In view of all that, a wide reaching discussion was kicked off in the country, about a controlled bankruptcy within or even without the euro area, that is, retaining or dropping the euro as national currency.
With or without the euro?
In this new debate a number of key people contradict the European allegation that a Greek bankruptcy may wreck Eurozone’s banking system. They point to the fact that more than 80% of the Greek debt is sovereign, government to government lending. Right after March 2010, the euro area governments and the ECB rushed and saved the big German and French banks by unloading the Greek debt from those big lenders and buying it themselves. By the same token, the Greek taxpayers were forced to recognize those debs at face value and undermine their country for decades. So today, Germany, France and the ECB officially own the Greek debt and those countries will not go bust, if say they are to write off a round 50% or €50bn to €80bn of the Greek obligations. At this point though, enter European politics.
Politics of racism
Three key euro area countries are holding elections this year. On Wednesday 15 March in Holland, voters may elect as Prime Minister Geert Wilders, the leader of an anti-EU, racists and xenophobic party. One may easily imagine what he has to say about the Greek debt. In France, the April-May Presidential election will be decided in two rounds. The Eurozone banking problem though may play a probably, small, role about who in the first round will cross the line as second and face and beat anti-EU and racists Marine Le Pen in the second.
Then comes the German federal election on 24 September where the Greek issue may acquire a significant role. For the center right governing party of Angela Merkel and Wolfgang Schäuble, the Christian Democratic Union though, and more so for their sister party of Bavaria, the Christian Social Union an alleged ‘generosity’ on the Greek issue, may coast them dear. Their center-right audience also squints towards the fast growing extreme right, anti-EU, xenophobic and racist AfD party. That’s why Schäuble doesn’t miss an opportunity to advertise how unbending he is on the terms that Greece has to fulfill, in order to gain access to the German ‘aid’.
The fallacy of German aid
Not a word about the fact that back in 2010 Greece saved Deutsche Bank and the entire euro area banking system, by accepting not to default on her debts. Instead, Athens agreed to repay them in full, at nominal value, regrettably. Again today a similar problem is developing, with the European banking system being at a very precarious position, including of course the loss making German lenders. But Schäuble once more avoids telling the truth to his compatriots and prefers to protect his country’s financial oligarchy at the expenses of the Greek, but also the German taxpayers.
In reality, we are back at the awful instances of the spring of 2010. Nearing the spring of 2017, Germany is also the only real lender in the EU, because even the French banks are borrowing from the German financial institutions. It’s an undeniable fact that the Germans, business, consumers and government alike spend less that they earn for decades now, so they are floating in cash. But cash doesn’t earn anything unless it’s lent or invested. So, the Germans, apart from the US treasuries they have bought, keep lending or acquiring other assets abroad. But, as they say there is no reckless borrower, if there is no reckless lender. Back in 2010, the German bankers had lent to the European periphery so much money, that they were almost uniquely responsible for the real estate bubbles in Ireland, Spain, Portugal, Greece and Italy.
Floating in cash
Again, today, as in 2010, the Berlin government has two options in order to confront the grave problems of her financial institutions, which are overexposed and over-lent abroad: to either pay with German taxpayers’ money in order to save the country’s lenders and never get that money back, or try to force the borrowers to repay their debts in full nominal values. In 2010 this system worked. In 2017 Merkel and Schäuble want to repeat the same game with Italy and Greece and also win the September election. They need the full cooperation of IMF, though, as it was the case seven years ago.
But, as everybody knows the IMF is in Washington D.C. and the White House has a potent leverage there. The question is then, if Washington under Trump will be as cooperative with Berlin as in the early days of the Obama administration. Soon, we will learn if this is so, as the mainstream Press says it is. There is one more big difference between 2010 and 2017. Today, a Greek default doesn’t scare anybody and of course not the American banking giants. It’s only German money which is at stake, so why should the rest of the world care?