FORBES: Greek Bailout Deal A Farce To Benefit Banks At The Expense Of Greece


Greek Prime Minister Alexis Tsipras



Greek Bailout Deal A Farce To Benefit Banks At The Expense Of Greece

Forbes’ Augustino Fontevechia, who covers power and money for the magazine, has said that “As it stands right now, the Greek bailout and debt deal agreed by European Finance Ministers is a farce, a program designed to pay Greece’s international creditors and buy time to somehow engineer growth in a completely uncompetitive economic environment.”

A leaked internal Troika memo proves that even under a relatively optimistic scenario, Greek debt-to-GDP levels would only fall to 129% by 2020 and could remain as high as 160%, while financing needs would still exceed Greece’s capacity to pay, prompting German daily Der Spiegel to ask the EU to admit Greece is bankrupt and stop the bailout package.

On Tuesday, the EU, the ECB, and the IMF – collectively known as the Troika – agreed to a €130 billion bailout package for Greece; this is the second bailout the Hellenic Republic gets after a €110 billion package approved in May 2010 .  Markets essentially yawned.  The bailout comes with conditions of further austerity, expectations that a “voluntary” debt restructuring (PSI) goes through, and promises that debt-to-GDP levels will be brought down to the arbitrarily sustainable figure of 120%.

Only six days before, on February 15, the same authorities that agreed to give the bankrupt Hellenic Republic another bailout warned that their own conditions wouldn’t be met, begging the question as to what the actual value of this “can-kicking” experiment is.  In a “strictly confidential” memo titled Greece: Preliminary Debt Sustainability Analysis, Troika researchers note that debt-to-GDP levels will remain well above the 120% mark, that “additional debt relief from the official or private sectors” will probably be needed, and that “prolonged financial support […] by the official sector may be necessary.” (To see the memo, go to this article on FT Alphaville).

From the memo:

“There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.

Rickens makes a strong point.  “How else,” he asks, “can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors?”  He explains that about €30 billion will go to holders of Greek government bonds “as an incentive to convert old paper into new bonds.”

The reasoning is simple: the financial sector is trying to keep alive the illusion that Greece isn’t bankrupt, “cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction” in order to get paid.

Greece is indeed broke, and the reason why all the bailout money being thrown into the pot should isn’t being used to foster competitiveness and help the country get back on its feet is because this bailout isn’t actually going to fix Greece: rather, it’s an attempt to buy time so that it doesn’t become Germany, France, and the rest of the EU’s problem.

Private investors can say they are “voluntarily” forgiving about 70% of the debt (according to net present value calculations by Barclays), but they are getting paid while Greece falls deeper into what already is a 5-year recession.  Among the largest IIF creditors involved in the discussion are the National Bank of Greece, BNP Paribas, Commerzbank, Deutsche Bank, Intesa San Paolo, ING, Allianz, and AXA, according to BusinessWeek.  Major US institutions like JPMorgan Chase, Citigroup, and Bank of America have a substantially smaller exposure to Greece.  While there is nothing wrong in creditors protecting their capital, policymakers appear to have decided on their behalf at the expense of the Greek economy.

Troika estimates show that Eurozone bank recapitalization needs have increased to about €50 billion.  It also suggests that given the PSI, Greece’s capacity to access capital markets has fallen dramatically, forcing it to rely on official sector help to avoid a default to the magnitude of around €50 billion from 2015 to 2020 “before actions to reduce debt.”  Privatizations and asset sales will deliver substantially less funds than previously anticipated and it will probably take Greece a lot longer to take its primary surplus to sustainable levels from the -1% projected for 2012, according to the memo.

It is clear from the official study that the current deal is definitely broken, the question is how it’s broken and why it’s going through anyways.  According to Der Spiegel’s Christian Rickens, the second bailout package “isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.”

Greece’s ruling Syriza party’ Left Platform have proposed a default on the country’s international debts and the nationalization of its banks.

The Daily Telegraph reported that a confidential plan for an “Icelandic-style default” will be put forward in the next few days by members of Syriza’s Aristeri Platforma (Left Platform) and has gained the support of at least 30 MPs.

The example of Iceland, which in late 2008 nationalized its three biggest banks when they defaulted on assets worth 10 times more than the country’s annual economic output, is being cited as a potential path for Greece to follow.

Since its catastrophic collapse, Iceland has slowly recovered, with its economy growing each year since 2011 and economists predicting a 3% increase this year.

Negotiations between Greece and its international creditors – the International Monetary Fund, the European Central Bank and the European Commission – broke down again this weekend, causing Greek stocks to fall by 5% on Monday.

Greece owes the IMF a further €1.5bn before the end of the month, with €452m and €3.5bn due to the IMF and ECB, respectively, in July. [ However, the bailout billions given to Greece was used to bailout the Deutch Bank and its creditors.]

The new proposals, which reportedly would also be backed by the nationalist ANEL party which is in coalition with Syriza, would likely be accompanied by a return to the drachma and thus almost certainly necessitate an exit from the eurozone.

It would involve the creation of a sovereign central bank to prop up the new financial system. This would function as a so-called ‘bad bank’, into which Greece could shift its illiquid and high-risk securities to reduce uncertainty and get its financial system back on track.

It would also entail the imposition of capital controls – restrictions on the amount of money which can be withdrawn and transferred from banks. In Cyprus, where capital controls were implemented in 2013, cash withdrawals were limited to €300 per day.

Greek prime minister Alexis Tsipras is holding out for a deal with the country’s European creditors and is striving to hold his party together by rejecting the international creditors’ demands to slash wages and pensions.

Raoul Ruparel, co-director of London-based policy thinktank Open Europe, says that while the balance remains slightly in favour of staying in, the future of the party is hanging in the balance as support for Grexit continues to grow.

“Quite a large swathe of the hard left in Syriza are considering now whether Grexit is a better option,” says Ruparel. “If Tsipras put a deal on the table which is basically what the eurozone wants, it would be very hard for him to hold his party together.”

A key difference between Iceland and Greece is that Reykjavik has its own currency, the Icelandic krona, which it allowed to depreciate drastically in order to boost exporters’ competitiveness.

The krona’s value is still 30% below pre-crisis levels while export volumes are 10% higher than they were at the end of 2007. The tourism industry, which is similarly important in Greece, has done particularly well, with visits increasing by more than 300,000 between 2008 and 2014.

However, Ruparel says that if it were to follow the Icelandic path, Greece would still have to undergo tough austerity measures. By some estimates, Iceland has engaged in 30% more austerity than Ireland and double that of the UK.

“Iceland has done a huge amount of austerity itself. So it’s [currency] devaluation wasn’t a question of that instead of austerity, it was both default and devaluation as well as austerity,” says Ruparel.

Greek negotiators will meet again with their international counterparts on Thursday in a bid to hammer out adequate reforms to unlock the next tranche of IMF funding before the 30 June deadline, when Athens’ current bailout deal expires.