“Syriza will eliminate the primary budget surplus and cease or reverse the privatization efforts of the Samaras government, the cost of which for 2015 alone would be around 8 billion euros. Meanwhile, bond maturities in 2015 will reach almost 25 billion euros. Since most of the maturities are held by state entities, one should not discount the possibility of either a violent ‘Grexit’ from the euro or, conversely, a long transition to some kind of normality that will unfortunately kill any hope of an imminent ‘Grecovery.’”
– My January 5 blog post, Greece in 2015: Assessing the ‘Syriza’ Political Risk
“Syriza’s behavior is unpredictable….What comes next might be something far worse than a nightmare.”
– My January 28 blog post, Greece’s New Government: Empty Pockets and Empty Promises
The nightmare is here
What is the current situation of the Greek economy? GDP is about to contract again after an increase of 0.6 percent in 2014 fuelled by tourism and an increase of private consumption of around 1.5 percent. Employment, after an increase of 0.6 percent in 2014, seems to be falling again, and the primary budget surplus has evaporated in a three month period.
There is no doubt that the political risk has killed the (albeit anemic) 2014 recovery. It has also destroyed the troika program. However, polls show that people seem to be still relatively happy with a government that is said to play hard ball with the Europeans and the IMF—but the honeymoon is very close to being over. People are beginning to understand that the postponement of the drama—i.e, painful short-term reforms—will only make the end even worse. This is not even mentioning the possibility of an economic disaster such as a “Grexit,” meaning that the poor will first and foremost pay a heavy price. In any case, sooner or later, the Greeks will have to face the reality and, after calculating real costs and benefits, will possibly show in the polls a more cool-headed view about the future of the country. In the meantime, the pretending-to-be-cool government is serving IMF liabilities and Treasury bill redemptions by using cash from pension funds, counties, and public organizations, ironically making a future possible default much more painful and disastrous. As time passes by, it becomes evident that behind the government’s frozen smiles, the country is going nowhere. And the creditors have finally got it.
The two scenarios
So here follow two possible scenarios we may see in the next weeks:
- “The deep dark before the dawn” scenario. I still believe this is the baseline scenario. The government, in a dramatic weekend either by the end of April or during May, being very close running out of money, meaning that they can’t pay back both IMF loans or refinance T-bills (May obligations: 746 million euros to the IMF and 2.8 billion euros in T-bills; June obligations: 1.5 billion euros to the IMF and 2 billion euros in T-bills), it has to urgently make a final decision. Tsipras then takes the initiative to announce to the public a painful yet indispensable agreement. No matter the details and efforts to mask the real thing, reforms will be fully implemented and a bill has to be passed by the parliament, or creditors will not pour the necessary money into the suffering economy, because the government’s erratic behavior has destroyed its credibility with the creditors. The agreement comes with a new European loan with a low interest rate. The “national populist” government embraces in substance a “neo-liberal populism,” which means a supposedly left/nationalistic rhetoric together with a policy of market deregulation and a huge wave of privatizations. One important detail: the government is fully incapable of preparing anything at all except for aggressively begging for money. The creditors will, in this case, have to provide in time the new conditionality rules with the detailed technicalities included. I still believe that this is the most possible scenario; I give it a 75 percent chance of occurring. But make no mistake, this is only one episode of the drama. Sooner or later the government will collapse—not because of the austerity, but from the incompetence, the inexperience, and the lack of diligent, hard-working people (rather than media personas). And because of this vacuum, the government can not serve its clientele voter that is hungry for money, positions, exchange of favors, and of course jobs. By destroying the weak recovery, the government has undermined its future.
- The “domestic implosion” scenario. I use this term instead of “Grexident.” Driven by a hard-to-believe domestic inertia and increasing incompetence, the government finds itself trapped in a zero-sum game, where, in the end, it similarly takes no money from the creditors and at the same time, it takes the huge domestic political cost from the collapse of the economy. The initial Syriza idea of a “home alone,” isolated country based on a state driven capitalism a la Chavez/Maduro or Putin, presupposes a strong state apparatus and a well-organized party mechanism dictating society, both of which are nonexistent in the Greek case. In this scenario, a bankruptcy within the eurozone means that the government finds itself in a desperate situation and either surrenders to the creditors or calls for elections in an environment of panic and capital controls.
What the creditors are doing and still have to do
The Europeans are doing very well this time by carefully supporting the banking system (i.e., depositors) and at the same time avoiding the mistakes made during the previous period by feeding the beast (i.e., by feeding in substance the incompetent and clientelistic political system). But maybe this is not enough. To reach a truly productive agreement for both parties, this time Europeans in particular have to be involved in a process of redesigning institutions (i.e., the way that non-market domestic decision-making is done in Greece), and not just to insist on a typical list of deregulations and privatizations.
Europeans should also talk to the Greek pro-European middle class directly—circumventing the political system—about the long-term fruits of reforms: that is, a just and prosperous society for their children. Offering a concrete prospective agreement to the Greek people that secures both reforms and growth will make the government either accept an honorable and productive agreement or collapse in the polls. Such an agreement must contain the following elements:
- An extension of bilateral and EFSF (European Financial Stability Fund) loans for 10 or more years and a small, final reduction in the interest rate. That, according to Bruegel Institute, might offer to Greece more than 30 billion in debt reduction and, more importantly, not at the expense of European taxpayers.
- A few billion euros to address the so-called humanitarian crisis. Although, that crisis is rather overestimated compared to what is happening to other parts of the planet.
- A new ESM (European Stability Mechanism) loan with a favorably low interest rate.
- An agreement bringing investment money that will involve the European Investment Bank.
- A front-loaded program regarding European structural funds comprising the disbursement of many billions even from the present year.
- And of course all the tranches that the creditors owe, which amount to around 25 billion.
An agreement incorporating these elements may sound very reasonable, but there is another big issue that the creditors need to take into account, and it is a tricky one indeed. Creditors have to find ways to secure that bills passed in the parliament will be implemented without being reversed the following year. And that this time, the disbursed money will not just feed the beast, the new regime.
I think what we've seen with the British reaction to this deal is that there's no parliamentary majority for any sort of agreement. There's not a majority for no deal. There's not a majority for this deal. But it's also not clear that there's a majority for any other sort of deal... I think a lot of people are playing a lot of games of chicken, which is a very high stakes strategy given that we are only three months away from the point where Brexit is supposed to take effect. It's worth remembering that the European Parliament still needs to vote on the deal, which could take them about six to eight weeks to do.