Why Greece Matters – Part Two

27 Jun

– by Andrew Brady

The country people are talking about across Europe is Greece – and not because summer holidays are beckoning.

It seems more likely than not that the Greek Parliament on 28 June will approve a new €120 billion bailout package. The UK directly – some will say quite rightly – is not part of this new package which will draw funds from the IMF and Eurozone countries.

A statement on Friday 24 June said that €28bn in spending cuts will be required and tax rises plus a €50bn privatisation programme as a ‘matter of urgency’. This is not up for discussion – it is a conditionality of receiving further monies.

We have had dozens of Greek citizens thanking us for the article posted last week but it is they who we must thank for resisting the proposed austerity measures. An analogy that could be given is that Greece has been the recipient of medicine (first round bailout) which has left the patient severely ill and now the doctor is returning to give the patient a second dosage but the patient is resisting.

The question everyone’s asking is whether or not default is the best course of action? What is the best course of action for Greece and the Eurozone? What will be the impact of a new round of austerity measures– further General Strikes or acceptance by Greek citizens of a further dose of massive cuts? Extraordinarily difficult questions to answer but what is clear is that the Greek citizens seem in no mood to back down. There will be a 48-hour General Strike next Tuesday and Wednesday.

So would default be so bad? The Guardian reported last week that European financial institutions are exposed to the tune of €92 billion. This led the newspaper in an editorial to call for an orderly default of Greece and for the recapitalisation of European banks with exposure to Greek debt to prepare for such an eventuality.

The train of thought has gained a lot of support in newspapers particularly in the UK. The moral thrust of this argument is that the Greek people have already been through enough pain, it can’t pay the debt back, its economy is broke and a further round is too much for society to take, so leave the Euro in an orderly fashion. The banks are being protected more than the people and contagion isn’t as big a risk as financiers are spinning.

However, what if the level of exposure isn’t truly known – what if the €92 billion isn’t a correct reflection of banks’ true balance sheets? A frightening piece in The Economist last week titled ‘Banks are safe, say banks’ discussed the infamous stress tests for banks which are premised on – yes – you’ve got it – self-reporting.

The same self-reporting that all the Irish banks passed before their collapse. Hence, they should be taken with a large dose of salt like any self-reporting. This is why the European Central Bank is frantically trying to collect all the data for the latest round of toughened stress tests which take account of the probability of default on balance sheets to shore up banks across Europe. Last year’s tests did not model for that problem.

The point of all this is that if Greece does default then what pressure will higher borrowing costs in Spain, Belgium and Italy apply on bank balance sheets in these countries – five out of the seven banks that failed the stress tests were Spanish. The infamous rating agencies are already downgrading banks in Italy on the basis of preparing for Greek default.

So will default – orderly or not – trigger a wider crisis in Europe? Is the Lehman analogy inappropriate because the scale of this crisis could be much bigger? This is why the concept of Eurozone bonds articulated by our good friend Yanis Varoufakis, Professor of Economics at the University of Athens, has a great degree of merit so some of the debt can be transferred on a lower interest rate payment – restructuring the debt and reducing the payments.

It is surely a better way and could certainly help redeem the EU in the eyes of Greeks and us all.

 

– Read this for a perspective on what’s happening on the ground.

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