Posts Tagged ‘debt’

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Trust this!

Posted: 15 July 2015 in Uncategorized
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Simon Wren-Lewis gives the lie to the idea that Europe’s lack of trust in Greece is responsible for the current crisis.

But does this help explain why other Eurozone countries keep going on about how Greece has lost their trust? I think the answer is a clear no. In fact I would go further: I think this talk of lost trust is largely spin. The issue of trust might have explained the total amount the Troika lent from 2010 to 2012. However, as I have said often, the mistake was not that the total sum lent to Greece was insufficient, but that far too much of it went to bail out Greece’s private sector creditors, and too little went to ease the transition to primary surplus. . .

The narrative about failing to deliver is just an attempt to disguise the fact that the Troika has largely run the Greek economy for the last five years and is therefore responsible for the results.

If anything, the Greek people are the ones who have learned they can’t trust the governments in power in the rest of Europe to do anything other than extract an enormous tribute—in the form of “extensive mental waterboarding” and continued austerity measures—in order to come up with the necessary funds to restore the banking system and give the country some breathing room.

So, who can they trust? They might be inclined to lend credence to the IMF, which has now acknowledged in an update (pdf) to its recent debt sustainability analysis (pdf) that Greece needs significant debt relief.

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Just two weeks ago, the IMF argued that the peak in debt (at 177 percent of GDP in 2014) was already behind us and that gross debt financing would remain below a safe (15-percent) threshold. Now, its estimates are much higher: debt would peak at close to 200 percent of GDP in the next two years and gross debt financing levels would exceed 15 percent and “continue rising in the long term.”

The problem is that the IMF blames the dramatically revised scenario on events in the past two weeks. No Greek should accept (nor should the rest of us) that two weeks of capital controls could alone raise the debt ratio by 28 percentage points of GDP a full seven years later. The IMF is simply unwilling to accept the fact that its own analyses and policies—alone and in conjunction with the other two members of the troika—have gotten it terribly wrong.

The result has been an economic depression and social crisis unseen in Europe since the 1930s.

That just leaves the Greeks themselves, who need to trust they can buy themselves some time to enact the anti-austerity structural reforms necessary to dig themselves out of the current crisis. That’s probably going to mean confronting not only the elites in Europe that are pushing the current bailout plan, but also eventually its own elite that has put the country in such dire straits in the first place.

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The Greeks must be crazy

Posted: 10 July 2015 in Uncategorized
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Less than a week after the Greek people voted to support the Syriza government’s position on the referendum, which (with a “no”) rejected new austerity measures as a condition for a new European bailout, that same government has presented a plan that includes a series of measures (of tax hikes, pension cuts, and labor reforms) that look a lot like the austerity plan that had been on the table before the referendum.

What the hell is going on?

Ambrose Evans-Pritchard thinks the government had actually planned to lose on the referendum.

Greek premier Alexis Tsipras never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.

He called the snap vote with the expectation – and intention – of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 “ultimatum” and suffer the opprobrium.

But the government actually won—by a landslide!

The question now is, will the various governments of Europe bow to international demands (including from the United States) that they accept a significant degree of debt relief in exchange for Greek concessions, which according to Evans-Pritchard “would give Greek premier Alexis Tspiras a prize to take back to the Greek people,” or will the current negotiations fail, thus forcing Syriza’s hand to adopt exactly the measures that were being contemplated (but ultimately rejected) last Sunday and that would lead to Greece’s de facto exit from the eurozone?

Are the Greeks crazy or alternatively, as they say in my corner of the world, crazy like a fox?

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Thomas Piketty, in an interview with the German newspaper Die Zeit, is the latest to recognize an inconvenient historical truth: in 1953, Germany was able to negotiate a large (50-60-percent) reduction in its outstanding foreign debt (owed to many countries, including Greece).

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

Mike Bird argues that there are holes in Piketty’s argument. But his main source, a discussion paper by Timothy W. Guinnane, actually shows that the main principles guiding the 1953 agreement—especially the “the premise that Germany’s actual payments could not be so high as to endanger the short-term welfare of her people or her long-term ability to rebuild a shattered economy and society”—run counter to the austerity measures demanded by the troika in its handling of the current debt crisis in Greece.

There are, of course, significant differences, which Guinnane also explains:

Surely the London Agreement’s relative generosity reflects not abstract notions of justice, which can be applied to any situation on the basis of some sort of “precedent,” but two concrete facts of the German case. First, increasing tension with the Soviet Union had led to a strong desire to rebuild a sound, democratic Germany. Harsh repayment terms would not serve that end. When the U.S. decided to forgive much of Germany’s Marshall plan debt, in effect treating it on a par with other European recipients of that aid, it was just recognizing that what in 1945 had been a defeated enemy was now a valued ally.

A second point was also something Keynes insisted upon as a reason to oppose reparations. Prior to World World I, the German economy was central to the European economy as a whole; a healthy Europe could not exist alongside a sick Germany. The same held true after World War II. The German economy was so important to the world economy, and to Europe in particular, that the country was in a strong position to demand concessions that would enable her to return quickly to her traditional role as the engine of the European economy.

Then as now, the negotiations over the terms of repaying outstanding foreign debt have nothing to do with “abstract notions of justice,” or for that matter economic rationality, but with pure and naked power.

But the fact that Germany was able to successfully renegotiate is external debt in 1953, on terms that assumed “that reducing German consumption was not an acceptable way to ensure repayment of the debts,” demonstrates that historically there have been many ways of repaying debt.

The current hard line on Greece turns out to be the exception to that historical truth.