An emergency program for Greece

05/11/2012 by

The Greek government, under intense pressure from the troika of its lenders (IMF-EU-ECB), is about to give the wheel of depression another, powerful turn. At a time when national income is shrinking at a rate not seen since the Great Depression in any post-feudal society, in an economy where the circuits of credit (not just the banking sector) have been utterly and truly dismantled, and against a background of the greatest fiscal squeeze ever attempted in peacetime, Greece’s creditors are imposing upon the country another fiscal contraction even greater than before.

The 2013 draft budget tabled recently at the Greek Parliament included a fresh fiscal contraction of 11 billion euros – in a country where GDP has already crashed from 249 billion in 2009 to 194 billion in 2012. Given the huge multiplier that has resulted from the accumulated force of austerity, the new fiscal squeeze will, with mathematical precision, reduce national income to around 173 billion, sending the country’s debt ratio to a stratospheric 201% (nb. the government, continuing a long string of underestimated, puts it at 190%). At that point, Greece will need another 100 billion to be approved by the German taxpayer just to keep the illusion going, at which point it will be game over as the nation’s insolvency, at a time of unprecedented poverty and hopelessness, will be unavoidable and no politically fathomable OSI (i.e. haircut taken by the troika) could address the problem.

Many in Europe think that, by next year, Mr Draghi’s OMT will have somehow paved the ground for a manageable exit of Greece from the Eurozone, and that this exit will be the ‘final solution’ to the Greek problem. Well, I am afraid they have another thing coming: Just as now, so in 2013-4 a Grexit will be deemed potentially catastrophic. Which means that squeezing Greece further into the proverbial ground today will only intensify the Eurozone’s woes next year.

Given, however, the obvious reluctance of Berlin, Frankfurt and Brussels to step back from a policy on Greece that is inane, in addition to being inhuman, what can Greece do in the short run to minimise its pain, and the pain that it will be inflicting on the rest of Europe in the months and years to come? Here is an idea:

A short-term strategy for Greece

Presently, the Greek government is trying to push through Parliament a horrendous fiscal squeeze that will take out of the circular flow of income 11 billion in 2013 and another 2,5 billion in 2014. As explained above, this will be the nail in the Greek social economy’s coffin. First, it will push the debt-to-GDP ratio to above 200%. Secondly, and most importantly, it will delay the elimination of the primary surplus by at least another two years. As long as the Greek state has a primary deficit, the Greek government remains in no position to negotiate with the troika. And since the troika does not even want to hear of rational arguments against the type of fiscal waterboarding that it is imposing on Greece, achieving a primary surplus (or at least eliminating the primary deficit) ought to be the nation’s top priority.

Regaining bargaining power vis-à-vis the troika

Can Greece achieve a primary surplus in the coming weeks? Sure it can. The primary deficit is now running at around 1.5% – or, in nominal terms, around 2.5 billion. The government can thus design a fiscal contraction of only 2.5 billion, instead of the 13.5 billion that the troika is demanding, in order to eliminate the primary deficit forthwith. Furthermore, to minimise the negative multiplier effect on the rest of the economy of this 2.5 billion contraction, the government could find these relatively modest savings from leximinimising wages and pensions: i.e. by taking the highest state salary and pushing it down to the level of the second highest, then taking these two salaries and pushing them to the level of the third highest and so on until the necessary savings are found (doing the equivalent for pensions). (Nb. By squeezing salaries top-down, it will be attacking first the incomes of those with the lowest marginal propensity to consume, thus minimizing the multiplier effect.)

Another constraint on the government’s capacity to bargain with the troika comes from its unpaid debts to a host of its suppliers (from pharmaceutical companies to contract janitors). The outstanding sums come up to around 8 billion euros that the government cannot afford without another tranche of loans from the troika; a dependence that impinges further on its bargaining power with its creditors. In this regard, the government could issue new anonymous transferable titles that entitle its holder to cash them in in lieu of taxes for a three year period (2013-2015). Since the tax burden on both individuals and (legitimate) firms is increasing exponentially (as the Greek state imposes heftier and heftier taxes in a desperate bid to make ends meet), these titles will have immediate value. Recipients will be able to use them both in order to repay taxes due in soon and, importantly, to trade them for goods and services (including as a form of paying outstanding wages – to the extend that workers too have taxes to pay next year).

Lastly, there is the constraint of the bank recapitalisation program. Of the 30 odd billion that the troika is dangling in front of Mr Samaras’ eyes (i.e. the next loan tranche), most will be used to recapitalise the banks. Setting aside that the mechanism with which they propose to do this is reeking with the smell of corruption (Greece’s version of what I call Bankruptocracy), this capital injection will be to no avail. Greece’s banks are beyond insolvent. They are irredeemably bankrupt, in view of the Depression all around them. The planned capital injection will, in its self, be nowhere near sufficient to guide them back to solvency. Indeed, even the European Commission agrees that unless (a) private capital is injected (along with the EFSF funds) into their equity structure and (b) deposits (that have migrated in droves over the past year abroad) return to the Greek banks, the recapitalisation project will have failed. But what investor will prove foolhardy enough to invest in a bank domiciled in a state that is about to default a second time in a year or two? What heroic Greek, who has sent her savings to Frankfurt or to Geneva, will repatriate them now, after reading the Greek government’s gloomy assessment of the nation’s prospects. It is, therefore, abundantly clear that having the insolvent Greek state borrow twenty odd billion now to inject it as capital into the Greek banks constitutes a major act of financial folly. Good money will be thrown after bad into the black hole of a banking sector that is reliant entirely on a state soon to be declared officially bankrupt (again)!

The point of the previous paragraph is simple: Just don’t do it! Do not use the next tranche of loans to recapitalise the banks, as long as the terms and conditions for receiving these tranches are such that the Greek state will be bankrupted with probability 1 in the foreseeable future. “And do what instead?”, I hear you ask. For the time being, let us continue with the present awful reality (with the ECB keeping the Greek ATMs going through the daily provision of liquidity through the Greek ELA) until the Greek government can negotiate (once it has regained a modicum of bargaining power) a new program that stands a chance of succeeding, at which point a recapitalisation can be effected that does not waste another large chunk of EFSF money.

The idea here is that, once the government has attained a primary surplus (see above), it can politely ask the troika’s representatives in Athens to leave and request at Eurogroup and/or Ecofin level the following, as a first bid in a new negotiation that may lead to a manageable program.

Extracting a commitment to re-negotiate the logic of its program

So, once it has achieved a primary surplus on the basis of 2.5 billions of savings (after having rejected the troika’s demand of the impossible fiscal squeeze of 13.5 billions in magnitude), what should the Athens government do in order to convince Europe to re-negotiate the logic of its program – a renegotiation that, presently, Berlin does not even want to hear of?

It should announce that all repayments to the ECB (of the bonds that the ECB bought during the ill fated SMP program circa 2010-11, which are now maturing and which were not haircut under the infamous PSI) are suspended until a new program is agreed with the EU, the ECB and the IMF. Since, due to the PSI, no Greek government bonds that are in circulation (and not held by the ECB) will mature before 2022, this means that the Greek government will be playing hardball only with the ECB and, by extension, the EU. Not with private creditors.

Before outlining what the Greek government’s demands ought to be, a question arises pressingly: What if the ECB gets so cross with the Greek government that it cuts Greek banks off the Greek Central Bank’s ELA, thus forcing the Greek government out of the Eurozone? Two answers come to mind. First, it would be illegal to do this unilaterally, the reason being that the Greek banks’ collateral is not of lower value or grade than, say, that which the Spanish banks use daily. Since Greek banks no longer hold any of the pre-PSI Greek government bonds, the ECB (which holds many of those) cannot claim that the Greek banks are now insolvent on the basis that the Greek state is refusing to honour bonds that they have in their books. Of course, the cynic will rightly argue that where there is a will there is a way. That if the ECB wants to cut Greece off, it will find a way (legal or not). True. But here comes my second answer-argument: There is no such will either in the ECB nor in Berlin.

I have no doubt, dear reader, that if Germany (and perhaps Mr Draghi) thought that they could amputate Greece and get away with it, they would. But they know that, with Spain and Italy teetering on the edge, there is no such way. So, if the Greek government, having achieved a primary surplus within weeks, demands a renegotiation by threatening to cease redeeming pre-PSI ECB-held Greek government bonds, both Frankfurt and Berlin will come to the table so as to arrive at a quick agreement that does not jeopardise the ECB’s credibility in relation to other member-states.

Three demands

If the Greek government is, thus, granted its re-negotiation, what should it demand for its partners? Three ought to be the demands that Athens has a moral obligation (not only to itself but to the whole of the Eurozone) to put on the table:

First, that the Greek banks are recapitalised directly by the EFSF-ESM, as per the June EU Summit agreement (which has fallen by the wayside since it was struck).

Secondly, that the 12 billion of unspent (due to the recession) structural funds earmarked for Greece for the period 2007-2013 (nb. 20 billion were earmarked of which only 8 billion were spent) are passed on not to the Greek state but to the European Investment Bank for the purposes of investing directly into the Greek private sector.

Thirdly, a new schedule for repayment of Greece’s debt to the troika which binds the pace and timing of repayments to GDP growth; effectively, making Greece’s creditors equity holders in its future income and wealth.


These are truly desperate times for Greece. The nation is experiencing not only a vicious Great Depression but also an existentialist crisis. Other great nations, under equivalently singular threats, would even consider using the nuclear option. My suggestion here is far, far milder. Just say no to a new fiscal squeeze that is commonly known to be terrible for Greece and bad for Europe. Instead, do what it takes to regain the bargaining power the government needs in order to argue for a program that is mutually advantageous for all Europeans. 

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