Despite last week's bond rally, Greece's long term debt is unsustainable. No longer dependent on foreign borrowing in the near term, however, it is now in a position to leave the eurozone, reestablish the drachma, and default on its debt. So says Wolfgang Munchau, the Financial Times columnist. He claims foreign capital would soon overcome its horror of debt repudiation. "While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors."
This seems doubtful, and for Munchau, it also presupposes further "deregulation" of the labour market, a euphemism for attacking trade union rights, which the Greek working class has been resisting. On the other hand, a Syriza-led government, if it had the political will and possibility to do so, could combine a eurozone exit, default, and devaluation with public investment in the economy, particularly in the health, education, and tourism sectors where the new exchange rate would attract patients, students, and visitors from across the continent. This could be the moment for Greece to default By Wolfgang Munchau Financial Post April 13 2014 While the financial world is celebrating the Greek return to the bond markets, I am asking myself this question: is this a good time for Greece to default on its foreign debt? It is not a subject of polite conversion in Brussels or Athens. Nor does it appear to be a popular subject for investors’ conferences. For the first time since the crisis Greece is in a position to default. It has a primary budget surplus – before interest payments. The European Commission has forecast the primary surplus to reach 2.7 per cent of gross domestic product this year, rising to 4.1 per cent in 2015. The Greek current account registered a first surplus. Greece is no longer dependent on foreign investors. Of course, just because you are in a position to default does not mean that you should. So how should one think about this? Greece is probably now close to the bottom of its economic slump, which started six years ago. Between 2008 and 2013 real GDP shrank by 23.5 per cent and investment by 58.4 per cent. The most recent labour force survey showed unemployment at 26.7 per cent in January. The rate of youth unemployment in 2013 stood at 60.4 per cent. Bank loans to businesses were down at an annual rate of 5.2 per cent in February. Non-performing loans have reached a level of 38 per cent of the total. Bank deposits are shrinking. More shocking than those relative changes are statistics that put the data in perspective. Yanis Varoufakis, a Greek political economist, recently produced a long list, of which I found the following most striking: of 2.8m Greek households, 2.3m have tax debts they cannot service; pensions are the main source of income for 48.6 per cent of families; and 3.5m employed people have to support 4.7m unemployed or inactive people. The Greek economy is not in recession. Nor is it recovering. It has collapsed. But there is another story – that of the bond salesman – who says Greece is the biggest rebound story in modern times. Piraeus and Alpha, respectively the second and fourth- largest banks, managed to raise equity capital of almost €3bn between them. Last year, it was mostly the hedge funds who took a gamble on the country. More traditional investors have been piling in since. Last week’s five-year sovereign bond issue attracted €21bn in offers from more than 600 mostly international investors. If I can discern any strategy in the official eurozone policy towards Greece, I would describe it this way: let’s generate a massive financial investment bubble and hope some of the money trickles down into the real economy eventually. With a debt ratio projected to rise to 177 per cent of GDP this year, Greece does not attract much real investment on the ground from overseas right now. Nor can it generate domestic investment because of its broken banking system. If the government could auction off its stake in the banks, it could use the funds to create a “bad bank” to take over the non-performing loans. Once the European Central Bank has concluded this year’s stress tests, a reinvigorated banking sector could start lending to a lean and reformed economy. Problem solved. But it would take quite a bubble to get to that point. The reason Greece was able to attract so much interest in last week’s bond issue was a combination of the promise of a high yield and the maturity profile of existing Greek debt. Official loans – from eurozone member states and the International Monetary Fund – make up 80 per cent of the total debt. Greece will not start to repay this until 2023. In other words the country is solvent in the short run. But long-run solvency is far from certain. And this brings us back to the fundamental problem: who in their right mind is going to make a long-term investment in a country with unsustainable long-run debt? I find it hard to see how one could generate an investment boom unless and until that official debt is forgiven, or defaulted on. The cleanest way to do this would be through a debt conference, but the creditor countries do not want to hear about it. Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
