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Posts Tagged ‘Eurozone’

IMF’s “mea culpa”

In News on June 10, 2013 at 12:07 pm

Last week, the IMF admitted it had been wrong in its predictions about the consequences austerity would cause to Greece and that some of the reforms imposed as part of the loan agreement had been too harsh. (See for instance p.6 of this IMF paper, where the IMF reports mentions that “the macroeconomic assumptions at the initiation of the program proved optimistic” as well as this IMF paper)

So, let’s recap on what has happened in Greece in the past 4 years.

  • Greece is now in its 6th year of recession.
  • GDP has contracted 22% between 2008-2012, one of the deepest peacetime recessions in industrialised economies GreatDepression_Greece

 

 

 

  • Unemployment is now at 28% unemployment

 

 

 

  • Youth unemployment is over 60%
  • Greece’s debt to GDP was 129% at the end of 2009 and prior to the IMF loan agreement. At the end of 2012, it stood at 157%. The aim is to bring it down to 124% by 2020

    Public_Debt

  • Homelessness has sharply increased. Partly due to the important role family plays in Greece, Athens was unlike other European capitals where homelessness is visible in the streets. In 2009, Athens had about 2,000-3,000 homeless people. In 2012 the number was 40,000 (for more info, see this article).
  • National minimum wage has been decreased by 22% and 32% for the young. It was reduced from €780 gross a month at 25% and 32% as of 1.1.2012. It went down to €586 gross and €511 for workers 15-25 years old, irrespectively of education and skills.
  • Pensions of public servants have been slashed by 40%.
  • Increase of suicides. Until 2008 Greece had one of the lowest suicide rates in the world, with 2.8 suicides per 100 000 inhabitants. Statistics released in 2011 by the Greek ministry of health show a 40% rise in death by suicide between January-May compared to the same period in 2010 (for more info see this EP discussion and this article).
  • The national health budget has been cut by 40% since 2008. As of January 2014, hospitals will also collect a fee of 25€ for each inpatient care, for services which were previously provided for free (see Ministry of Health’s presentation for more)
  • Expenditure for mental health has been cut by 50%. As of December 2012, employees in the mental health sector had not been paid for 6 months.
  • Increase in HIV/Aids; The incidence of HIV/Aids among intravenous drug users in central Athens soared by 1,250% in the first 10 months of 2011 compared with the same period the previous year, according to the head of Médecins sans Frontières Greece
  • Rise of malaria: Malaria is becoming endemic in the south for the first time since the rule of the colonels, which ended in the 1970s, after mosquito-spraying programs were slashed in southern Greece
  • Infant mortality has risen by 40%.
  • Hospitals are forced to cancel operations (for more, watch this short film by Aris Chatzistefanou)

The above provide a snapshot of the situation in Greece, not to mention the rise of the neo-nazi Golden Dawn party, which has entered the Greek parliament and attacks and stabs immigrants, with the cooperation of the Hellenic police (see more here  and here).

I guess it’s ok, since the IMF said they are sorry about the mess, as they had to prevent contagion of the Greek sovereign debt crisis to the rest of the Eurozone. Although it was clear from the beginning that the IMF’s technocratic approach was indifferent to any social cost, it’s ok, they are having second thoughts, even now.

Of course, the Greek government at the time could have resisted signing the loan agreement proposed by the IMF and the EU. There are many Greek technocrats, university professors, economists and experts around the world, which could have been brought forward to make a counter-proposal [and they did, see for instance here, but they were dismissed without second thought]. The Greek government could then have negotiated a different solution which would have been less painful to the Greek people and society. And how knows, maybe that solution would have included a fairer allocation of the costs of lending to high-risk Greece, rather than blame it all on the “lazy Greeks that don’t pay taxes and retire at 50”.

But fortunately for foreign institutions like the IMF and governments, they have always found eager collaborators among the Greek elite, who have been more than willing to disregard the country’s and its peoples’ interest in favour of a “good boy” pat and a cookie from Europe and other foreign “partners”.

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Mr. Stournaras’s credentials

In News on July 8, 2012 at 4:15 pm

Yesterday, Greece’s new Finance Minister  Prof. Yannis Stournaras made his first policy speech since taking office. He said that Greece must implement the measures it has agreed upon its international lenders and he announced that he would speed up privatisations. Some key points of his speech include (here, in full, in Greek):

  • speeding up the privatisation programme and including new assets in the existing one
  • concluding the privatisation of the Public Power Corporation (DEI)
  • developing the land from Faliro to Sounion in Attica through privatisations
  • 90% of the privatisation programme will include selling or renting land and infrastructure
  • creating a modern social state through combatting tax evasion and tax avoidance
  • reducing uncertainty in the economy and improving the economic climate
  • greater transparency in the tax system
  • battling corruption
  • creating a social consensus to accept that staying in the eurozone is the only road available

Like any critical reader and thinking citizen, one should always check the sources of his information. Prof. Yannis Stournaras full cv can be found here. The highlights include a strong academic record (Master’s and Ph.D. from Oxford) and a long list of publications.

In addition, he has worked in many respected positions in the Greek public administration. In particular, Stournaras worked as a

  • 1986-1989 Special Advisor to the Ministry of Economy and Finance on Public Enterprises and Incomes Policy issues
  • 1989-1994 Special Advisor to the Bank of Greece on Monetary Policy issues. During that period he represented the Bank of Greece as an alternate member in the Meetings of the Governors of European Union’Αs Central Banks.
  • 1994 – July 2000 Chairman of the Council of Economic Advisors at the Ministry of Economy and Finance. He participated in the design of macroeconomic and structural policies (especially in the design and implementation of the Convergence Programmes) and represented the Ministry of Economy and Finance at the Monetary Committee (now Economic and Financial Committee) of the European Union. In this capacity, he participated in the negotiations for the entry of Greece in the Economic and Monetary Union. He was responsible for the consultations with international organizations, such as the International Monetary Fund, the European Commission and the Organization for Economic Cooperation and Development (OECD).
  • 1994 – 1997 Vice Chairman of the Public Gas Corporation
  • 1998 – July 2000 Member of the Board of Directors of the Public Debt Management Office
  • 2000 – 2004 Chairman and Chief Executive Officer of Emporiki Bank and Vice-Chairman of the Association of Greek Banks

Which side do you think he will be on? The people’s?

Point of no return

In News on May 14, 2012 at 10:53 pm

Last week, the Greek elections were at the centre of international attention. The first reason was that the election results saw a neo-nazi (yes, not far-right, neo-nazi) party, Golden Dawn, entering the parliament. The second reason was the rise of SYRIZA or the Coalition of the Radical Left. SYRIZA, which traditionally received 3-4% of the vote, reached 17% and became the second party, following New Democracy with 19% (full elections results here).

For those who are not familiar with the Greek political system, here is some background information: The country has been ruled by centre-left PASOK (Panhellenic Socialist Party) and centre-right New Democracy parties alternating in power since 1974 – the year when democracy was established in Greece, after the end of the dictatorship 1967-1974.

New Democarcy 1974 1977
New Democarcy 1977 1981
PASOK 1981 1985
PASOK 1985 1989
New Democracy-KKE coalition 1989 1990
New Democracy 1990 1993
PASOK 1993 1996
PASOK 1996 2000
PASOK 2000 2004
New Democracy 2004 2007
New Democracy 2007 2009
PASOK 2009 2012

The two mainstream parties have set the internal agenda for almost 40 years. They are the ones responsible for hiring public servants based on party politics, of not using EU funds efficiently and feeding them to their voters, of excessive borrowing in the decade which followed the introduction of the euro. The two large parties are the ones that have left their stamp on Greece’s political scene.

The latest elections were viewed by many spectators in Greece and abroad as surprising and many tried to understand the”angry” vote or the way voters shifted across the political spectrum. (here is a good analysis by BBC’s Paul Mason)

While the international media are trying to make sense of Greek politics and Greek politicians are trying to shuffle a new government of “personalities” which will lead the country out of the state of ungovernability (and chaos) (e.g. see here), the anger of Greeks is rising. This anger is reflected in the rise of SYRIZA. And this anger consists of three elements:

1. anger and despair by the economic reality that has hit most Greeks, which includes income reduction by 40%, abolishing labour laws, reducing pensions, unemployment at 21%.

2. cumulative anger at the bashing Greeks have received by foreign and domestic commentators over the past two years about the Greek statistics, working hours, laziness, spending more than producing etc.

3. a cumulative anger at the political system and the mainstream parties‘ politicians who have been repeatedly lied to citizens and have brought the country where it is today. All politicians lie and Greeks like their tales. But in the past two years the hypocrisy of the Greek mainstream parties has reached new levels, as PASOK has basically become a right-wing party and New Democracy is tiptoeing around it awkwardly (e.g. New Democracy voted in favour of the 1st Memorandum of Understanding (MoU) and opposed the 2nd).

With every political tactic followed by the mainstream political parties, with every article published by the Spiegel, with every comment expressed as a threat by Angela Merkel, these feelings of anger and despair are increasing.

Many Greeks no longer care for the country’s stability, Greece’s image abroad, the critique by international media and Europe’s politicians but instead want their lost dignity. SYRIZA seems to have realized this and expresses a new narrative and hope.

Increasingly, Greeks are reaching a point of no return.The sooner Europe’s political elites (and Greece’s pro-austerity political elites) realize this, the better for everyone.

How short is the “short-term”?

In News on April 26, 2012 at 3:34 pm

Today European Central Bank (ECB) chief Mario Draghi speaking at a hearing in the European Parliament urged the Eurozone to continue supporting austerity and “fiscal adjustment”. His comments come after the first round of French presidential elections, where Socialist leader Francois Hollande came first and ahead of the second round of the French elections and the Greek parliamentary elections on 6 May .

One of the arguments Draghi used – and supporters of austerity measures generally reproduce – is that the recession and high unemployment levels that Greece, Portugal, Spain, and Ireland to name a few are experiencing, are the “necessary steps” on the way to growth. More importantly, this “necessary pain”, the adverse, contractionary effects, which are only to be felt in the short/ medium term.

Let’s clarify a few things about the short-term: In economics and finance, the short-term is defined as a short period of time, usually 12 months. In fact, in some fast-moving business sectors, the short-term is 6 months, but let’s be generous and round it up to 12 months.

Now let’s review some data. Greece has been in a recession since 2008 [A recession is defined as 6 months of negative growth rate. Negative growth is when the country produces less than the year/ month before. A good, healthy growth rate is usually considered to be between 3-6%]. Greece’s recession is expected to become worse in 2012. Greece’s recorded unemployment is 22%.

Ireland has been in a recession since 2008. It moved to a growth rate of 0.7% in 2011 and is to grow by 0.5% in 2012.  Unemployment is at 15%.

Portugal had  zero growth in 2008, recession in 2009, and really low growth in 2010, before moving back into recession in 2011. The recession is expected to become worse in 2012. Unemployment levels are at 15%.

Spain had a marginal growth rate in 2008, before plunging into recession in 2009 and 2010. It rebounded slightly in 2011 and is moving back into a recession for 2012. Unemployment is 25%.

These are all countries that are implementing austerity measures either because they are forced to through their Memorandum of Agreement with the IMF or through political pressures EU or nationally driven.

Draghi’s and European leaders’ remarks about the short-term are not only unfounded economically but also socially provocative.

People don’t wait for the long-term to live, gentlemen. People actually try to “live” in your “short-term”. They lose their jobs, they can’t pay their bills and taxes, they can’t afford to buy basic products. They fall below the poverty lines and leave their country to find work.

It is short-term that matters. Besides, as Keynes said, in the long-term we are all dead. But then again, his economics actually made sense.

1. People in crisis, Greece http://www.theatlantic.com/infocus/2012/04/portraits-of-greece-in-crisis/100285/

2. All the economic data can be found here

Of European solidarity and other demons

In News on March 13, 2012 at 6:23 pm

On 13 March 2012, the Council of the EU ministers adopted a decision suspending €495.2 million in scheduled commitments for Hungary under the EU’s cohesion fund, to be implemented from January 2013.

This was the result of the fact that Hungary did not take enough measures to reduce its budget deficit and meet the target of 3% of GDP.

This is the first time that a clause enabling the suspension of commitments has been invoked since the cohesion fund was established in 1994.

It should be reminded that Germany and France were the first ones to break the 3% deficit limit agreed in the Stability the Growth Pact in 2003. Back then, the Commission requested Germany to reduce its structural deficit by 0.8% of the GDP, and France by 0.4%. The recommendation was blocked in the Council. As a result, there was no case for imposing sanctions if these countries would not comply.

Commitments suspended for Hungary amount to 29% of scheduled commitments for 2013. Germany’s GDP per capita in PPP prices is $37,935, France’s is $35,048. Hungary’s is $19,647.

This is not European solidarity. This is not even European cooperation.

This is plain and simple a Europe where the powerful impose their terms on the weak. Good old, traditional rule of power.

Greece and the Shock Doctrine

In News on February 15, 2012 at 11:54 pm

In the weekend leading to Sunday 12 February 2012, Greek politicians were debating the necessity of the latest austerity package. The austerity plan was to be approved, as a condition for Greece to receive a second-bailout package by the IMF-EU of €130 billion and to a debt restructuring. The majority of the Greek people are against further austerity measures, which come on top of previous tax increases and public spending cuts. The government knows this and is defying the will of the people.

According the Greek government, represented by appointed and unelected Prime Minister Lucas Papademos and its ministers:

  •  The dilemma facing Greece is “austerity package” versus “leaving the eurozone” – no middle ground exists
  • “Leaving the Eurozone” would entail social and economic disaster, which would see Greece’s standard of living reduced to that of thirty, forty, fifty years (number vary, depending on the emotional state of minister/speaker)
  • As a result, the austerity measures are the “only alternative” to a catastrophic default (more about this here) and should be approved, as it is the only way for the country’s growth and prosperity.

The facts:

  • The bailout package is a loan  and most of its funds will be used to pay previous loans.
  • In line with the neo-liberal agenda of the previous memorandum, the austerity plan foresees: reductions by 22% of the national minimum wage to €600 per month (before social security payments); Employees made easier to be fired (these two measures are known in neo-liberal-speak “reform of the labour market”; Reduction in the supplementary pensions; Reduction in public health expenditure
  • Greece is now in the 5th year of recession, starting in 2008. Its unemployment levels have reached 21%, with youth unemployment at 48%.

During the ten-hour debate in parliament, there was a large demonstration in Athens and other cities of Greece. In Athens, the riot police kept trying to push protestors outside Syntagma Square (where the Greek Parliament stands) and was throwing tear-gas, unprovoked, to  peaceful demonstrators. At some point, riots erupted which ended up in looting and fires across Athens during the night.

In the early hours of Monday 13 February 2012, the Greek parliament approved the austerity plan, with 199 out of 283 votes.

The mainstream media in Greece focused on the destructions that followed the demonstration; the violence; the fire in a historic theatre “Attikon” in Athens; the fact that the Greek government needs to implement harsher measures to gain its lenders’ credibility; the reactions of European officials to the result of the vote.

Not a word was said in the Greek mainstream media about the size of the demonstration, not a word about the fact that demonstrators were shouting “We are not leaving” amidst clouds of tear gas. Not one commentator questioned the legitimacy of the government or even bothered to wonder aloud whether this demonstration was any different from previous ones.

Over the past two years, the Greek people are being bombarded by mainstream media with falsified information that Greece is on the “brink of disaster”, scare-mongering speeches by their politicians about the future of the country, insulting comments from foreign commentators and politicians about Greeks and their “overspending”. Over the past two years, the Greek parliament passes law after law, entailing cuts, tax increases, and anti-social measures at great speed, before it has any time to recover.

Sunday’s events were no exception to this pattern. Is there anyone who still thinks Greece is not under the Shock Doctrine?

Europe’s fiscal compact: A political economic perspective

In News on December 16, 2011 at 9:37 pm

Over the past, there has been a proliferation of analyses, reports, commentaries on the Eurozone sovereign debt crisis, its causes, the economic and political situations in Greece, Italy, Spain, Portugal, on the handling by European leaders, on the structural and other issues of the European Monetary Union (EMU).

Some commentators focus on Greece and its high sovereign debt levels. Some, usually at the more sophisticated end of the spectrum, provide an analytical approach to identify the causes of the Greek debt: 1. the low interest rates available to the Greek government, as a result of EMU, which led to an increase in government borrowing 2. the increase in Greek imports (from Germany and the European north) which led to a current account deficit, translated into debt accumulation and, of course, 3. corruption. Others analysts of course, at the less sophisticated end of the spectrum, indulge in the bashing of the “profligate” Greeks, who did not respect the Maastricht rules, “spend more than their means allow them” (colloquialism for borrowing), work 5 hours a week and have taken the term “tax evasion” to a whole different level. Of course, the Maastricht rules were first broken by none other than France and Germany back in 2005 and the shift towards spending-by-borrowing (rather than by reducing your savings) is a universal one, but these are different issues.

Other analysts look at the Eurozone as a whole and point to its well-known deficiencies and often startle at its problems: For example, that the Eurozone has a currency but not a government (really? Wasn’t this in the Maastricht Treaty of 1992?), or that the European Central Bank (ECB) only focuses on low inflation rather than high employment and growth (again, really? Wasn’t the ECB modelled after Deutchebank, inheriting its anti-inflationary obsession?) Others stress the centrifugal powers within Europe, which will lead to the break-up of the Eurozone, as Brussels interferes more and more in nation-states’ politics,economics and societies. Although an increasing transfer of powers from the national to the European level is taking place with questionable methods (see rule by bankers in Italy and Greece), the break-up of the Eurozone seems to echo less the reality and more Conservative British wishful thinking.

What is often downplayed, is a more political reading of the Eurozone debt crisis. The Eurozone debt crisis debate has been framed in terms of “more or less growth”, or “Europe versus national economies”. However, the developments in the Eurozone over the past two years are more political than ever.So, let’s clarify a few things:

First, to go back a year, the Greek austerity measures, all-too-easily accepted by the Greek political elite, are well-known for their neoliberal character among development economists. Similar IMF-backed Structural Adjustment Policies, as the ones being implemented in Greece at the moment, have taken place in developing countries since the 1980s and failed to create growth and employment. It should not come as a surprise to the Greek media and political elite that increasing taxes and reducing deficits threw the Greek economy into depression, more so as the Greek government could not devaluate its currency.  This is another well-known fact among economists, and even the World Bank allowed for more social spending in the programmes it proposed to developing after the end of the 1990s.

Second, economic growth can be stimulated in a variety of ways. One of those is to reduce deficits and debt, reduce the role of the state, privatize, open the economy to trade and foreign direct investment, and facilitate the private sector domestically. Another way to stimulate growth is by increasing investment made by the public sector. In theory, were the IMF a different institution, it could very well bail-out Greece not on the condition that the role of the state in the economy is reduced through tax increases and public spending reduction, but provided the government invested in the economy, and, for example rebuilt its industrial base.

Third, fiscal stability is a fine and noble goal. The whole idea is that a government’s revenues must more or less match its expenses, because if it borrows excessively, it mortgages the country’s future, as these debts have to be repaid. However, among other things, one of the reasons why a government may borrow in the first place is to stimulate the economy by public spending in the case of a recession. Put differently, the government could (and should) borrow to implement an expansionary policy when the private sector is not confident enough to invest, as is the case presently in Europe and the US.

It is in this light that last week’s “fiscal compact” should be read. The rule (government deficits not to exceed 3%) exists since the Treaty of Maastricht (1992). However, the idea back then was all about making European economies converge ahead of the adoption of the common currency. This time, the rule will be stricter and harder and presumably incorporated in constitutions or legal texts of similar legal force. While this will essentially render counter-cyclical economic policy at the national level illegal, the European Union has yet to provide an equivalent mechanism at the European level. The Brits may have stayed out of  Europe’s deal to protect the interests of their City, but in effect they retained the one of the most powerful government policy tools.

There are many who like to present austerity and fiscal stability as simple economic rules, in the far-far-away land of technocratic, depoliticized issues. This is not about economics. This is about good, old traditional left-right politics. And up to now, the Right is winning.

What if Greece defaults?

In News on June 20, 2011 at 12:47 pm

Greek default a.k.a. Lehman brothers II? 

Eurozone ministers meeting in Luxembourg over the last couple of days, agreed on a second bail-out for Greece. They acknowledged the fact that Greece cannot borrow from the international markets and have on principle agreed on a second aid package. But they have postponed a €12 billion EU/IMF loan (and last payment of the €110 billion aid package which was agreed in May 2010) for mid-July, and on the condition that the Greek parliament agrees on the new austerity programme. Without this new loan, Greece will not be able to make debt payments. So, what Europeans in effect did was to create even greater pressure to the Greek government to approve the greatly unpopular measures, which foresees privatizations of €50 billion until 2015.

The greatest fear shared between market analysts and politicians across Europe is a Greek default. Earlier this week, as Greeks were demonstrating on the streets against the austerity measures and Europe’s leaders were indecisive regarding the form of the Greek bail-out, the fear of default spread across financial markets.

So, what if Greece defaults? First of all, there will be a shockwave spread in the banking sector in Greece and Europe. Greek banks will lose billions as they hold a great part of the Greek debt and they will immediately be downgraded by credit rating agencies. French and German banks will also lose billions of euros, as they are also greatly exposed to the Greek debt (€56 billion and €34 billion respectively). (Here there is an overview of which banks are exposed to the Greek debt). The greatest fear lies in the unknown. What if there is a so-called “Lehman Brothers moment”, when the financial markets panic and the lending taps are closed?

As Greece defaults, the perceived risk of Portuguese and Irish bonds will increase, which will lead to a massive sale of these assets by foreign investors. The same thing, to a smaller extent, will happen to the cost of borrowing for Spain and Italy, as doubts are increasing over about the sustainability of their debts. More importantly, the Greek default will have now set a precedent. So, other highly indebted European governments, also pressured by their electorates and public opposition, may start considering the option of default. It doesn’t matter if these governments would not actually consider this option. For the financial markets and the credit rating agencies, it matters that the option is now on the table.

The third repercussion of the Greek default will be that for the first time in the European Union’s history, European integration will unravel. European integration has stalled, has gone through periods of Eurosclerosis, has suffered from lack of political leadership, indecision and inertia. The European Union may be considered a two-tier, or even three-tier economic area, depending on how one reads the levels of cooperation between the countries, but never in its history has there been an actual “step back”. If Greece leaves the eurozone, European integration will have unravelled.

The consequences of a possible Greek default are the reasons why the Europeans reached an agreement on a second bail-out loan for Greece. However, postponing the last payment of the first bail-out and making it conditional on the present austerity programme is highly problematic. First, it creates huge pressures on the Greek government to pass a highly unpopular programme. Second, this will only represents a short-term solution. The magnitude of the Greek debt remains. The debt is now heading towards 153% of GDP. There are many economists who argue that the question of Greece defaulting on its debt is not “if” but “when” (whether now or in 2015).

The austerity programme which was agreed last year simply did not work. And why would it? How can a shock austerity programme, which depresses aggregate demand while the government cannot devaluate its currency, be successful? Unemployment has gone up to 16%. The Greek economy shrunk in 2010 by 4% and industrial production decreased by 11%. How can a new austerity programme, which will follow the same rationale work on an already depressed economy?

A three-level play

In News on June 19, 2011 at 1:58 pm

The Greek debts crisis is now unravelling in three different levels. The national level, the European level and the citizen level.

At the moment of writing, the Greek parliament is in its first day of a three-day debate, at the end of which the Prime Minister George Papandreou will ask for a vote of confidence of the new cabinet. The new cabinet was announced on 17 June, following two days of drama politics. One of the key changes was replacing the current Finance Minister Giorgos Papaconstantinou, with Evangelos Venizelos, which the Guardian described as “physically imposing presence”  (this apparently is a prerequisite for being Deputy Prime Minister, judging from the equally imposing Mr. Evangelos Pangalos). Mr. Venizelos is Mr. Papandreou’s longtime rival. He come from the Socialists’ “old guard” and was Mr. Papandreou’s opponent in the 2007 race for the party leadership. According some analysts, Mr. Papandreou forged an alliance with his “chief enemy”, with the aim of appeasing some members of his party who were opposing the new austerity programme. This reshuffle will presumably consolidate the Socialist party and will lead to greater support for the tough austerity measures. The hope is that the new government will win the vote of confidence (which is due on 21 June), and the new austerity programme will pass through parliament the week after.

At the same time, the Eurozone finance ministers are meeting in Luxembourg to discuss releasing a loan of up to €12 billion to Greece. This is the late payment of the €110billion EU-IMF aid package that was agreed in May 2010, without which Greece will not be able to pay forthcoming debt repayments. On 16 June, EU Commissioner Oli Rehn urged  Eurozone Finance Ministers to come to a “responsible agreement” on Greece’s bail-out. He also said that the Greek government should endorse the economic measures agreed.  On 17 June, the French President Nicholas Sarkozy and German Chancellor Angela Merkel agreed on principle that any extension of the maturities of the Greek bonds will be purely voluntary (the point of disagreement was the private banks’ contribution to the new aid package). Ms Merkel conceded to the demands of France and the ECB that the private banks’ contribution in the new bail-out package for Greece should be voluntary, she insists that it is “substantial” . However, while European frets, the financial markets jolt every time news were coming from Athens and Brussels. There are fears of a Greek default which could jeopardize the stability of the Eurozone. At the moment of writing, the next Eurozone meeting is 19-20 June is taking place, where it is expected that this agreement will be sealed off. The hope is that there will be an agreement and the new loan will be given to Greece.

Meanwhile, according to the latest poll, 47% of the Greeks are against the new austerity programme, which includes tax increases, cuts in civil servants’ wages and a long list of privatization. Since the bail-out, 400,000 have lost their jobs. Total unemployment is now 16%. Greece’s “indignant citizens” have been camping out in Athens’ central square (Constitution Square) since 25 May in protest against the government’s new measures. For some Greeks the hope is that their pension or their wage will not be reduced any further, that there will not be asked by their employer to work longer hours on the same wage, or that they will still have a job in a few months’ time. For the younger generation, there is no hope.

Eurozone ministers: What is the fuss about?

In Background on June 16, 2011 at 8:15 pm

On 14 June, the Eurozone ministers could not agree on the form of the second bail-out package for Greece. The contentious point was the role of the private investors in it. Germany insisted Greece’s lenders should swap their bonds for new ones with extended, seven-year maturities. This would allow plenty of time to the Greek government to implement the necessary reforms in order to lead the economy out of the recession and in a path of growth, which will allow it to borrow from the markets.

This was not accepted by the European Central Bank, the European Commission and France. The reason was that although Brussels would call this bond-swapping “reprofiling” of loans, the credit agencies would interpret this as a pure and simple default. The ECB, both in the words of the current President Jean-Claude Trichet as well as the likely next head of the European Central Bank, Mario Draghi, stood firmly against anything which could be seen by the markets as a default. It claims this would cause panic (see US 2008 collapse of Lehman Brothers) and have serious repercussions for European banks. On 15 June (day of general strike in Greece), Moody’s announced that it might review the ratings of France’s three largest banks (BNP Paribas, Societe Generale and Credit Agricole) because of their exposure to Greek debt.

Instead the ECB was promoting the so-called “Vienna initiative”. This is an agreement which had taken place in order to contain the debt crisis in Eastern Europe in 2009. In effect, foreign banks had agreed not to cut their exposure to the region and run, and thus there was no spread of the  financial contagion in Central and Eastern Europe. In this scenario, any bond-swapping is purely voluntary.

The agreement among Eurozone ministers is now on the way. This was partly facilitated by the IMF’s decision to give the next payment of Greek aid of €12 billion on 29 June, on the basis of a “promise of future EU funding rather than any concrete commitments” (BBC news).