The IMF has now released an updated debt sustainability report to say that it has nothing but incredulity for the new proposed deal to make a bailout deal if the Greek parliament plays by the rules tonight and the other 6 parliaments play along later this weekend/next week.
Here’s a link to the report itself, and here’s the executive summary:
Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.
The suggested “sustainable” measures:
- If the Europeans want to continue with grace periods, then those will need to be, like, 30 year grace periods on all debt, including any new debt from the bailout;
- Alternatively, “deep upfront haircuts”;
- Alternatively, “explicit annual transfers to the Greek budget”.
The conclusion that everyone is drawing: “The IMF won’t participate in a Greek bailout that does not have explicit and extensive debt relief. Sorry.”
Having said that, if the IMF feels that strongly about it, then I’m not sure why the IMF isn’t volunteering to either:
- Take deep haircuts on the debt owed to it by Greece; or
- Take over the bailout itself.
Maybe it is. Although there are almost certainly a barrage of rules that say that it can’t.
But either way – I’m not sure how the IMF’s sudden rise to the debt-sustainability occasion is helpful. It might have been helpful 6 months ago. Or a year ago. Or anytime really that didn’t involve Greece having already plunged into capital-controlled chaos with no safety net while her potential rescuers stand atop the cliff trying to decide if they’re going to grab the rope unravelling next to them because that could be sore on the fingers and no one likes an ouchie and perhaps this is a good lesson to anyone else at the party that might feel inclined to vault over the populist edge.
Anyway. Let me talk (again) about the two options the Greek Parliament has to choose between later this afternoon:
- Hyperinflation; and
Option 1: Reject the deal, and plunge into Hyperinflation
Because that is what rejecting the deal will mean. I mean – assuming that there is no assistance offered by the Eurozone with the exit (which there might be – but the longer the status quo continues, the more assistance that will be needed).
The trouble is, the only way to make the Greek banking sector solvent again, in the absence of extra Euros from the ECB, is to recapitalise them with freshly-printed drachmas.
Introductions of new currencies are a troubling time for any economy. But they are especially troubling when the government in power is weak. Is the Greek government weak? Well:
- Greece currently has a coalition government forged by one extreme left-wing party and another extreme right-wing party whose only real common ground is an objection to austerity;
- The legislation base itself is utterly fragmented by the clientelism practiced by more than a century of dynastic politics;
- The strength of the government is almost entirely a question of the people’s faith in said government – but the government in question just called a referendum, then did the opposite of what was asked, and if they flip-flop again, well. What more can be said really. To say nothing of the fact that the reason most Greeks want to stay in the Euro is because they don’t want their politicians to have control over the printing presses.
- Also, the current Greek government has no sources of financing other than bailout money and tax collections (and asset sales apparently, although the assets aren’t worth very much). A Greek government outside of the Euro will not have bailout money, and they certainly won’t have much tax collection*. Their only immediate source of financing will be drachma printing.
*Three reasons for the negligible-tax-collection: firstly, the government won’t be paying their tax collectors enough (because once you pay their salaries in drachmas, the officials will be doing “fakelaki” deals for euros like mad); secondly, the taxes would be re-denominated in drachmas, which would be an accounting nightmare, so it won’t be at all clear what should be collected; and thirdly, there is a long-standing Greek tradition of tax-evasion-as-civil-protest, so I doubt that anyone would be in a rush to pay taxes regardless.
As I see it, even if there is Eurozone assistance with the Grexit, the Greek Government won’t be able to resist financing their non-austerity policies with money-printing.
And the implications of a small bout of hyperinflation:
- Pensioners, and anyone dependent on fixed income, will become destitute. Mainly because their incomes and pensions will be fixed in nominal terms, and therefore cannot keep pace with the rapid decline in purchasing power.
- The banking sector will fail.
- Most of the formal business sector will shut down.
- There will be mass food, medicine and petrol shortages.
- There will also be capital flight, and I’m not just talking about money. I’m also talking about human capital – a mass emigration of professionals (doctors, lawyers, accountants, businessmen, etc).
When the hyperinflation eventually grinds the country to a halt, Greece will be left with:
- A massive informal sector that pays no tax;
- A forced dollarisation – whereby Greece will have completely surrendered her monetary sovereignty to either the United States (if the population adopts the US dollar as their primary means of transacting) or the Eurozone (if the population adopts the Euro);
- A mostly-unskilled labour force; and
- A even-more nepotistic governance system supported by a rich elite that used the chaos of hyperinflation to acquire assets at vast discounts (either by purchasing them at fire-sale prices from those that needed the money to survive, or by purchasing them using drachma bank loans that have been inflated into nothing).
It’s also entirely possible that the new governance system will be that of a military junta, or some other form of dictatorship.
And the only real supports for the economy will be tourism, and remittances from the diaspora, sending back money and goods to their families.
Option 2: More Austerity
Well, this won’t be great either.
National assets will be moved off the government balance sheet and run by non-Greek technocrats. Pensioners will have lower pensions. Taxes will go up, as will unemployment.
- Pensioners will become more destitute – although probably not as destitute as they would have been under hyperinflation;
- Fixed income workers will either earn less, or they’ll become unemployed.
- The banking sector will struggle along, receiving more bailouts along the way.
- Some of the business sector will have to shut-down – because depressions are not good for business.
- You’ll still get human capital flight – with the unemployed and the professionals leaving in search of job opportunities and better incomes.
- You’ll get growth in the informal sector, as more people move off to earn less-taxed incomes.
- If the promised reforms are put in place, you might also get a governance system with less patronage and less red-tape.
- And hopefully, Greece will avoid the shortages.
And as austerity grinds on, Greece will eventually be left with:
- A large informal sector that might even pay a little tax if the reforms are implemented;
- Monetary sovereignty will still rest with the Eurozone;
- A mostly unskilled labour force; and
- Hopefully, a better governance system with less clientelism.
The real supports will still be tourism and remittances. And potentially, as an upside, some debt relief.
The Analysis, In The End
As I’ve been saying for a while now, I think that adopting the drachma or accepting austerity will have largely the same outcome.
Krugman and Stiglitz and Sachs would have Greece pick the drachma because it at least offers some national dignity, or because they don’t like austerity in principle.
Only, there is no immediate option for Greece that does not involve all the impact of austerity. And worse.
But I think that there is a third, more medium-term, option. It’s what could have been the short-term option if all the reforms of the first and second bailouts were implemented.
Option 3: More Austerity, Supported Reforms, then New Currency
The biggest obstacle to the re-introduction of the drachma is “having a weak government”. If Greece had a stronger government, with less embedded patronage and a more constructive track record, then Greece could make the sensible decision today of taking herself out of the Eurozone while still maintaining her position within the European Union. Much like the UK, or Denmark, or Sweden.
But her current governance system does not permit that. It needs external pressures in order to keep itself in some semblance of order. And even those pressures need to be quite extraordinary in order to keep the Greek politicians in line.
What is needed here is government reform. Preferably government reforms enforced by those with the money outside of Greece; rather than government reforms averted by those with the money on the inside.
The reason to choose austerity is not because austerity is better, but because the bailout requirements are the best shot that Greece has at putting herself in a position to make better sovereign decisions in the future.
The bottom line for me is this:
- with a reasonable government, Greece could leave the Eurozone and exit a depression caused by a currency that is too strong for her to remain competitive.
- with a weak government, Greece will leave the Eurozone and enter a depression caused by a currency that will almost immediately become too weak for her to use.
- so the first step is to try and get a reasonable government – and given that Greece has spent years trying the old way, perhaps it’s time to try something different.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.