Thursday, July 09, 2015

Grexit drama is still unfolding

It does appear that unfolding events point to a Grexit. Today, Greece is supposed to present its plan. The EU, the IMF and ECB will review the plan and give their response on Sunday. If they find the plan unacceptable, it will be Grexit. That means, immediately, that Greece will not have the euro as its currency. Eventually, it could also mean that Greece leaves the European Union.

Is this inevitable? Well, yes, because the EU is unwilling to accept that debt restructuring must be the basis for any deal. It's the IMF that made a powerful case for restructuring ahead of the vote in Greece on the referendum, a fact that Yanis Varoufakis, recently ousted as Greece's FM, gleefully latched on to his blog. The IMF showed that not even heroic austerity- a primary surplus of 2.5% for 50 years- can lead to debt sustainability for Greece.

Joseph Stiglitz is among the heavyweight economies who have thrown their weight behind the idea of further debt relief for Greece. But the EU will have none of this. They say the EU states have taken their hits. Thus far and no further. If there's no debt relief, more austerity will be mean more economic contraction for Greece. Instead of facing austerity hell, the Greeks would rather face the hell that would be unleashed by Grexit- that's what the 'no' vote on the referendum meant.

Why would Germany and others in the EU be willing to put up with the risks of a Grexit? One reason could be that they are confident of containing any economic contagion. It could also be that they think that events have really spun out of control, so any attempt at agreement on Greek debt is futile. Perhaps, governments in Europe think they shouldn't be feeding leftist movements elsewhere by indulging Greece.

Well, neither the US nor the IMF is taking as sanguine a view. Perhaps the US is also concerned about the political fall-out (a strengthening of parties similar to Syriza in other countries, Greece edging closer to Russia) but it's clear that they are not under-estimating the economic fall-out either. The Americans should know. They have seen the consequences of the Lehman implosion and what it did to the world economy. 


Anonymous said...

My two cents. Please correct if I am wrong.
I believe it is the fiduciary duty of lender to ensure that the borrower is going to be able to repay the loan. If that due diligence is not done, then lender is equally to blame.

When Greece joined EU, it was after diluting a lot of rules of financial, liquidity, banking rules for EU hoping that Greece would set its house in order soon. But, that was never to be and public corruption and tax avoidance was never checked by governments.
Joining EU made availability of loans easier and the loans taken were majorly consumption loan with no productive value coming from them. The tourism sector, that was the backbone of Greece, faltered after global crisis and decreasing disposable income.

C+I+G+NX method:
I believe the way out is by following these 5 steps:
1. restructuring the entire debt for 50 years with debt tranches to be repaid based on favorable drachma/ euro exchange rates, using derivatives, hedging etc. (Reduce C, to autonomous consumption levels through austerity)
2. setting up manufacturing bases (in SEZ fashion) for firms to create jobs that contribute to growth of nation's GDP (basically let in 1 million Indians and see how they transform any country of the world). (Result: Increase in I and NX, strengthening of Drachma)
3. IT based income and property tax collection systems with stiff penalties for tax avoidance (Result: Decrease in external debt)
4. check on corruption
5. leverage its long coastline with developing major container traffic ports

After all EU left the kid in the room with cookie jar and now it is punishing it for eating all the cookies. India helped world once when it faced Y2K by providing cheap, efficient COBOL programmers. Now, its the time countries opened up for bulk migration, settling and work allocation to Indians too. IT firms like Infosys with billions of dollars of cash reserves would love to set up development centers there as it would provide both time-zone benefit and access to Europe directly.
But, geopolitical situations are best left to be solved on their own, never did the economists ever got a place on such high tables. Let us see what happens in future!

T T Ram Mohan said...

Great comments, anonymous. Except that I don't believe that reducing consumption to autonomous levels is politically feasible or socially desirable.There has to be a combination of debt forgiveness, measures to augment tax revenues and a boost to economic growth.


K.R.Srivarahan said...

Will debt forgiveness not amount to incentivisation of indolence? Greece entered Euro Union by faking its financials. The basic moral and legal principle that fraud should give no advantage to the fraudster cannot be transgressed. Waivers now will snowball into major disasters in future. The choice is not between forgiveness and failure, but between discipline and disaster.

T T Ram Mohan said...

Srivarahan, Whatever Greece's original sin, the rise in the debt to gdp ratio is the result of austerity policies forced on it. Debt has to be reduced for growth to resume. Do we want to punish Greece for its past sins or do we want a way out of the present problem?