Monday, August 24, 2015

Why the third Greek bailout is likely to fail

Published by MNI Euro Insight

It looks like it’s all being sorted: Eurozone parliaments have grudgingly agreed to a third Greek bailout allowing the eurozone’s bailout fund ESM to lend 86 billion euro over three years to Greece, while early elections should consolidate the more moderate part of Syriza in power. Hereunder I take  a closer look at the assumptions underlying the third bailout, explaining why Greece’s debt situation is unlikely to be “sustainable”.

Given that trust in the European Commission is limited at best, the more “hawkish” Eurozone countries are keen to have the – presumably more “hawkish” - IMF involved, despite the fact that the latter leaves no occasion unused to tell Eurozone countries to take losses on their lending to Greece, something it doesn’t even want to contemplate with regards to its own lending to Greece.

A key condition for the IMF to be involved and lend some more cash to Greece is that Greek debt is “sustainable”. It already agreed with Eurozone countries to basically ignore that the country’s debt is heading to reach 200% to GDP in 2016. Instead it will look at whether the percentage of GDP which Greece devotes to “debt service” exceeds 15%, having agreed that above this point debt service would be unsustainable. Eurogroup Chairman Jeroen Dijsselbloem has stated that even according to the most pessimistic Eurozone predictions for future Greek growth, Greece’s debt service still wouldn’t exceed 12% and would thus be “sustainable”, at least “in the 20202030 period” . The only thing is that according to him “the remaining difference is that the IMF’s worst-case scenario is more pessimistic than ours.” With Open Europe, we expect that the IMF may be convinced by extending maturities – from just over 30 years now to around 50 years – combined with an extended grace period in which Greece doesn’t have to pay back debt yet – up from ten years now to between 20 and 30 years. The interest rate Greece now pays is lower even than the one carried by Portugal, Italy, Ireland and Spain and can hardly be cut much lower.

This tinkering to keep the IMF on board may perhaps make sure that given the assumptions of Eurozone countries, Greek “debt service” costs remain under 15% of Greek GDP also after 2030. Still it’s of course questionable whether it’s possible to predict GDP growth figures so far ahead. Even more questionable, and the fundamental problem here, are the assumptions.

The Eurozone estimates in its “debt sustainability analysis” that in the most pessimistic scenario, Greece’s economy would shrink 0.75% this year, would remain at 0% growth in 2016 and at 1.25% in 2017 and 3% in 2018%. Also the IMF doesn’t seem much more keen to predict negative growth data any more than Soviet bureaucrats were. As recently as April, months after the Syriza-victory had produced a deep stand-off with Greece’s creditors, it predicted that Greece would be the fasted growing country in Europe, although in July it said that the crisis would take “a heavier toll” than previously expected on economic activity in Greece. This all reminds of how its predictions of Greek GDP growth, really since the crisis erupted, consistently turned out to be false.

On the other hand, estimates by private institutions put Greek growth for this year and the next few years at a much more negative level than the eurozone’s “most pessimistic” estimate, with for example Standard & Poor's predicting at the end of July that Greece’s GDP would shrink 3% in 2015. In April, S&P thought Greek GDP would be shrinking 1.5% in 2015 whereas the IMF still predicted growth of 2.5% for Greece this year. If this gap can be of any guidance of the incompetence of public sector institutions, the growth predictions may turn out to be false once again and the annual “debt service” may easily surpass 15% of Greece’s shrunken GDP.

There are more factors indicating Greek growth may not take up: there are lots of reports of Greek companies relocating or considering to do so. Some 60.000 have requested moving their headquarters to Bulgaria, while ship owners may move at least part of their operations to Cyprus due to increased taxation. Not exactly a factor which may boost Greek growth.

Currently, the EU Commission estimates that the Greek “fiscal gap” amounts to 1.25% of GDP, or around 3 billion euro. It looks like the idea is to largely finance this by tax hikes. The “memorandum of understanding” - the instruction list imposed by creditors – requires that the unpopular real estate tax ENFIA, to be paid at the end of October, “should raise €2.65 billion revenues in 2015”. Spending cuts this year look minimal, although defense spending will still be cut by 100 million euro before the 1st of January. Other tax hikes include an increase of the corporate tax rate from 26 to 29%, increasing sales tax on processed food and restaurants to 23%, abolishing VAT discounts for Greek islands, extra luxury taxes on big cars, boats and swimming pools, a new tax on television advertisements,  “tonnage taxes” which will hit the shipping industry, higher income taxes on – lightly taxed – farmers, higher taxes on insurance premiums and a higher “solidarity tax” for all income brackets. To be fair, the next few years will witness more spending cuts, like 400 million euro in military spending next year, but it’s puzzling how anyone can believe releasing an avalanche of tax hikes on an economy already suffering from capital controls will do anything to boost growth.

Furthermore, one doesn’t need to have paranormal abilities to be able to predict that tax hikes will also lead to a greater informal economy, thereby further shrinking Greece’s official GDP which is supposed to carry the annual debt service cost of which EU institutions think it’s sustainable and won’t exceed 12% even in the most pessimistic scenario.

Then there is the question mark how much Greek privatisation efforts may raise. It’s widely assumed these will fail to bring in the 50 billion euro which creditors are expecting. During the previous “programme”, EU institutions estimated that selling off Greece’s state owned real estate may raise “anything above some €20bn”, but this failed spectacularly. In 2011, Greece’s creditors wanted Greece to raise 50 billion euros as well by selling state assets. Since then, however, Greece only managed to raise 3.2 billion euros: 94 percent below the target. The failure to do so was due to obstruction by powerful and privileged trade unions and because it was hard to value certain assets, like Greece’s islands, while there was little demand for things like sport infrastructure or government airplanes.

Still, privatisation is a great idea. It can work in Greece, as proven by the privatisation of Piraeus Container Terminal’s strong performance since it was taken over by China’s COSCO Pacific. Still one should do it in order to make the economy more competitive and not in order to raise a lot of money.

It’s unfortunate that the Greek government will use some of the proceeds from privatisation to recapitalize some of the country’s zombie banks. Essentially, more than half of the capital of Greek banks are claims on the shaky Greek state, which itself owns stakes in Greek banks. It would be better to first unwind these zombie banks, whereby shareholders and bondholders suffer losses, and then restructure and completely privatise them.

I haven’t mentioned the “structural reforms to enhance competitiveness and growth”, which are laudable, but unlikely to lead to a quick turnaround in growth, given how deep-rooted Greece’s structural challenges are. The fate of the unstable Greek bank system and its debt service burden are hanging like the Damocles over everything else. Angela Merkel had the opportunity to test a different recipe on 12 July, but she chose to kick the can down the road. One last time?

Tuesday, August 04, 2015

Een nieuw Hongkong kan de migratiecrisis oplossen

Gepubliceerd in De Morgen

English version on

04 augustus 2015

Met de bestorming van de Kanaaltunnel bereikt de migratie- en vluchtelingencrisis een zoveelste hoogtepunt. Hectoliters inkt zijn gevloeid over de kwestie, maar suggesties voor een oplossing die in verhouding staat tot het probleem lees je zelden of nooit. Nochtans is die er.

Als we aanvaarden dat er nu eenmaal geen democratische steun bestaat voor het opnemen van 60 miljoen vluchtelingen binnen Europa, is de enige oplossing het verwelkomen van die mensen in veilige zones buiten de EU, op land gehuurd van niet-EU staten - waarbij we er voor zorgen dat dit niet zomaar vluchtelingenkampen worden, maar een investeringszone, waar mensen hun leven kunnen opbouwen en waar multinationals fabrieken kunnen vestigen.

Laten we ze vrijhavens noemen, waar een lokale economie kan ontstaan. Dat is enkel mogelijk als er recht en orde heerst. Daarvoor kan de Europese Unie bijvoorbeeld politie- en justitiepersoneel voorzien, zoals het dat al deed in Kosovo. Er zijn ook historische voorbeelden. Hongkong, bestuurd door Britse ambtenaren, bood in de vorige eeuw reeds een veilige haven aan Chinese vluchtelingen. Zij konden er genieten van westerse rechtsbescherming en een economisch mirakel voltrok zich.

Waar zou zo'n 'vrijhaven' dan wel moeten komen, hoor ik u denken? Per definitie buiten de rijkere landen, denk ik, want er is geen schijn van kans dat die bereid zullen zijn om de miljoenen vluchtelingen in deze wereld op te vangen binnen hun grenzen. Dat er een mogelijkheid is om landen te overtuigen om zo'n zone te creëren, bewijst het feit dat de EU Niger kon overhalen om er een door de EU gerund tijdelijk onderkomen voor vluchtelingen te vestigen.

Nu is de woestijnstaat Niger wellicht niet de beste locatie om een vluchtelingenkamp om te toveren tot een ontwikkelingszone, maar veel arme landen zouden wat graag een mooie huurprijs ontvangen voor het beschikbaar stellen van een stuk - uiteraard onbewoond - land voor een bepaalde periode.

Zoals de Britten met China overeenkwamen om 99 jaar in Hongkong te blijven, inderdaad.

Hoe kan zoiets gefinancierd worden? De kost van het Belgische justitie- en politieapparaat bedraagt 3 miljard euro per jaar, voor 11 miljoen mensen. De jaarlijkse kost van zo'n vrijhaven zou misschien wel drie keer zo hoog zijn, maar nu ook niet zo veel meer.

Zou het echt zo moeilijk zijn om voor een dergelijke belangrijke maatschappelijke uitdaging geld te vinden binnen de gigantische budgetten voor grensbewaking, ontwikkelingshulp, of binnen de huidige EU-begroting? Die loopt op tot 1.000 miljard euro over zeven jaar, waarvan zo maar even 270 miljard euro naar eigenaars van landbouwgrond gaat, onder wie banken en de Britse koningin. Het Europees landbouwprotectionisme en de excessieve subsidies hebben veel schade toegebracht aan de 'derde wereld', dus het aanboren van deze financieringsbron is misschien niet eens zo'n slecht idee.

Idealiter komt er ook publiek-private samenwerking. Multinationals doen grootscheepse investeringen in landen waar een revolutie steeds om de hoek loert. Zouden ze zo weigerachtig staan tegen zo'n 'vrijhavens', bestuurd door landen met een degelijke reputatie op vlak van rechtsbescherming?

Wat als het toch misloopt en de 'vrijhaven' eerder een nieuw Liberia dan een nieuw Hongkong wordt? Een terechte vrees, maar de keuze om naar daar te migreren zal uiteraard vrijwillig zijn. Het kan toch niet zo moeilijk zijn om voor landen die ooit de hele wereld controleerden in een voor-technologisch tijdperk een omgeving te creëren die beter is dan landen zoals Syrië, Noord-Korea, Eritrea?

Is dit wel een realistische oplossing? Toch wel, op zijn minst in vergelijking met de falende alternatieven. Ngo's zouden moeten toegeven dat pleiten voor volledige open grenzen onrealistisch is en eigenlijk neerkomt op wegkijken van het probleem. Politici zouden moeten toegeven dat zelfs de meest forse grensbewaking niet in staat is om het hoofd te bieden aan mensensmokkelaars, indien de migratiedruk zo hoog is. Vrijhavens bieden voor vluchtelingen een mogelijkheid om veilig en legaal te gaan naar een plaats waar ze hun leven kunnen opbouwen.

Het sluit andere oplossingen - grensbewaking, ontwikkelingshulp, bieden van asiel en toelaten van economische migratie - ook niet uit. De EU plant nu reeds een soort van vluchtelingenonderkomen buiten Europa, in Niger. Het heeft ervaring met het uitsturen van politie- en justitiepersoneel, in Kosovo. Als men vluchtelingen wil helpen, maar men wil of kan ze niet helpen binnen Europa, zijn er niet veel andere oplossingen dan ze te helpen buiten Europa.

Pieter Cleppe vertegenwoordigt de onafhankelijke denktank Open Europe in Brussel

Monday, August 03, 2015

The great Greek fudge

Published by Vocal International and Zero Hedge

A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the precise location in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two   weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.

If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.

The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states. How on earth did the UK, which isn’t part of the Eurozone, agree to bail it out in 2010, one may wonder? The reason is that the decision to create the EFSM was taking precisely at the time of the power vacuum in the UK. Labour had just lost the election and the Conservatives were still busy negotiating a coalition with the Lib Dems. Outgoing Labour Chancellor Alistair Darling claimed to have “consulted” likely new Chancellor George Osborne, but it remains muddy who precisely gave the expensive OK. In order to correct this, PM Cameron secured a declaration from other EU leaders in December 2010 that the fund wasn’t going to be used any longer, until it was used after all, in July 2015, to provide Greece with a first bridge loan. Then not only the UK, but also the Czech Republic and Poland protested heavily, only backing down when they secured special guarantees against possible losses and a commitment that it would be illegal in the future to provide loans to Eurozone countries with the EFSM without also providing such guarantees to non-euro states.

EU Finance Ministers are currently busy implementing the legal change, through a “written procedure”, which should be finalized before the middle of August. The Council declared in July that an “agreement” on this legal change was needed “in any case before” Greece can request a second bridge loan. Another “written procedure” is needed for that, but it’s unlikely that Finance Ministers will manage to decide this in smoke-filled rooms. With Polish elections coming up on 25 October, local opposition parties may once again rail against Polish PM Ewa Kopacz, who promised voters they wouldn’t be exposed to this. Also the UK may use this as an opportunity to extract concessions related to its own agenda for EU reform. Perhaps the French government’s sudden openness to this agenda and its welcome stance that “we need a fair treatment of the 'out' countries" may have been linked to the British approval for a first bridge loan.

As always in the Eurozone, the safest bet is on another fudge, at least when it comes to the bridge loan.

More questionable is how the IMF’s statement that it “cannot reach staff-level agreement [to participate to a third Greek bailout] at this stage” will play out, given that Greece no longer meets two of the four IMF criteria for a bailout: ability/willingness to implement reform and debt sustainability. It will only decide whether to take part in the bailout after Greece has “agreed on a comprehensive set of reforms” and after the Eurozone has “agreed on debt relief”, meaning it may even only join next year or not at all, of course. This is a problem, given that a number of Eurozone states, especially Germany and the Netherlands, have explicitly linked their willingness for a third Greek bailout to participation by the IMF. Former EU Commissioner for Monetary Affairs Olli Rehn has suggested that many countries demand IMF involvement in bailouts because they don't trust the Commission.

It’s not entirely clear what will be sufficient for the IMF: its President, Christine Lagarde, has discussed a write-down on the value of the country’s debt but ruled out a straight “haircut”, while mentioning an extension of debt maturities, an extension of grace periods and a maximum reduction of interest rates. The IMF carries the legacy of its former Director Dominique Strauss-Kahn, who managed to overcome opposition within the fund against taking part in the first Greek bailout in 2010. The IMF only issues loans to countries when there is prospect for debt sustainability, which clearly wasn’t the case for Greece in 2010, but the interests of supposedly “systemic” banks were considered to be more important. Now the IMF, which has never taken straight losses on loans it has issued, may be experiencing this in case of Grexit.

As opposed to the IMF, which has completely ruled out the idea of taking losses on its lending to Greece, and contrary to the picture painted by some, Germany has made some noices suggesting it may be open to cutting its losses in Greece. German Chancellor Merkel has not only been open to extending debt maturities and lowering interest rates, but her Finance Minister Wolfgang Schäuble has said that “if you think the best way for Greece" is debt relief, then "the best way forward" is to leave the euro, adding that “a real debt haircut isn’t compatible with the membership of the currency union”. So Germany is willing to accept debt relief, if there is Grexit.
Some have questioned Schäuble’s claim that debt relief wouldn’t be legally banned within the eurozone, as for example Financial Times columnist Wolfgang Munchau, who recently wrote: “In its landmark Pringle ruling — relating to an Irish case in 2012 — the European Court of Justice (ECJ) said bailouts are fine, even under Article 125, as long as the purpose of the bailout is to render the fiscal position of the recipient country sustainable in the long run.”

This sounds a bit like a stretch. The ESM is very much conceived as a “European IMF”, hence the ECJ’s use of the term “sustainable”, reminiscent of the IMF’s condition to provide cash. Just like the IMF, the ESM has been set up to issue “loans”, not to provide “transfers”. Obviously, a loan with an artificially low interest rate partly counts as a “transfer”, but even for the rather politicized judges of the European Court of Justice there is an end to stretching the meaning of words.

Therefore, apart from the case where the ECJ would completely remove the meaning of the words of its previous rulings and the ESM Treaty, EU law doesn’t allow the “loans” made to Greece to just be forgiven, as much as proponents of a Eurozone transfer union like Mr. Munchau may regret this.
After PM Tsipras threatened with an internal referendum in his own left-wing populist Syriza party, it looks like he has secured the necessary domestic support for a third Greek bailout.

Obstacles remain, but much of the protest in “creditor countries” seem to have been overcome. In Finland, where the coalition was at risk at some point, Foreign Minister Timo Soini has said that it “would make no sense” for his Eurosceptic Finns party to leave the Finnish coalition over this. In the Netherlands, the governing VVD party, which is skeptical to the Greek deal, has provided tacit consent for negotiations to start. In Germany, despite all the noice, Merkel enjoys a comfortable majority to get on with the third range of transfers.

The third bailout is likely not to be sufficient to cover all Greek funding needs in the next few years, also given that expecting 50 billion euro from privatizing Greek state assets looks a little rosy. This is a problem which can be solved near the end of the bailout period, once Greece has made it through the difficult year 2015. In 2016 and 2017, the country needs to make debt repayments “only” amounting to around 6 billion euro each year.

The IMF may in the end just back down and join in, given how it already bent its rules twice to agree to Greek bailouts. It would have been expected to provide between 10% and a third of the funding of the new bailout which may amount to 86 billion euro (and possibly more), so if the IMF wouldn’t back down, Germany and France would see their bill for the third bailout rise with another 1.7 billion and 1.3 billion euro respectively. A lot will depend on how the IMF will calculate “debt sustainaibility”. Speaking in the Dutch Parliament, Eurogroup chief Jeroen Dijsselbloem said on 16 July that the Eurozone already “agreed with the IMF to look at "debt service", not merely at the debt to GDP levels”. In other words: because Greece’s interest burden as a percentage of GDP is even lower than the one carried by Portugal, Italy, Ireland and Spain, one can ignore the fact that its debt to GDP is at the horrendous level of 180% now. This of course overlooks the difficulty to boost that GDP, given the tax hikes and the capital controls which will be hard to remove as a result of the talk about “Grexit”. Still, a fudge looks on the cards.

It isn’t a good idea to let the bill of Eurozone taxpayers grow even bigger, to burden an economy already crippled by debt with even more debt and to intervene deeply into domestic Greek policy choices. Opting for Grexit may have been the wisest choice for everyone. The opportunity was there, given that many Greeks had already taken their savings out of banks anyway. Also, many of the reasons to think Greece still may leave the Eurozone, like the difficulty to unwind capital controls, remain in place. We have come close, but Grexit seems to have been avoided for now. But it’s unlikely to have been referred “ad kalendas Graecas”- "until pigs can fly".

Pieter Cleppe represents independent think tank Open Europe in Brussels