Global Agenda: Back to Greece

The awful truth gradually filtering into the public consciousness of Europe and the wider world is that there is not going to be any deal.

By PINCHAS LANDAU
Greece protesters flags 311 (R) (photo credit: Yiorgos Karahalis/Reuters)
Greece protesters flags 311 (R)
(photo credit: Yiorgos Karahalis/Reuters)
‘One trillion euros of borrowing support; 106 billion euros of new capital for the banks; 50 percent haircut on Greek debt.”
This was the opening sentence in this column for October 28 last year, under the headline “Make-believe rescue.” It summarized the main elements of the rescue plan for Greece announced a couple of days earlier – a plan that was, needless to say, hailed as the long-awaited salvation/solution of the European sovereign-debt crisis.
The response of the equity markets, equally needless to say, was to end the sharp falls that had characterized most of October and to begin a strong rally that has continued, on and off, until very recently. The response of the bond and other debt markets was far more skeptical, with investors selling European sovereign bonds and fleeing from exposure to European financial institutions – until the European Central Bank, with its back to the wall and under the guidance of a newly installed Italian president, pumped 500 billion euros of emergency liquidity into the banks in late December, thereby achieving a brief but blessed respite for the entire financial system.
For whatever reason – possibly an unwonted sentiment of mercy toward readers – I have not written about Greece for several weeks. It would not be correct to say that nothing has happened during that time, nor even that no development of importance transpired. On the contrary, there has been ceaseless activity in Greece and around the Greek crisis. However, it would certainly be true to say that nothing good has happened since this column last addressed the topic.
Just referring back to the putative deal of October is enough to make one laugh, cry and snort in anger or disgust. The support package now under discussion is officially for 145 billion euros, although other calculations suggest the true figure is north of 200 billion euros. As for a 50% haircut, most holders of Greek debt would dance in the streets if offered a loss of only 50%.
The haircut currently “on the table” is for 70%, but it is likely to be larger. And anyway, it relates only to privately held Greek government debt, so-called PSI (private-sector involvement), as opposed to OSI (official-sector involvement). The latter is not participating in the haircut, although the ECB has reportedly agreed to waive all or part of the paper profits it has accrued on the considerable quantity of Greek bonds it has acquired via its support operations.
However, all these details are ultimately irrelevant, and even the 70% haircut is very unlikely to be realized – as the bond market signaled a couple of days ago, by pushing the yield on Greek two-year government paper through the 200% level. The awful truth gradually filtering into the public consciousness of Europe and the wider world is that there is not going to be any deal and that the endless bickering over terms is merely a charade to cover up this underlying reality.
This outcome reflects the fact that, on the one hand, the Greek people will not swallow endless doses of austerity and imposed reductions in their standard of living. As the Greek economy enters its fifth year of contraction – this week it was announced that GDP shrank at the annualized rate of 7% in the last quarter of 2011 – the country is quite obviously in the throes of an economic depression, which its social and political fabric can no longer endure. The unions will strike, the mob will riot and burn, while the political elite pretends to go along with the unelected leader imposed on the country by the EU and passes laws and decrees dictated in Brussels and Berlin, but that everyone knows will not be implemented.
The EU, led by Germany and France, is beginning to accept that there can and will be no resolution of the Greek crisis, at least none that keeps Greece within the union. Everyone is now focused on the way to control the damage that will stem from a Greek default, with many analysts seeking to claim and even prove that this will not be a watershed event, while others say it will prove to be far worse than the Lehman Brothers bankruptcy of September 15, 2008, that caused the financial markets to freeze and the global economy to almost stop functioning.
We will find out soon enough which of these prognoses is correct, because on March 20, Greece has to redeem government bonds to the tune of several billion euros, and, without the next bailout package, there is no way it can come up with the money. But the debate is really not about Greece at all, but rather over whether Greece can be “ring-fenced” to prevent other countries – read Portugal, then Spain and Italy – going down the same path. The European political establishment says it can, and the financial establishment is going along with that – from lack of choice rather than from conviction.
That’s where we are currently at. One thing is sure: you haven’t heard the last of the Greece mess.
landaup@netvision.net.il