R. Godin: A debt restructuring is necessary

R. Godin: A debt restructuring is necessary

Athens, July 21, 2016/ Independent Balkan News Agency

By Spiros Sideris

An article by Romaric Godin is published in La Tribune newspaper titled: “Greece: the logic of creditors borderline absurd”. In a climate of general indifference, Greece which is releasing high primary surpluses just repaid some of its debt to the ECB. While the economy is at its worst, the logic of lenders continues to strangle the country. A year ago, the repayment of Greek debt had attracted all eyes and attention. This time, in a general indifference, the Greek State paid 2.3 bln euros on 20 July 2016 to the ECB account in Frankfurt for bonds bought by the central bank in the market during 2010-2011 and had expired. A little less than one third of the 7.5 billion paid by the European Stability Mechanism (ESM) in late June, left Greek coffers to wipe off debt from the ECB balance sheet. The next Greek payments will be made next year, besides the repayment of short-term loans from the markets. Athens must also pay 1.7 billion euros to the ECB and 3.2 billion euros to the ESM.

This is an absurdity regarding ECB’s priorities. This repayment inevitably leads to questioning the rationality of such debt repayments chosen in March 2012, with the famous PSI.Greece, as a member of the euro zone, and in order to remain one, has accepted great sacrifices and is in recession for the past three quarters, is the country that without doubt needs this policy most. However, the ECB which continues not to buy Greek bonds, demands the repayment of debt that will help to reduce its balance sheet. These 2.3 billion is a drop in the ocean of the 3,248 billion euros of the ECB’s balance sheet. But isn’t this exactly the reason to use this money differently to benefit the Greek economy? Impossible because it is not allowed by the rules…

For making this sterile repayment for the Greek and European economy, the Alexis Tsipras government should therefore accept the greatest sacrifices: a new austerity plan amounting to EUR 5.5 billion, with an increase in taxation, the VAT rate, a painful reform pensions and the waiving of financial independence through the acceptance of automated measures to reduce costs to achieve these objectives.

A further commitment will still be borne by the economy whose quarterly GDP fell by 1.5% between January and March 2016, after falling in three consecutive quarters. The level of real GDP, has never been so low since the fourth quarter of 2002; 13 years ago. Compared to the third quarter of 2008, the quarterly GDP notes a decline of 30%.

But this is not the only strange feature of economic policy in Greece. The Greek budget recorded in the first quarter a brilliant result, a primary surplus, excluding debt service amounting to 2.47 billion euros. This success also raises questions though. Firstly because, due to the weight of Greek debt, more than 177% of GDP, which will be repaid over a period of more than 40 years, this level is not enough and causes Greece to seek help from its European partners. Secondly, because the price to pay to achieve this result is bitter: public expenditure decreased by 3.35 billion, a large sum missing from an economy in recession. Furthermore, this reduction is mainly due to the resignation of the state from the implementation of the public investment program. Only 1.3 billion euros were spent for this purpose from the 6.75 billion planned for this year. This lack of investment is not only harmful to economic activity but is also a problem for the future of a country where the private sector is bleeding and no longer invests. To perform so brilliantly, the present and future are being mortgaged. Especially if one considers that under the third memorandum was signed in August 2015, the third of this surplus will automatically be spent to reduce debt and not for the Greek economy. In fact, given the deadlines and objectives, this figure will probably be higher.

Moreover European Commissioner Pierre Moscovici who was in Athens last week stated he does not want to reopen the chapter regarding the appropriateness of the 3.5% of GDP primary surplus target by 2018 which the Greek government wants reduced. Therefore, despite the financial performance of Greece, the target of creditors remains the same: the Greek economy is not oriented to growth but to repaying creditors. In short, the success of this budget is essentially a financial, economic, political and social failure.

Following the agreement with creditors last June, the Greek government announced the end of the crisis in Greece. There is proof that indeed the crisis has eased. The ECB has again accepted Greek government bonds, capital controls should ease in part in coming days. The tourist season also appears good, taking into account the risk that exists in other competing destinations, primarily Turkey. This will be able to partially offset the negative impact on the trust of financial players. Business climate indicators point to a certain stabilization. But the situation of the Greek economy is still worrying. With the reduction of wages by 24% in the last quarter of 2015, domestic demand remains weak and of course will still suffer the consequences of the fall in public spending and the VAT increase.

As result, more than ever, Greece needs a real plan for economic reconstruction that could pull their European creditors from their current logic: that of counterproductive austerity imposed on the Greek government in order for debts to the ECB, the IMF and the ESM to be repaid in an alarming Ponzi scheme. The borrowing of money to revive the Greek economy could probably be invested better. Or at least, not worse. In fact, behind this glorious word ‘reforms’, creditors hide a purely accounting aspect of reality and have a drawback: the will to compel Greece to prioritize the the repayment of its debts and not its development. Again, the introduction of automatic cost reduction mechanism is a perfect example of this logic. To avoid recourse to this mechanism, the Greek government will certainly continue to reduce its costs. All Greek wealth should be given for the repayment of debt.

To finish with this “enslavement” of debt, a debt restructuring is necessary. We are still very far from that. By the end of the year, we should have from creditors a promise on extending the repayment period. But in the current situation, this measure will not be truly effective: they maintain a huge burden on the Greek budget which will hit growth. Therefore, debt should either be cut or the target for primary surpluses should be amended. These are solutions proposed by the IMF, which nevertheless European creditors always reject.

It is now very difficult for the Greek government to act. Last spring’s episode showed the scope for reaction it had and its dependence on creditors. It had to accept the “narrative” of creditors, resulting in the Tsipras government being held responsible for the current plight of the country. The Samaras government refused the terms of the creditors and developments prove that the analysis pointing to the need for economic recovery and restructuring of debt was not as unreasonable as some argued. Now Alexis Tsipras will have to comply with the positions of creditors and calculate the “reforms”. The space for maneuvering is almost non existent, as shown by the reaction of P. Moscovici on the primary surplus target for 2018. Greece is doomed to align with the logic of its creditors. And pay the highest price.