Sunday, 19 June 2011

Should Maltese Tax Money Bail out Greece

The Malta Independent on Sunday

Before addressing this question, I have to reflect on two higher order questions related to the grim political and fiscal situation in Greece.

Does Greece want a bailout? Is a bailout the best solution for Greece? Without a bailout Greece will default on its debt obligations.? If Greece defaults it could be the European version of the Lehman debacle that will shake the entire European banking system.?

Many European banks, still operating with thin layers of capital following the financial crisis of 2008, will incur huge losses on their exposure to Greek borrowers (sovereign, banks or private sector). Many systemically important European banks will be wiped out unless instantly recapitalised by state injection of funds. It is very doubtful whether the shaky recovery from the bank solvency crisis following Lehman in 2008 can withstand another systemic shock induced by a Greek default. A slip back into recession or depression would seem a plausible outcome as governments no longer have capacity for fiscal stimulus without endangering their own sovereign solvency.

Some say that the systemic crash caused by a Greek default would make the 2008 financial crisis seem like a walk in the park.

Does Greece want a bailout?

Given that the alternative is a default, which would wipe out the Greek banking system and close its only lifeline for liquidity through the ECB, the Greek government seems prepared to do whatever it takes to qualify for a bailout. However, such a bailout comes with very tough conditionality, which will impose severe austerity measures on the Greek population. Such austerity would be comparable to the draconian conditions for reparation payments imposed by the Allies on Germany following its defeat in the First World War ended in 1918 by the Treaty of Versailles. The Greek government has no electoral mandate for such austerity and, judging by the social upheaval that has become a regular feature in the main squares of Athens where rioters and police face each other like Roman gladiators, the Greek government needs a broad mandate either by holding fresh elections or through the formation of national cross-party government.

Is a bailout the best solution for Greece?

This is a question that should be answered by the Greek electorate through the holding of early elections or a specific referendum. The electorate would have a choice of two options. Either go for the bailout and accept the strict austere conditionality like the Irish did and organise an internal devaluation (through cuts in wages, reduction in government expenditures through massive trimming of the bloated public sector, massive privatisation of state-owned inefficiently run economic activities, substantial improvement in tax enforcement, liberalisation of labour markets and softening of union rights, containment of social security abuse and extension of retirement age to North European standards), or exit the euro, revert to the old drachma, force conversion of all debt (sovereign and bank) back to Greek drachma at the same rate used when Greece had joined the euro, make a massive devaluation of the Greek drachma, re-introduce capital exchange controls, and force the temporary nationalisation of all Greek banks which will need to be recapitalised and sustained through enforced freezing of deposits.

It would be a re-run of Argentina 2001/2002. If the Greeks think that the second option would be more bearable than the first one they should think again. In case of the second option, Greece would be on its own, blocked out of international capital markets for a very time long until it rebuilds its credibility. The losses such a move would impose on European banks will cause a deep European recession just when Greece would need a healthy European economy to whom it would be able to export goods and services as it regains competitiveness through the devaluation route. Such rediscovered competitiveness would be quickly dissipated unless the Greek economy is restructured through the painful measures imposed by a EU or euro bailout.

If Greeks choose the euro exit and devaluation route as an alternative to the austerity measure of an EU bailout, they would be condemning themselves to a perpetual crisis.

So coming back to the original question, should Maltese tax money be used to bailout Greece?

I would say that Maltese tax money would have to be used to bailout Greece because in the process we would be bailing out the whole European financial system and the general EU economy which we need in good health to maintain our exports and our tourism. However the bailout must not be temporary patchwork, just kicking the can down the road till it explodes in the face of successor governments. The bailout must be a true solution that delivers a period of several years during which Greece will not need to have access to private capital markets.

Bailout loans:

  •  are to be at normal market rates paid by Greece in the first 10 years of euro membership not at the current crisis rates. 
  •  Substantial privatisation to re-energise and re-invigorate strategic sectors of the Greek economy which are currently extremely inefficient through public sector style of management which leads to a normal train worker earning €9000 a month remuneration package. Privatisation revenues will reduce the size of the bailout required. 
  •  Acceptance of the austerity measures through a national government or the conduct of referendum or fresh elections whereby the government seeks a popular mandate for acceptance of the austerity package or for the stark alternative of exiting the euro. 
  • It is inconceivable that if Greece were to default it could stay in the euro. 
  • International supervision for prompt execution of the austerity package. 

 Anything short of this would be wasting our scarce resources on an errant nation that never absorbed the spirit of EU and euro membership and who should feel ashamed especially when comparing themselves to their neighbour Turkey. Fifteen years ago Turkey was the Greece of today and Greece was a respectable stable democracy with sound financial structures. Greece is now in a worse situation than Turkey was 15 years ago whilst Turkey has improved its economy so much that currently it can borrow on the capital markets at margins much finer than Portugal, Ireland and Spain and obviously much better than Greece would have to pay if it were possible for it to borrow on the markets, which obviously is not possible at present.

A final word of warning to those who had depicted our euro entry as an anchor of stability for our economy. The Greek financial tragedy and the Turkey success story proves that euro membership does not guarantee success and retaining control of one’s own sovereign currency and monetary policy is not an impediment to achieving financial stability. What matters is not being in or out of the euro. What matters is how prudently and how effectively politicians manage their economy. Greece, euro and all, has failed while Turkey, without the euro, has succeeded. We have to earn our living by safeguarding our external competitiveness and consistent hard work. Euro membership alone guarantees nothing if not an obligation to use our tax money to bail out errant peers.

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