Wednesday, 28 January 2015

Greece is not the problem. The whole system is!

I am angry that Malta has built credit exposure versus Greece both bilaterally as well as through the EFSF and ESM not because I do not feel that somehow over-indebted Greece has to be bailed out in order to save the Euro, but because this burden should have been carried by the 11 original Euro area members that allowed Greece to join without having the proper credentials to do so.

I am angry because Malta's exposure did not go to save Greece, so much so that Greece is still in the soup with 175% debt to GDP which by all measures is unsustainable.  It went to save Greece's creditors  mostly banks from countries that were the beneficiaries of Greece's largess when its corrupt politicians went on unsustainable spending spree to line up the pockets of the oligarchs that sustained their political careers.

Malta joined the Euro in 2008 when Greece had been a member for 7 years.   We benefited absolutely nothing from Greece's largess.   The original Euro area members had 7 years selling the Mercedes, BMW's, Champagne, Chocolate and military equipment funded by Greece's growing debt which we were forced to co-finance.  Slovakia opted out of the bilateral financing to Greece and should have we.   Ireland, Portugal and the Baltic states, who joined after the EFSF was set up, have been given exemption from guaranteeing Greece's debt commitments through the EFSF.

What has been done cannot be undone and now we have to look forward.

Nobody should be surprised by the Syriza electoral victory with a mandate to renegotiate Greece's debt.   With unemployment at 26%, youth unemployment at 50%, GDP down 26% from the pre-crisis level and overall consumer spending down some 40% ( given that Greece was running a Balance of Payments deficit of 15% before the crisis but their Balance of Payments is now in surplus) Syriza had the only credible redemption plan i.e. that Greece cannot redeem its economy by further debt but by negotiating a substantial debt write-off with their creditors,   The false assumption that the Greeks will agree to run a large fiscal surplus for a generation to back pay money that creditor governments used to rescue their private lenders from their folly is a big delusion.

Yet Europe cannot afford to give Greece what it needs.   If such bilateral EU/Greece agreement were to be reached that would give a big boost to Eurosceptics in Spain France and Italy so that rather than solving a problem they would be creating bigger ones.

So Greece is not the problem.  It would be wrong for Europe to consider this problem strictly in terms of the blue and white horizontal striped flag.   The problem is the whole system and only a total holistic approach can deliver a sustainable long term solution.

Europe has two choices.     The easiest and the most politically convenient would be to call Syriza's bluff, refuse to negotiate anything substantial and use the debtors' prison approach to defy the democratic will of the Greek electorate and possible force Greece out the Eurozone where it will unavoidably default on its debt.   This will be very expensive to the creditor nations as they would in any case have to write off their debt or accept repayment in worthless Drachmas.  It would however send a strong signal to voters in France, Spain and Italy to be careful whom to vote for lest they finish in Greece's company out of the Euro.

This choice is also risky as it would defy the concept that the Euro is forever and will of itself create instability which could make the Euro dissolution a self-fulfilling prophecy.

The other choice is politically very difficult for the creditor nations but unavoidable if they mean to continue to enjoy the great benefits they are earnings from the Euro through the external competitiveness compared to what this what have been if they still had their Marks, Florins, Schillings or Francs.

Here the solution cannot be Greek focused.  It has to encompass all debtor nations whose debt to GDP exceeds 110%  ( as agreed by the eurozone ministers in 2012).    All this debt needs to be transferred to the EMS who will refund cost to the holders and the EMS will convert this debt into  notes bearing no interest but participating on a contingent basis on the GDP performance of debtor nation beyond the Euro average and with capital repayment spread over 50 years with a large front loaded moratorium.

How will the EMS finance this?    In part at least by including the principle that Euroarea countries who run a Balance of Payments surplus, so benefiting from the competitiveness generated by the Euro system, have to make defined contributions into the ESM fund for potential losses on their contingent exposure.

Obviously the debtor nations have to do their part too.  Any suggestion by Syriza that they go back to their old ways of hiring unnecessary employees into government service is a non-starter.   Debtor nations have to commit to run a moderate primary surplus by delivering their economy efficient by taking internal measures i.e. fight corruption, collect taxes as due, create the right environment for private investment and remove bureaucratic waste.

Greece and debtor nations need to do this for their own sake and not for the sake of their creditors.

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