The Greek Tragedy

The IMF staff documents relating to the “bail out” of Greece make for scary reading.

http://www.imf.org/external/pubs/ft/scr/2010/cr10110.pdf

The scale of the economic contraction being imposed through this “solution” is staggering. On top of 2% contraction of real GDP in 2009, there will be a decline of 9% over the next several years, with 6.6% of that coming in 2010 and 2011.

The unemployment rate – now a high 9.4% – will soon soar past 14% to a peak of 15% in 2012, and come down only gradually.

The fiscal contraction 20101to 2013 will be an additional 11% of GDP on top of the 5%  already imposed – a mix of spending cuts (mainly falling on public sector wages and pensions); consumption tax increases; and improved tax collection.

The big hope here is that “internal devaluation” – a polite word for deep private sector wage cuts -  will prompt export growth and  an improved external balance.

21 comments

  • If that’s what they’re projecting, I wonder what will *really* happen.

    Presumably for as long as they keep the Euro, that wage-cut strategy can only work in sectors that aren’t very capital-intensive–which in turn means that it has an anti-development effect, basically. I mean, if you devalue your currency, then all your exports become cheaper, but if you just pay people less that only makes things cheaper to the extent that people’s pay is a big component of the price. In the absence of any kind of import controls or targeted subsidies, like in a “free trade” situation, surely that means you’re in effect preferentially helping exports involving the least amount of development and hollowing out the rest. They’re forcing them to underdevelop their own country.

    They’re also presumably making them trash the education system (public spending), which will help depress productivity, reducing any hope that gains in productivity could make them more competitive and mitigate that underdevelopment effect. It’s impressive–the hold of the financiers is so strong that they can get the world to push a country into the third world for the sake of their next quarter’s profits without anyone mainstream making a peep. It reminds me of an international version of the squeezing of the middle class. Over the last 30 years, people’s incomes within countries have polarized, with some of the middle class becoming working poor and a few others becoming wealthy. Now it seems they’re starting to squeeze out the “middle class” countries, pushing them down into poverty by stealing their stuff. But every time it makes the whole setup more volatile and depresses demand. How long before there’s nobody much left to squeeze?

  • duncan cameron

    This piece (via Martin Woolf) http://www.ceps.eu/book/when-financial-markets-force-too-much-austerity makes the important point that public sector debt was taken on to defend the financial sector, which now wants austerity.

  • Given the numbers of debt to GDP, I do wonder if anyone will actually start pointing fingers at the USA- without trembling. Could it be the reason why markets were so jittery last week?

    I guess it is easy to sacrifice one small developed country to keep the rest of us in line. I am truly amazed at how fast the global economic discourse can change- from stimulus to austerity- sometimes within the same sentence.

    We will never get out of this quagmire, without a full exposure of the black hole of the financial markets at the center. Preservation of markets at what cost- oh it on us all so tremendously seriously right now, for such a serious rethink of plausible alternatives. The next time the markets roar, for more, it is hard to see what will be left on the plains to feed them. Then the herd will be spooked into finally finding a new way.

    pt

  • Nobody’s forcing Greece to borrow more money. They can choose to default. However if they want to borrow those are the terms. Can’t really point the finger at the IMF as the bad guy here. When you’re effectively insolvent you paid loan shark rates no matter who you are. Greece made its bed now it lies in it. It’s really crappy for Greek people but they voted those profligate governments in, supported financially unsustainable policies, and avoided paying their taxes.

    Now it’s time to pay-up.

  • Even given these austerity measures, the plan is for the debt-to-GDP ratio to peak at 149% in 2013. That’s a pretty high number relative to any other Western country (Japan has its own currency and is special in other ways).

    Given that the founding agreements for the Euro stipulated that debt-to-GDP should not be higher than 60%, it’s not surprising that Greece is having to restructure the entire economy. They borrowed far too much to pay for social benefits they couldn’t really afford. The wonder is that the Germans and the IMF are willing to pay for the bailout.

  • Kelsey Kirkland

    Andrew, what are IMF conditions imposed on Greece viz., military expenditure ?

    This is the reason why Greek protesters are so angry.

    http://peoplesworld.org/world-notes-afghanistan-greece-egypt-south-africa-ecuador-cuba/

    Greece: Arms vendors first in line, parliamentarian charges

    “Green Party leader in the European Parliament Daniel Cohn-Bendit on May 7 accused Germany and France of forcing Greece to pay up on arms purchases from France and Germany as a condition for accepting the European Union’s 110-billion-euro bailout of the heavily indebted nation last week.
    As reported by Agence France-Presse, Cohn-Bendit learned of the arrangement, denied by French President Nicholas Sarkozy, in conversations with Greek Prime Minister George Papandreou. The preceding conservative Greek government of Kostas Karamanlis had contracted to purchase submarines, warships, helicopters and war planes worth billions of dollars from France. The Greek military, alleging significant military threat from regional rival Turkey, has emerged as a top European arms buyer.”

    Military expenditure was one of the underreported items (about 1/4the) by Greece, yet the media only blasted their public sector. The weapons industry is completely sequestered from discussion in economics and the practices of psycho-financiers. It is no coincidence this industry promotes leaders to high office’s which somehow happen to come from homes with strong dominant mothers and weak or absent fathers. Not everyone is a candidate in that scenario, nevertheless the cabal wants to exploit their suppressed resentment towards society. What can be expected when the father of psychology Sigmund Freud had a unhealthy relationship with money. Unbelievable, how the world lapped up his weird theories. Without a doubt, for a far better and cleaner and sensible explanation check out the “Phantoms in the brain” by V.s. B Ramachandaran.

    http://www.amazon.ca/Phantoms-Brai-Pb-V-s-Ramachandran/dp/0688172172/ref=sr_1_1?ie=UTF8&s=books&qid=1273782868&sr=1-1

    Incidentally, Sigmund Freud’s grandson Clement Freud worked as a liaison officer at Nuremberg trials.

    On a positive note, this historic moment Turkiye PM and Greece PM are holding high level meetings to discuss the armament issue.

  • It’s impressive–the hold of the financiers is so strong that they can get the world to push a country into the third world for the sake of their next quarter’s profits without anyone mainstream making a peep.

    It’s important to remember that the various Greek governments have put themselves in that grip. Loans aren’t gifts; lenders expect to be repaid. Even if all Greek government debts were forgiven, they’d still have a primary deficit of 8% of GDP to deal with.

    It’s true that Greek authorities have made the problem worse by joining the euro zone, this depriving themselves of the usual way of adjusting to asymmetric shocks (i.e., devaluation).

    But it’s hard to see how international financiers are to blame here. Unless the point is that they should have stopped lending to Greece long ago, forcing the Greek government to make these cuts earlier.

  • This a bigger problem. If creditors should be worried, its the US creditors(China, Saudi Arabia, Japan), who through the IMF, just partly bailed out Greece.

    How can there be confidence in the Us to be responsible in the future…

    If they were worried about off the balance seet debt in greece, through goldman. Phony accounting by Greek Government hand in hand with Wall Street Fat Cats.

    Then what about all the liabilities Freddy Mae and Freddy Mac that posted a recent 10 billion loss. There obligations are in the trillion, is not included in any balance sheet of the US goverment amonst others things.

    Jobs creation in the US is barly enough to sustain, new entrants. The jobs being created are furthering the trade deficit, impots over exports. The debt growth is outpacing US GDP.

    SS is in the red faced creating a not pretty phycological effect, too many investor ontop of additions to healthcare and immagration

    ““There should be a bipartisan interest in it, of taking measures that are quite reasonable measures — would not require any significant increase in taxes — to stabilize the outlook for Social Security for the indefinite future,” Mr. Volcker said.

    “There might not be any savings at all in the short run, but I think that psychologically, the fact that it would have a real impact over time is reassuring” to global markets and to foreign holders of American debt “that we can step up to this problem.”

    He and other speakers expressed fear that without some action in the next year or two that reduces deficits for decades to come, interest rates could spike, the dollar could lose value or some other financial crisis would occur.”

    Now we have gold setting a new high in dollars and euros depsite the rally in the USD. Which is different…

  • Loans aren’t gifts; lenders expect to be repaid.

    Interest isn’t a gift, either. Interest is paid to lenders to cover the possibility that sometimes they won’t be repaid.

  • Default risk is one component of the interest rate, sure. But not the only one.

  • And besides, the situation would only be marginally better if all the relevant interest rates were reset to zero.

  • Stephen. Has the notion ever crossed your mind that potentially running a country and civil society are a bit more complicated than counting beans. You excel at that- and as long as you keep coming on here with you one sided points of view, bean counters such as you and all that you represent shall be exposed.

    International financiers, helped hide the debt, they also started betting against them and raising rates to see them fail. SO you tell me that somehow they are not to blame? And if that is not enough, lets get back to something I mentioned, if Greece is being put through the social meat grinder by the likes of the thoughts that motivated you to write in to tell us of your phracked up one sided beliefs, then why are you not saying the same about the USA. Their debt is worse.

    Lets not kid ourselves, Greece might have done alright, if the financiers would not have thrown the entire global system into the drink with an implosion on the model that is at the heart of our system right now.

    In fact they were at 70% GDP before the crisis, but like every other developed country they were told to bail the banks and then spend.

    So you are such apologist.

    To shake up and dismantle the EU over some trivial amounts, imagine what short sighted crap you speak of, given the history of the EU. Sometimes I wonder about the economic moronic ideas out there, at what cost do we resolve ourselves to keep peace and order. Yes the system is falling apart, but to throw more fuel on it just plain lunacy. What happens when the EU falls apart and we open up that space that two world wars told us, we need to keep a lid on. The costs of such idiocy are could buy us the current Greek debt a 1000 or more times over. So before you go near your type writer, try and think would you!

    Phrack

  • And let me add,

    It took another trillion dollar promised bailout for markets to think maybe, just maybe it is okay to come back out and make something from nothing.

    I am not sure about you STephen, but lets be real clear- if you want to have green brick and mortar, smart machine type investment, we need to be able to force investment out of speculative bubbles and into the real. Despite all the complexity people attribute to the economic recession and growth, and how we get to sustainability- it is fairly easy – shut off the money for nothing casino culture. We have a whole world to discover through science, technology, sustainability and human achievements, but it takes investment. Real investment, that chases long term success. I would even take the silicon valley IPO internet type speculation, at least the internet was built with that wealth. At least some of it anyway.

    The international rules are seemingly evolving before our very eyes, and letting market forces governed by the mentality that got us here, to serve at the center of rationing out solutions is unfathomable.

  • Paul: Acquaint yourself with arithmetic. It is not your enemy.

  • Okay right- do you want be to do a factor analysis of the thoughts contained in your previous comment- seaching for some meaning that is relevant, then I will co a k- mean cluster analysis of those thoughts- should not take quite as long as I an used to. Then when that is complete I will feed the clustering into several independent categorical variables that rate you and I will perform a discriminant analysis to see how close your gray matter differs.

    Then I will take an MRI image of your brain and using a multinominal logistic regression see which category of mammal your brain sizes fits best.

    I may have to do a few optimax rotations and maybe one or two varimax rotations to see just where the factor loadings are becoming clearer to see exactly what the cluster centroids are discriminating on. I may adjust the squared euclidean distance to some other measure to compensate for your bean counting tendency.

    I could if you wanted write up a neural net routine that would feed in every comment you ever made on this site and then set the Support Vector Machine calibrations to compensate for your lack of civil society understanding and have it output some poetry that would probably extend a bit more of a nuance depth of emotion than you could most likely muster in real life!

    pt

  • lol I must admit Stephen, you can take a joke!

    So maybe there is some emotion lurking.

  • Just a follow up for my good chap Stephen, Greece announced today that they are contemplating legal action against several financial firms in the USA. Hmmmm, I guess maybe there is something you missed Stephen.

  • Kelsey Kirkland

    Isn’t it odd the Federal Reserve bailout program may end up contributing up to $400 million to the Big Three credit rating agencies – the one’s that gave AAA rating to Lehman’s a week before the collapse?

    http://www.ct.gov/ag/cwp/view.asp?A=3673&Q=440000

    The Connecticut Attorney General Richard Blumenthal launched a lawsuit in 2008 against the credit rating agencies for allegedly giving municipalities artificially low credit ratings costing millions of dollars to taxpayers in higher bond insurance and higher interest rates.

    All three credit rating agencies systematically and intentionally gave lower credit ratings to bonds issued by states, municipalities and other public entities as compared to corporate and other forms of debt with similar or even worse rates of default, Blumenthal alleges.

    http://www.ct.gov/ag/cwp/view.asp?a=2795&q=420390

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