25 January 2015

Greece: the `1789’ moment - but via the ballot box rather than guillotine

The exit polls are predicting an upheaval though the precise magnitude will only become clear as election results are declared formally. But Syriza should be able to govern adequately.

The exit polls are predicting an upheaval though the precise magnitude will only become clear as election results are declared formally. It may yet be that Syriza has not won an outright majority in the 300-seat Parliament. Nonetheless, the people have spoken clearly and broken the mould of the ancient regime.

At the moment of writing, the projections are that Syrizia will only get 150 seats - precisely half the number of seats in the Parliament, so short of a absolute majority. Providing party discipline can be maintained, what are the realistic chances of all the other MPs combining to block Syriza actions? Quite small - after considering the huge array of political views likely to be represented in the Parliament. In practice, Syriza should be able to govern adequately.

What EU policy events will happen next? 

• Grexit risk will be swiftly and comprehensively dismissed – much to the chagrin of the British media. There appears to be no planning for Grexit: formally it would require a Treaty change – with all the delays and uncertainties that would leave the Greek banking system totally vulnerable to a ruinous run on deposits. Grexit could be achieved by leaving the EU – which would be quick. However, re-applying for membership could turn out to be a very lengthy process during which time Greece would be cut off from all EU funding via agricultural payments, structural funds, EIB loans etc. Further loan disbursements would stop and formal default would seem inevitable. These options are so unappetising that another route seems certain and Commissioner Moscovici has already said that planning has been done by the EU for many scenarios.

 

• Few observers seem aware of the scale of the debt relief already granted by the EU. To re-state my comments of last week: “The European Commission’s Autumn Forecast was very positive about the outlook for Greece. In 2016, Greece is expected to grow twice as fast as the euro area average, and its 3.7% growth would put it level pegging with Ireland as the top-performing economy. Employment would rise sharply and the unemployment rate fall from 27% last year to 22%. Correspondingly, the public debt ratio would fall from 175% of GDP to about 160%; hardly any borrowing from the rest of the world would be needed and the budget would be close to balance. Moreover, investment is set to boom. The government that can claim ownership of such a turnaround would earn great plaudits from the electors as `austerity’ would indeed have ended.

Cutting the annual cost of servicing the debt: Public debt interest charges peaked in 2011 at 7.3% of GDP and fell to 4.3% last year. With little fanfare, the EU has already extended the maturity of it loans from the EFSF to an average of 32 years; at an interest rate of 1.5% (basically the EFSF’s borrowing cost); and given a 10 year moratorium on interest payments. As EFSF CEO Klaus Regling put it, these policies produce “annual budget savings of €8.5 billion per year, or the equivalent of 4.5% of Greek GDP - year after year. Consequently, there is no debt overhang in Greece over the next 10-20 years, despite very high debt to GDP ratios.” As this feeds through fully, debt interest in 2016 should fall to 4.0% of GDP. Plenty of opportunity to declare `victory'.

What exactly is a “debt haircut”? Some further extension of maturities and interest moratorium would naturally reduce the “present value” of the debt. Any worthwhile politician should be able to portray that as a “haircut”, especially by comparing the present value with the level before the maturity extension/interest moratorium.

The alternative policy of forcing a default – perhaps associated with “Grexit” (though it has never been clear how that could be achieved within the existing EU Treaties) would create massive economic disruption. The absence of an interest moratorium for a decade would probably cause an increase in interest payments as the `new Greece’ might find it difficult to borrow in the markets at the same rate as the EFSF and pay interest every year from now on.”

• Eurogroup President Dijsselbloem told Germany’s Spiegel Online on Friday “There’s certain wriggle room to negotiate, to talk about the form of the adjustment programme…But just to ask for a credit without having to meet conditions - that won’t work.” That seems an entirely sensible policy as Grexit would surely be accompanied by a complete write-off of the loans from the EU to Greece – far more painful than a bit of `wriggling’.

 

Greek policy events: Perhaps the biggest policy conundrum is how Syriza will deal with the oligarchs and other such vested interests – the `1789 moment’. A deft solution should open the way to the economic reforms that the Troika have been demanding (and the ancient regime has resisted so bitterly) as the necessary conditions of making Greece into a functioning market economy. Bringing the whole of Greek society into the normal tax-paying orbit should yield major revenues that could be used to ease austerity quickly.

This market economy approach might seem improbable from a “Communist fire-brand” but is that an accurate description of Tzipras? The smell of power has already caused some rapid re-positioning. His article in the FT on 20 January was especially interesting: “We want to bring Greece to the level of a proper, democratic European country. Our manifesto, known as the Thessaloniki programme, contains a set of fiscally balanced short-term measures to mitigate the humanitarian crisis, restart the economy and get people back to work. Unlike previous governments, we will address factors within Greece that have perpetuated the crisis. We will stand up to the tax-evading economic oligarchy. We will ensure social justice and sustainable growth, in the context of a social market economy.”

The reality of power may now force further shifts – though perhaps tempered by the Syriza party’s membership. At first sight, none of this seems impossible for the EU to `wriggle’ its way round. The upside for the EU is immense: trigger a major revival of the Greek economy, banish fears of Grexit and demonstrate even further solidarity with those who finally may have elected a government that will deal with the actual problems.  Hope springs eternal, but this could be a game changer.

PS: An additional benefit - the advocates of `Brexit’ would find their arguments substantially undermined! 

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© Graham Bishop