09.02.2012
Greek razor edge
A default by Greece would unleash chaos way beyond the euro zone, writes Eddie Ford
With one ‘deadline’ after another flashing by, the crisis in Greece continues to rage - it might even escalate. A catastrophic default still remains a very real possibility, whether in the immediate future or some time later.
As I write, Lucas Papademos, the technocratic prime minister - in reality the European Union bureaucracy’s man in Athens - still has not agreed to a package of austerity and ‘labour reforms’ (ie, attacks) that sufficiently please the European Commission, European Central Bank and International Monetary Fund troika: not enough cuts, not enough blood squeezed from the workers. Troika patience, and that of European leaders as a whole, is said to be running very thin. So much so that they could just press the eject button on Greece, leaving it no longer a member of the euro.
The central obstacle at the moment to any deal between the Greek government and the troika comes in the shape of the leaders of the three coalition partners who make up the ‘national unity’ government: George Papandreou’s Panhellenic Socialist Movement (Pasok); the mainstream centre-right New Democracy of Antonis Samaras; and the rightwing, populist-nationalist, anti-immigrant, anti-Turkish, Popular Orthodox Rally (Laos). At least two them are deeply unhappy with the austerity plans, especially Laos. Before heading into a meeting of the coalition leaders on February 6, Giorgos Karatzaferis, the Laos leader, declared that “we will not give in to ultimatums”. If the troika “doesn’t budge”, he asserted, then Laos “will not take the package”. He might even stick to his words, as the pressure builds up to just sign on the dotted line and like it or lump it.
No-one wants to give ground, yet someone must. And the odds are stacked in favour of the troika, of course. As one infuriated EC spokesman, Amadeu Altafaj-Tardio, put it - the “truth is we are already beyond deadline” and the “ball is in the court of the Greek authorities”. So just do what the troika wants and comply, little Greece.
Sticking points
Showing the tensions, a meeting of the party leaders and Papademos due to start on the night of February 7 was postponed to the next day - and even the time of that meeting kept being pushed back. Ostensibly, it had only one purpose - to approve the 50-page “final draft document” outlining the austerity measures demanded by the troika. But even at this late hour it is not absolutely guaranteed that the deal will be ratified or that the rightwing leaders will not demand even more negotiating time (it seems that Pasok has decided to swallow the bitter pill of further austerity).
According to the ever changing and improvised timetable, euro zone finance ministers scheduled a meeting for February 9, originally due to take place three days before. The aim was to “review” the budgetary plans contained in the “final draft document” so that the Greek parliament could vote on the measures at the weekend. Of course, even if the party leaders eventually concede to the troika’s demands, it is not an impossibility that parliament will reject them - disgruntled and angry Greek MPs might rebel. Events hang on a razor’s edge.
One of the main sticking points to date has been the troika’s insistence on a cut in the minimum wage. According to Altafaj-Tardio, the Greek minimum wage is over €100 a month higher than Spain’s and €200 more than in Portugal and so it should be cut by at least 20%. In addition, in order to satisfy the troika’s bailout demands, the Greek government was still “assessing” €1.3 billion of spending cuts for 2012 as part of total reductions of €3.3 billion. The government has already made plans for huge cuts in health, defence, local government subsidies and pensions, not to mention the axing of 15,000 civil service jobs by the end of the year - part of the 150,000 public sector posts scheduled to be cut by 2015.
Meanwhile, to make life even more difficult, there are the parallel negotiations with Greece’s private creditors. The Institute of International Finance - the group representing the majority of Greece’s global bond-holders - is apparently prepared to write off 70% of the value of current loans, which currently stands at €205 billion. But only, of course, if the troika package of cuts is securely in place. In turn, the troika will only authorise the next tranche of €130 billion bailout money if the Greek government has formally ratified the ‘reforms’ demanded - which is dependent on Samaras and Karatzaferis playing ball. Obviously, if the Greek government fails to get the money, then it cannot meet its €14.5 billion interest repayment on March 20 and will therefore be in default - almost certainly leading to its exit from the euro zone.
What we are seeing in Athens is a high-risk game of poker. The Greek government, or at least the coalition party leaders, are hoping that the troika will blink first and row back on some of the austerity measures. Greece may be tiny and only constitute about 2% of total EU GDP, but the calculation is that forcing the country out of the euro zone would have ruinous repercussions for the whole EU and it is therefore in the troika’s interest to compromise further. Or so the Greek government hopes.
But, whatever exactly happens over the next few days and weeks, the unthinkable is now routinely thought about - which is ‘Grexit’, to use the term coined by Willem Buiter, the chief economist at Citigroup. He now reckons there is a 50% chance of a Grexit over the next 18 months, up from his previous estimate of just 25%-30%. This is because, he argues, the “willingness of euro area creditors to continue providing further support to Greece despite Greek non-compliance with programme conditionality” has “fallen substantially”. He therefore recommends that the Greek government must either “exhibit a minimum degree of compliance” with the fiscal and structural conditions of the bailout programme or “choose to temporarily cede authority” over certain budgetary decisions to EU representatives.
Yet how likely is either option? Fury and outrage erupted last week over the “sick” idea of an EU commissioner effectively running the Greek economy, all the better to pound the working class with yet another round of cuts. But something has to give.
Social explosion
You can see why the Greek party leaders have dragged their feet. With elections pencilled in for April, to be seen signing up to more savage cuts is to run the risk of becoming utterly hated - if they are not already. However, their reluctance to put their names to the troika’s “final draft document” is even more basic than that; fear of the massive social explosion that could occur if the troika pushes Athens too far, sweeping them all away. Not for nothing did Karatzaferis pronounce that he was not “going to contribute to the explosion of a revolution” by backing a “wretchedness that will then spread across Europe”. Time will tell if this reactionary’s nightmares come true.
We saw possible intimations of this explosion on February 7, as the coalition partners held yet another fraught meeting, with a 24-hour national strike called by the country’s two main unions - the public sector Civil Servants Confederation (ADEDY) and its private sector sister, the General Confederation of Greek Workers (GSEE). Between them they represent 2.5 million workers or roughly half the country’s workforce. Some 20,000 took part in demonstrations in Athens, protesting against the prospect of further job losses and budget cuts, which had driven the economy into a downward - death - spiral.
Workers were originally told that the job losses could be attained through “staff attrition” (or ‘natural wastage’). No compulsory redundancies. However, Dimitris Reppas, the public sector reform minister, has now stated that the job cuts could be carried out under a new law introduced on February 6 allowing public sector workers to be dismissed in a more or less arbitrary fashion. Naturally though, being a good social democrat, he was “opposed to indiscriminate firings” - rather, he explained, the reduction in the workforce is “strictly connected with the restructuring of services and organisations at each ministry”. How reassuring.
Yannis Panagopoulos, president of the GSEE, stated that the unions have “moved beyond negotiation” now, as any further austerity measures would utterly “destroy” the Greece economy. For him, the troika’s demands for 20%-30% cuts in private sector wages are the “chronicle of a death foretold” and represent a “brutal cynical blackmail against an entire nation” - the cuts to private sector wages will affect people on the minimum wage as well and in general increase the number of people now living below the poverty line. According to the unions, some 1.5 million people in Greece have no income - the troika insists that there is no alternative but to add to this destitution. Similarly, an ADEDY statement castigated the austerity regime for “turning workers into pariahs, jobless people and pensioners into paupers”. This “must be stopped at any cost”.
On the demonstrations, protestors tussled with police outside parliament, chanting: “No to mediaeval labour conditions!” There is wide resentment against German chancellor Angela Merkel - the most militant advocate of cuts/austerity and key architect of the euro zone’s new “fiscal compact” (the Treaty on Stability, Coordination and Governance), who almost boasted about how “parliamentary majorities” will not change anything from now on: the EU bureaucracy will always win.
Anger obviously mounting, Nikos Sofianos - who sits on the central committee of Communist Party of Greece (KKE) - told a local radio station on the morning of the demonstrations that the Papademos government is “murderous”, and pledged that the KKE will “do everything in our power to stop this agreement with foreign lenders” being carried out. The troika - “We won’t let them pass”, he told his audience in demagogic fashion.
The real tragedy, of course, is that the KKE’s ‘solutions’ to the crisis in Greece - and Europe as a whole - would be just as disastrous for the working class as the troika’s austerity plans, if not more so. Withdrawal from EU “capitalist club” into splendid ‘socialist’ isolation: the ‘Albanianisation’ of Greece. A programme for true misery and impoverishment from the JV Stalin and Mao handbook.
Euro overboard?
Inevitably, divisions are opening up amongst the euro zone leaders and representatives. Merkel cuttingly remarked that she “honestly can’t understand how additional days will help” for Greece. “Time is of the essence” - given that a “lot is at stake for the entire euro zone”. A tetchy sentiment shared by French president Nicolas Sarkozy, who sternly noted that Greece’s leaders “have made commitments” and hence “must respect them scrupulously” - the deal with the troika “needs to be concluded”. EU officials have now said that the “full package” must be agreed with Greece and approved by the troika before February 15 at the very latest - yet another deadline.
Less patiently, the Dutch vice-president of the EC, Neelie Kroes, told the Volkskrant newspaper on February 7 that it is “absolutely not a case of man overboard if someone leaves the euro zone”. Going on, whether advisedly or not, she noted how we are always told that if a country “asks to get out” - like maybe Greece - then it is inevitable that the “whole edifice” will collapse. But this is “simply not true”, she maintained - the euro zone can live without Greece. She warned the Greek government that the conditions for a second bailout package had to be met - it was a case of “too few spending cuts, too little restructuring”. The Greeks have to realise, she lectured, that “we Dutch and we Germans can only sell emergency aid to Greece to our taxpayers if there is proof of good will” - the obvious suggestion being that there is precious little of that from Athens.
Kroes’s scathing comments seem to reflect those made by Jean-Claude Juncker, the chair of the euro group of finance ministers, in Der Spiegel the day before. Greece, he wrote, “could no longer expect solidarity from other euro zone members” if it failed to implement the “reforms” it has agreed to. Furthermore, he said, if all else fails, “in March they have to declare bankruptcy”. So it was essential for Athens to “get muscles”, he said, concluding with a barbed remark about the “elements of corruption at all levels of the administration” in Greece. How to make friends and influence people, EU-style.
However, doubtlessly alarmed by the aggressive tone adopted by his colleagues, José Manuel Barroso - president of the EC and EU vice-president - emphasised the costs of a Greek default and a possible speedy exit from the euro would be “much higher than the costs of continuing to support Greece”: it is “very important” to remember that, he stressed. Though it was equally as important, he pointed out, that Greece undertakes to “clearly” and “unambiguously” make the “necessary adjustment efforts”, as laid out by the troika. Good EU cop, bad EU cop.
Now everything hangs in the air. Juncker has openly backed a German plan premised on the idea that a proportion of future bailout money should be paid into an ‘escrow account’ that can only be used by the Greek government to repay its other, private-sector lenders. Some investors and EU officials have also suggested that any additional money needed to make Greek debt “sustainable” could come from the ECB, which holds a portfolio of around €40-50 billions worth of Greek paper (ie, debt). Unsurprisingly, such a notion is not too favourably looked upon by the German government.
Meanwhile, private investors are looking very nervously at Greece - whatever the eventual outcome, deal or no deal. If Greece defaults, chaotically or otherwise, they stand to lose a lot of money. But even if Greece does eventually come to an arrangement with the troika, they still stand to potentially lose substantial amounts of money - they are already looking at a 70% ‘haircut’. Who then is to say that they will not have to do the same in Portugal, Spain and Italy?
Perhaps most worrisome of all to those who have lent to Portugal, for example, is that Greece might well pass a law that would force a reluctant minority of bondholders opposed to the restructuring to participate nonetheless. Hence the wide speculation in the financial press that the Greek government is planning to retroactively adopt “collective-action clauses” that indeed bind the minority of creditors to the decisions of the majority. Such CAC clauses are a perfectly normal market practice when new bonds are issued, but retroactively inserting CACs in sovereign bonds via legislation is totally unprecedented. The upshot is that the private investors in Greece and elsewhere could end up being force-fed the same debt ‘restructuring’ terms that are on the table for the Greeks.
One thing is for sure. If Greece defaults and gets kicked out of the euro, this will be the equivalent of an economic and social nuclear bomb. The contagion would quickly spread to Portugal, Spain and Italy.