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November 30, 2012, Friday

Greece’s ‘dark period’ not over yet

The third agreement between the Troika (European Commission-European Central Bank-International Monetary Fund [IMF]) and Greece was signed this week. The first one goes back to 2010, and the second one to a year ago. Both of them failed. Will the third work? As soon as the agreement was signed, Greek Prime Minister Antonis Samaras declared that the “dark period for Greece is over.” Unfortunately, I am not as optimistic as Mr. Samaras, and I think that the “dark period” for Greeks will continue for a long time.

When the second agreement was signed, I wrote for this column an article titled “Sisyphus and the Danaids” (March 4, 2012) in which I compared the Greeks to King Sisyphus and the Danaids to the Europeans. Sisyphus was punished by Zeus -- for many crimes -- to roll an immense boulder up a hill. Every time he was about to reach the top, however, the massive stone would roll back down, forcing him to begin again. The Danaids were the daughters of King Danaus, who were also condemned by Zeus -- for killing their husbands -- and sentenced to fill a leaky barrel for eternity. The punishments for Sisyphus and the Danaids are well known metaphors for useless efforts and unending frustration.

So, what has changed with the third agreement? Except for some details regarding the time spent for the planned stabilization and a limited debt structuring, almost nothing regarding the fundamentals of the problem. The Troika decided to disburse 44 billion euros in December, and the remaining amounts -- up to 100 billion euros -- will be disbursed under strict conditions. Greece committed to implementing radical tax reform in January, to firing thousands of additional public employees, privatizing public companies worth 50 billion euros and making its economy more market friendly. For its part, the Troika will lower the interest rates on official loans by 100 basic points (bps), postpone interest payment for 10 years as well as fiscal targets from 2014 to 2016, and asked Greece to buy back a limited part of its undervalued debt from the market.

Finally, it has given Greece much more time to stabilize its debt, which will reach two times its gross domestic product (GDP) by 2016, and only then start to decrease if the country can produce a budget surplus after interest payments of 4.5 percent of GDP and, above all, to realize sizable growth in the next decade. If all these targets are reached, its debt ratio will be back to 120 percent in 2020! I am not the only economist who thinks this is a Sisyphean task. Daniel Hanson wrote in The Wall Street Journal (Nov. 22) that “Greece's only option is default” given the state of Greek society.

Let me quote Hanson's description: “No stable consumer base exists to drive consumption demand, exports have fallen sharply and investment growth has been negative for more than five years. Investors would be foolish to bet on earning returns from Greece any time in the near future.” Let me add that recent statistics point out that this year only 20,000 homes have been constructed, while this number was 100,000 in 2007. Hanson notes that, according to the Greek Ministry of Health, the suicide rate was 40 percent higher in 2011 than in 2010, while the unemployment rate reached 25 percent, youth unemployment stands at 50 percent, and they are on an increasing path. Hanson believes (and I agree with him) that “stable governance and peaceful elections are not guaranteed, and so long as social conditions continue to deteriorate, political protests will grow larger and more violent. Recent polls claim that the electoral support for the neo-Nazi party climbed from 7 percent to 12 percent, while support for the leftist partners of the coalition government continues to vanish.”

From the beginning of the Greek debt crisis, I argued that there is no solution to the crisis but the exit of Greece from the eurozone in order to restore competitiveness and pave the way for growth through high devaluation while imposing severe fiscal discipline. As part of this option, large debt relief should be considered as the price to pay for mitigating the Greek threat to the eurozone. Recently, the IMF defended the second part of this option, a radical “hair cut,” in official Greek debt to make it sustainable. But the Germans refused, being afraid of the reaction of their taxpayers. I spent a few days this week in Berlin. Some influential German journalists I met with there were unanimous: Chancellor Angela Merkel cannot consider this option till the next elections, to be held in September 2013.

However, Moody's Investors Service said on Thursday that even with the agreed upon measures, “Greece's debt load remains unsustainable and the chance of a default high.” Admittedly, the Danaids will be continuing to try to fill up the leaky barrel.

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