Greece were the first of the PIGS to request a EU-IMF bail-out – with the threat of contagion, as Mack’s timeline records, leading to the construction of a wider mechanism which Ireland, eventually, availed of. The result, according to ECB executive Lorenzo Bini Smaghi, of the “choice of economic model” by “successive governments, and their voters”.
As Tim Garton Ash commented at the time, “The crisis of the eurozone has only just begun.”
A year on and, as BBC Europe editor Gavin Hewitt noted at the start of the week,
But as Europe stands on the threshold of this anniversary there is a growing belief that the bail-out has failed. It has bought time. Nothing more. Greece was heading for bankruptcy a year ago. It still is. It got a reprieve with a debt mountain that was about 300bn euros. It is higher now. The debt-to-GDP ratio is over 140% and heading towards 158%.
The Greek government, to be fair, embarked on a cultural revolution. The world of early retirement, holiday payments and tax evasion would be cleaned up. Over time the reforming zeal has faded. Austerity has reached its limits.
In a country that relies heavily on public spending the squeeze has dampened demand. Greece cannot escape the debt trap. The tighter the squeeze the more the economy contracts and the greater the debts pile up. GDP will shrink this year by 3%. Unemployment heads towards 14%.
Hans-Werner Sinn, the head of the IFO German think-tank, says “it is obvious Greece is insolvent”. He and a significant number of economists believe that a restructuring of Greek debt is coming. It is the truth that dare not speak its name in Brussels. As Mr Sinn puts it, “we need to put the debt on the table and free this country a little bit from the overwhelming debt burden”.
Perhaps… Yesterday Greece announced plans to attempt to raise 50billion euro [£44billion; $72billion] through the sale of state assets by 2015
Government stakes in the utility power company PPC, the telecom operator OTE and ATEbank will be sold off by 2015.
The government’s mid-term budget plan also aims to save 3bn euros, of which 2bn euros will come from cutting tax breaks.
The same day, still everyone’s hero, Robert Peston considered the potential damage a porcine default could cause
Finally, if the European Central Bank – for example – ends up incurring big losses on its substantial holdings of Greek, Portuguese and Irish debt, it can always be recapitalised by solvent eurozone nations, notably by Germany and France.
However this is to ignore the node of fragility in the financial system, the faultline – which is the banking industry.
In the financial system’s network of interconnecting assets and liabilities, it is the banks as a cluster that always have the potential to amplify the impact of debt writedowns, in a way that can wreak wider havoc.
That’s built into their main function, as maturity transformers. Since banks’ creditors can always demand their money back at whim, but banks can’t retrieve their loans from their creditors (homeowners, businesses, governments), bank losses above the norm can be painful both for banks and for the rest of us.
Any event that undermines confidence in the safety of money lent to banks, will – in a best case – make it more difficult for a bank to borrow and lend, and will, in the worst case, tip the bank into insolvency.
Which, of course, is what we saw on a global systemic scale from the summer of 2007 to the end of 2008.
As ever, read the whole thing.
Which brings me back to Ireland, and yesterday’s “carefully managed show of unity” by the EC/ECB/IMF and the Irish Government.
Structural ReformsProduct and Labour Market Reforms
- We are adopting policies to lower costs in sheltered sectors, thus boosting purchasing power and underpinning further competitiveness gains.
- The Government is due to consider a potential programme of asset disposals based on the Programme for Government and the Review Group on State Assets and Liabilities. The Government will discuss its plans with the European Commission, the IMF and the ECB when it has finalised its response to the Review. [added emphasis]
- We are committed to create conditions conducive to job creation through the Jobs Initiative, which will be announced in May.
- The reversal of the cut in the minimum wage will be reversed with the effect on business costs being offset by a reduction in employers’ PRSI.
- The review of the EROs/REAs and other measures to increase competition in sheltered sectors of the economy (these measures are not conditional on each other but are partof a comprehensive package designed to make work pay and improve the competitiveness of the economy).
The question is, do they still all know what to do? Even if they can’t get re-elected once they’ve done it?
Or will domestic political pressures, in Ireland and elsewhere, hold sway?