Tag Archives: Greece

Strengthening of Eurostat Powers to Check National Accounts

We all know the background story – Greece had certain problems with its statistical data record, so to speak. Now the Council has adopted an amendment of the regulation on statistical data that is used by the Commission in the excessive deficit procedure. From now on the Commission service Eurostat will be entitled to have access to the accounts of government entities at central, state, local and social security levels, including the provision of underlying detailed accounting information, relevant statistical surveys and questionnaires and further related information.

This is a classical example of an ex-post strengthening of the regulatory framework. Let’s hope it works this time.

The Existential Crisis of the Euro – Where Did We Go Wrong?

The German government is on the forefront of an attempt to restrict the volatility of the euro exchange rate. First, the German financial regulator BaFin placed a unilateral ban on naked short-selling of eurozone sovereign debt instruments, with little effect. Second, Angela Merkel proposed a comprehensive reform of the stability and growth pact, with tougher rules of the game aiming to achieve one thing in particular: that member states bear the responsibility for a solid budget management. Third, Germany is hosting an international conference on financial market regulation in Berlin.

So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.

The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.

One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. according to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.

Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.

I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.

What Act of the Greek Tragedy?

It looks like the markets don’t really buy the “end of the Greek tragedy”. At the same time the eurozone member Slovakia will only vote on financial aid for Greece after the June national election.

Meanwhile the New Democracy party in Greece (the opposition to the left PASOK government) has obviously decided NOT to support the austerity measures.

So what is going on??? I am not sure.

Martin Wolf says that it is hard to believe that Greece can avoid debt restructuring. He also notes that several eurozone Member States have unsustainable fiscal deficits and rapidly rising debt ratios. Wolfgang Münchau says that the bilateral loans will have the so-called junior status, meaning that they will be repaid only after the repayment of existing Greek government bonds. He believes that this represents a real financial transfer from eurozone members (and particularly Germany) to Greece. He calls this „an absolute scandal“ and believes that the Bundestag could block a junior loan agreement.

This may mean a contagion, especially if the Greek situation is not resolved quickly. Spanish Prime Minister Zapatero has denied rumours that he’s preparing an aid package for Spain.

There is too much information being withheld, I think.

The Greek Bailout: the Details

The Greek bailout is here, and we have the details:

The financial package makes available € 110 billion to help Greece meet its financing needs, with euro area Member States ready to contribute for their part € 80 billion, and the rest provided by the IMF. The first disbursements will be made available before the payment obligations of the Greek government fall due on 19 May.

Euro area financial support will be provided under strong policy conditionality, on the basis of a programme which has been negotiated with the Greek authorities by the Commission and the IMF, in liaison with the ECB.

The programme will include the following measures:

  • Greece is subject to a check by IMF/EU each quarter;
  • 5pc point reduction in fiscal deficit in 2010;
  • Goal is to drive deficit down to 3% of GDP by end-2014;
  • Debt-to-GDP ratio is forecast to grow from 115% to 140% (but these are the Maastricht numbers. Add some 10pc point to get the total debt);
  • Individual measures include, another increase in VAT from 21 to 23% (plus increase for smaller VAT rates), 10% increase in excise taxes on fuel, cigarettes and drinks, a windfall tax, a property tax, near abolition of 13 and 14th month pay in the public sector, cut of Christmas and Easter bonuses, cuts in pensions, reducing early retirement.

The shortcomings of the plan according to Eurointelligence:

  • No public sector layoffs, or change of status of public sector job;
  • No complete removal of 13/14th month salary in public sector;
  • No removal of 13/14th month salary in private sector, meaning more unemployment;
  • No immediate privatisation of state companies;
  • No change to rule that caps dismissals to 4% of workforce, and no change to firing costs;
  • No anti tax-evasion mechanism.

I would also recommend reading an interview with one of my favourite philosophers, Jürgen Habermas, on the Greek bailout, the institutional challenges, and the German intransigence.

EU to Greece: Show Us the Reforms

The European Union has asked Greece to produce detailed plans for its budget deficit reduction targets for the period 2010-2012. This should be done this week, in order for the European Commission and the ECB to provide an assessment to eurozone Member States, which must approve unilaterally the release of credit funds for Greece.

8.5 billion of Greek debt payments come due on 19 May. Now the question is whether the Greek government can produce a plan that is acceptable for the German Bundestag on time. Greek financial minister George Papaconstantinou has hinted on the opportunity of bridge loans if the procedure for release of financing is too slow. But many analysts think that debt restructuring (a polite form of bankruptcy) may be necessary.

Meanwhile the prominent American economist and Harvard Professor Kenneth Rogoff says that at least one more country in the eurozone will need help from the IMF over the next two to three years. Other problematic cases include Ireland, Spain and Portugal. Mr. Rogoff said that:

“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame”.

Wolfgang Münchau says that this is going to be “the most important week” in the 11-year history of Europe’s monetary union.

Greece Formally Asks for Help

Greece has formally asked for financial assistance under the EU-IMF joint financial package.

The Greek finance minister, George Papaconstantinou, has sent a letter to Eurogroup President Jean-Claude Juncker, EU economy commissioner Olli Rehn and European Central Bank President Jean-Claude Trichet, requesting the activation of the support mechanism.

The request for aid must first be approved by the ECB and the European Commission. Then it must be approved unilaterally by all eurozone Member States.

European Commission, German Financial Regulator Follow Closely the Goldman Sachs Investigation

EUobserver reports that both the European Commission and the German financial regulator BaFin are following closely the investigation of the US investment bank Goldman Sachs (see the detailed legal analysis by Bill Singer).

UK’s Prime Minister Gordon Brown has also demanded investigation of the possible fraudulent activities of Goldman Sachs.

It is worth reminding that Goldman Sachs was also involved in providing help to the Greek government in order to hide an additional 1 billion US dollars in debt by currency swaps.