Wednesday, April 29, 2015

After the Game of Chicken was (supposedly) over (what to do with Greece)

Wow, talk about your way of thinking being validated! After my last foray in the metaphysical realm, which culminated Yesterday with the end of my series about dualism in the XXIst Century (don’t jump ship yet! I swore I was finished and I am!) I had started writing an update on my series in the Greek tragedy, and when taking in my dose of good journalism in the GNoOT I find this piece of blatant plagiarism: The James Dean movie that explains the Greek debt negotiations A catchy headline, isn’t it? Just may be too reminiscing of this one, from yours truly: Playing a game of chicken with your country or may be this other one: The game of chicken final outcome

Not that I think that Mr. Neil Irwin actually read any of my posts two months ago, was dumbfounded by their brilliance and has bid his time until appropriating the idea (without giving me proper recognition), poor me. Just shows that memes are limited, and probably all the ones with even a minimal brand recognition and minuscule potential for pop culture cross reference are already in use. As it is, one of my recurrent nightmares lately is adroitly perusing the Internet a few hours before having to publicly defend my dissertation (which I hope happens soon enough) and discovering with horror some obscure publication from a few years ago that contains all the arguments I have painfully developed over the best part of the last six years…

Now back to the matter at hand, the Greek negotiations seem again close to a standstill (you may remember two months ago they were greeted as the second coming, when I already branded them as a piece of irrelevant skullduggery whose only achievement was to kick the can down the road for a couple of months, and barely buying time until the next big payment came due, which happens to be right about now) and the markets are panicking again at the prospect of a Grexit, a Greccident or even a controlled default without Greece leaving the euro (a Grefault?). Panicking up to a point, that is, as equities are not as down as they were in February, when it seemed no agreement was possible between the newly elected Greek government and the Troika.

Time then to revisit how my predictions have stood the test of time (no biggie they have been mostly validated, predicting the obvious in the short term has no special merit) and dust off the old crystal ball to give some hint about how things may develop. But first a nod to my friend Yannis Varoufakis, the “erratic Marxist” (in his own words), which has been demoted as head negotiator of the Greek government to be substituted by the deputy foreign affairs minister Euclid Tsakalotos (which will need the analytic capabilities of his original namesake to be able to find the straightest way out of the current mess –knowing full well the difference between a theorem and the axioms it is derived from, btw). His sacking may have temporarily increased the price (and decreased the yield) of Greek bonds, but sympathetic observers like me will miss his gumption (even if his infamous photograph disrespectfully showing his middle finger was fake, it is already revealing it could be considered legit).

What I said back then could be equally said now: no country can be asked to keep a primary surplus of 4.5% as long as the eye can see. Want proof? Let’s take a look at the German (those paragons of uprighty fiscal virtue!) deficits of the last 9 years:

Even now, when the rest of the world (and their own citizens) are paying the state money to keep their savings (with negative yields their creditors essentially accept to be paid back less than what they advanced in exchange for the supposed security the German state provides them with) and with their economy “expanding” (I have to use quotes as the sclerotic societies of Europe are not capable of much expansion) they can’t go much higher than 0.7% surplus, in a society with a super-healthy tax base, with virtually no tax evasion and a culture of transparence and trustworthiness. Expecting Greece, with its culture of tax dodging (from the super-rich to the everyday public servant), its insufficient means of fiscal enforcement and its lack of adequate record-keeping (even real state is thoroughly subject to dispute) to generate a surplus (even after excluding debt payments) of 4.5% never had any chance of happening.
But of course, you may say, that is precisely the state of things that has to be changed, and the only way to change them, to jerk the Greek electorate out of their complacency and their systematic acquiescence to be fooled by a political class that for decades has been telling them they could have many things in exchange for nothing and that painful choices (bread or circus?) could be postponed indefinitely. And the only way to affect such change is supposed to be to force austerity upon them until they renounce their wayward ways and accept that living frugally and within their means is the only way to economic bliss? Well, sorry to break the news to any bozo that thinks economy is a morality play (which unfailingly consider him/ herself to be in the side of virtue, and thus deserving only rewards, whilst is always other country/ race/ class who deserves to be punished by their sins), but no economy has ever, in the whole history of the human species, reformed itself through fiscal prudence imposed from outside. Conquest, plunder, pillaging, raids by external enemies that razed the villages and escaped with booty and enslaved populations have historically shown some promise in forcing societies to change their mores and become more prudent, increase their productivity and be more forward-looking (to escape from the miseries of the present?) and less lazy (the lazy tend to be overrepresented between the massacred). But the threat of devaluation? Not much of an incentive.

Want proof that living beyond one’s means is so deeply embedded in modern statecraft there is a whole school of economics devoted to its justification? Look no further than the current dominant center of the World-System, the almighty USoA. Except for the small blip of the second Clinton presidency, they have been in deficit for most of my adult life, and intend to be until the Sun becomes a red giant and Earth is obliterated (give or take a few years):

Of course, that has created a whole subspecies of political pundit, the “deficit scold” that specializes in predicting the “debasement of the dollar”, the loss of confidence of international investors and runaway inflation any day now if there is not a drastic course correction and the deficit is immediately curbed (usually through savage cuts to the “less favored” segments of society –the growing number of outright paupers in one of the world’s most opulent societies- which happen to belong disproportionally to a race different from that of the pundit)… my point being that continued deficits do not seem to imperil the well being of a polity to the point we are led to believe by some. And the protestations to the contrary normally are tinged with more than a scent of certain type of “morality” that sees as unacceptable any redistribution to “those people”, but doesn’t have any qualm to funnel as many funds as needed to much costlier (and less justifiable on ethical grounds) military operations and equipment.   

So back to my original point, threatening Greece with an impossible to meet condition of fiscal balance is not likely to be of much help inducing them to reform, and the condition never made much sense in the first place, so I would expect it to be substantially relaxed in any scenario of the current impasse resolution.

Of course, the Troika knows it, and the only reason they keep it nominally on the table is because it is their main bargaining chip, what they will in the end offer for Tsipras and his boys to show their electorate. The real leverage they have (and it is a mighty leverage) is the “power of the purse”. If Greece tries to gain the concession of a lower surplus target too cheaply, they can always threaten to stop sending money their way, condemning them to default, amid an ugly chaos of bank failures, (increased) capital flight, if there is some capital left in the country and most likely currency change (as they would be forced out of the euro). After that there would be massive devaluation, which (may be) would cause a significant competitiveness gain, and potentially a rebound of economic activity, returning to the path of economic growth. Of course, nobody knows exactly how it would play out: how deep would be the chaos, what the impact in the normal functioning of society would be (lights going off, surgeries not being performed, schools not opening as the public sector sorted out who was being paid and how much…), how long would it take for the new (or old) currency to take hold, how much would the economy contract (further and atop an approximate fall of around 20% due to austerity in the last five years), how long it would take for the inevitable economic recovery after the slump and how robust would that recovery be (when would the Greek economy recover its pre-crisis level). No wonder the Greeks are scared shitless of being thrown out of the euro, but the rest of Europe shouldn’t be too complacent; as Varoufakis said, “everybody that thinks he knows what the consequences of a Greek exit would be is being delusional”.

Because after that Grexit it would have become abundantly clear to any creditor that the euro is an artificial construct with clay feet, and that a euro in a Portuguese bank is by no means the same as a euro in a German bank (as it was not definitely the same as a euro in a Greek bank, which happened to be converted into drachmas without the poor creditor being able to do much about it). Think for a moment what that would do to the interest rates in all the periphery countries, that have grown for a couple decades since the introduction of the common currency thanks to being awarded the same interest rates as Germany…

So the Greeks have some leverage after all. If they default it will be mayhem and havoc, do not pay heed to analysts telling you that most of the Greek debt is nowadays in the hands of institutional investors that can take the hit of writing it off without serious impact to their balances. It is not the Greek debt that matters, it’s the chain of Irish, Portuguese, Spanish (Italian? French?) debt that would immediately demand a much higher yield in return for the (rightly so) perceived risk of holding it, given the Greek precedent, that would in turn send their economies, not yet fully recovered from 2008, in a tailspin that would make their anemic growth of the last two years look like a skyrocketing ascent.  

This is why, regardless of what the bookies say (some betting parlors in London have stopped taking bets against Greece, as the odds were already considered by the market to be so overwhelmingly against it) I still think it more likely than not that an agreement will be reached. It speaks poorly of the negotiators' abilities they have not been able to do so yet (sorry Yannis, I’m throwing you under the bus here), the overall shape of such agreement being quite evident for some time now: the Troika will relax the primary surplus target (to something in the vicinity of 0.5-1.5% of GDP) and Greece will commit to a mildly unpopular program of continued austerity (even that reduced surplus target is not going to leave them much elbow room) that will be made more palatable to the electorate with some more or less populist morsels (from raising taxes to the super rich to allowing for some increase in pensions, public sector salaries or public sector jobs). It is funny that what foreigners perceive as one of the easiest measures to adopt for a leftist party, the hardening of the laws against tax evasion and the closure of loopholes and deductions to increase the fiscal receipts, has been so far pursued in the faintest, less enthusiastic way. I wonder if it may have to do with tax evasion being centered, in most countries (but not in Greece), in the upper classes of society, whilst in the Hellenic republic it is so widespread between all classes of society that it is not seen by the have-nots as a measure to recover what those that have owe them, but as an unalloyed danger.

Now the really big question is, would that be the end of the story? I’m afraid not, as we are well beyond the AAOS point (when All Available Options Suck). No matter how lenient the troika ends up being with the surplus target, the Greeks are not going to comply with it. It may happen in one year, two years, three at most, but their economy is simply structurally unable, given their current productivity level, to compete internationally at the current prices. They do have a monopoly over sights of the Acropolis, the Piraeus and the Aegean islands, but the rents they are able to extract from those have an upper limit, and a dwindling one at that (there being so many competing sights in the world, at more affordable prices). They would need decades to regain the productivity needed to have a viable (from the economic standpoint) society, probably rewriting the social compact in the process. Much before that it will become apparent they only adopted half the “structural” measures agreed, they will keep on failing to meet the planned budgets and their cash needs will keep coming in much higher than expected, and we will need to replay this sorry play all over again. After they ensure enough cash for the transition, they should freely choose to leave the euro and look for their best interest outside the EU (by the way, so should Spain, Portugal and most likely Italy). But the post euro future of the periphery of Europe, and the re-ignition of the political project after the madness of its subordination to a failed economical one deserve a post of its own. 

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