Greece: what's next?

I have put up a series posts addressing some issues that are being overlooked by the British media regarding Greece, this is the last one. The man may be completely psychotic but that doesn't prevent him from occasion posting something that is absolutely right. I *am* starting to feel like I'm talking to myself.


The "deal"

Greece is in the throws of executing the debt buyback as part of the "deal". The buyback is a precondition to the IMF participating in the next bailout and the Troika releasing the next tranche of the bailout money to Greece. The whole exercise is one of optics, with the IMF pretending that it is not violating its own charter on debt sustainability, the eurocrats continuing the charade in front of their own electorates that "Greece has been solved" (it only took 29 summits in two years !!!) and the ECB continuing to pretend that it is not in violation of the Lisbon Treaty that prohibits it from funding any EZ government spending .

The benefits from the debt buyback have been largely negated by the way the whole thing was handled (gift to hedge funds) but I have no doubt it will all be declared a success to allow the IMF to participate in the bailout. Even at the attractive (for hedge funds who bought on the cheap) prices offered by Greece, I anticipate there will be some holdouts (about 5bn euro) as the GGBs in question are under english law which can create significant legal issues for Greece and the EZ/ECB down the road therefore those will be paid at par. During the first PSI, about 6bn euro of hold outs of creditors holding english law GGBs got paid at par when everyone else "voluntarily" agreed to a 74pc haircut. Regardless, this does absolutely nothing towards achieving debt sustainability or returning Greece to solvency, or adding one euro of growth to Greece's economy.  Greece is a downward spiral without any good options in sight, their unemployment number now the highest in the EU at 26pc and a youth unemployment at an astounding 56pc.

The original amount of the bailout was supposed to be 35bn euros but the eurocrats, with Merkel leading the way, thought that releasing 44bn euros now (35bn this year, and 9bn in three tranches each month Jan thru Mar 2013) would keep the "Greek insolvency" topic off the front page of the newspapers as well as avoid having to go back to their own legislatures several times to approve subsequent pay outs. Most of this bailout money is going towards recapitalizing the complete insolvent Greek banks. Very little will go towards the economy, the money will be held in an account in Luxemburg under the control of Troika for disbursements, as will be all the revenues from the privatization program.

The Greek supreme court a couple of days ago ruled that the collection of ad hoc properties taxes, imposed as part of the memorandum of understanding, through the electricity bill (with the thread of having electricity cut off in case of non payment) unconstitutional but after scalding the supreme court justices in a speech in parliament Mr Stournaras (Finance Minister) (who needs the law when you are the law) announced that the ad hoc taxes would be collected by a special branch of the Tax Department anyways, with those not paying facing severe new fines. The beat goes on……




Political maneuvering

It is unlikely this coalition government will survive to the end of 2013. The impact of the latest austerity programme they committed to in the last memorandum hasn't even been felt by the public yet and the country is already a basket case. The coalition's popularity has only one way to go and that's down. It's already showing up in gallop polls where Syriza now leads by 5 points and even the extreme right neo-nazi party Golden Dawn scores higher than the once all powerful Pasok. There are also too many scandals unfolding at the moment for this government to survive. The collapse could come from any one evolving corruption story gaining traction, whether it be Mr Samaras (Prime Minister) funneling 11.5 million euro to a botanical institute (supposedly conducting research for plant deceases helping Greek farmers, unfortunately however most Greek farmers have never heard of it) run by his brother a short 22 days after he was elected PM, or Mr Venizelos concealing the contents of the "Lagarde List", or Mrs Skopouli (Health Minister) selling the nations blood bank at fire sale prices (when her husband was under a retainer and receiving significant research grants from major pharma companies who were involved in the sale).

In anticipation of this, the ruling coalition is planning to completely dissolve the two parties that have ruled Greece since the re-establishment of democracy in 1974 and form a new "pro europe" party in an attempt to stop the Syriza ascendancy. They hope that this repackaging of the same old faces under a new party name, not carrying the baggage of those two old parties, will sway public opinion. In line with the effort to stop Syriza, the ruling coalition will try to pass through parliament a change is Greece's electoral process. Under the current system Greece uses the "reinforced proportionality" electoral system whereby the leading party gets a "bonus" of 50 seats in the 300 seat strong Greek parliament. What the ruling coalition will propose is a change to "proportional representation" hoping to take the 50 bonus seats away from Syriza, the likely leading party if an election were to be held today.  The obstacles they are running into to make this change is that according to the Greek constitution, this change needs to be approved by 200 votes (out of 300) in parliament (the coalition only has 163 seats) and it is to take effect in the election following the next election (two elections down the road). If anything though, it has proven that nothing is beyond this ruling coalition, so I expect they can reach 200 votes by making "promises" to some of the smaller parties in parliament and get the change to apply to the next election justified on some "national emergency" measure. This hasn't played out yet but one thing is for certain, the political landscape in Greece is changing (depressions have a tendency to do that) with consequences on what happens next vis-a-vis Greece and Europe.

A race to November 2013

The situation in my view can be summed up as follows. Will Greece hold together as a society until the German elections in 2013? The bailout money seems enough to get them there but the economic situation is getting worse by the day, and that hasn't been addressed. This is a tough one to call because the country that invented democracy gave it all up recently with hardly a murmur for seven whole years when Junta took over in 1967 and stayed in power until 1974. And it would have probably stayed in power longer if to wasn't for the pubic outrage stemming from the innovation of Cyprus by Turkey. The situation is now different of course, and hungry people sooner or later tend to see clearly, but the heavy hand with which the government has imposed themselves on their society,  despite demonstrations, protests and public outcry, has been more heavy handed than the military junta. I'm not sure where the Greek public stands after getting accustomed to crony capitalism. General uprisings are not for everyone, even the feisty Irish swallowed paying for their banks' loses with hardly making a sound.

If we get to the German elections, then the Germans (and the rest of the eurocrats) have a decision to make, either admit to their taxpayers that they need to take loses on Greek loans so that Greece can continue the borrow and spend charade, or cut Greece loose from the euro. The Germans so far have proven to be terrified of a Greek euro exit, massive Target2 imbalances will do that to you, so my guess is that they are likely to promote an OSI right after Merkel gets selected (she is already warming them up to that). But a lot can change between now and then…..