Greece has faced a de facto default. The crisis background is characteristic of a country integrated into an economic bloc with much stronger economies, with the Brussels market regulator having a finger in the pie.
Here are a few facts. The steel production in Greece was reduced by 30 percent by a decision of the European Union. The situation with agriculture can be described with quite a dramatic example. In late 1990s, Greece produced over 1.3 million tons of cotton annually while its quote in 2011 was 782,000 tons. It was an extreme case, but serious restrictions were imposed on almost all the sectors of agriculture. In other words, if anyone thinks that it is comfortable and of honor to be an agrarian appendage of the European Union, they are completely mistaken.
Instead, Greece was offered “equal” competition at quite different categories, an over- appreciated rate of EUR that suffocated even Germany’s export, and as anesthetics - subsidies and loans that among others enabled “discarding the unnecessary hands” in the government sector and the early pension age. The trade balance was more than disturbing - in 2007 export totaled 17.4 billion EUR amid 58.9 billion EUR import. Such ratio had persisted for long. The country’s state debt kept growing and was refunded at the expense of new borrowings. However, in 2008, debt pyramids crashed down everywhere.
In 2009, GDP of Greece suffered a 3.3percent decline. On April 23 2010, Greece officially appealed to EU for assistance requesting 45 billion EUR. On April 27, S&P lowered its rating on Greece’s debt from BB+ to BBB- (BB or lower rated bonds are considered highly profitable and risky (junk-rated)) . This had quite natural consequences. Cost of borrowings for Greece increased – yield of two-year bonds increased to 15percent , that one five-year bonds – to 10.6percent (higher than in Ukraine – 7.1percent ), and the yield of ten-year ones grew to 7.9percent . The Greek bank shares suffered their worst one-day loss – by 9percent.
Actually, the Greek crisis triggered a growth of borrowings for Portugal - the second most problematic country in the Eurozone, where two-year bonds increased by more than 20percent (from 4.16percent to 5.23percent), and a decline of stock markets of the key European countries. France's CAC 40 was down 3.8percent and Germany's DAX - 2.7percent. Later, a similar scenario repeated.
The story about “saving” the Greek economy started, with media outside Greece reporting on how hardworking Germans fed lazy Greeks. Looking ahead, we would like to say that for Greece it would be better if there were simply no salvagers like hardworking Germans. The optimal way out of the country would be a default in 2010, withdrawal from the Eurozone and resumption of growth after inevitable crisis. However, as it was mentioned above, even the first signs of problems in Greece had seriously affected its neighbors in Southern Europe.
The first “austerity” plan for Greece was approved in May 2010 and provided for a bailout of 110 billion EUR by 2014. It was supposed that the country would return to the international markets of mid-term and long-term borrowings as early as in 2012 and would be able to gradually refund its debts. As to resumption of the economic growth, it was anticipated as early as in 2011.
The austerity measures in Greece looked to freeze all public sector salaries, reduce the salaries of officials by 8 percent (after nearly as much reduction at the beginning of the year – a total of 15 percent), equalize the pension age for men and women – at 65 – by 2015, and increase the excise tax for alcohol, petrol, and tobacco by 10 percent.
The second measure was another increase of the VAT (which de-facto led to price hikes ) and a range of other taxation initiative, freezing of government investments, privatization and liberalization of the energy market. The corporate tax fell to 20 percent (from 24 percent at that moment, and 25 percent a year ago).
The hidden dangers of the taxation reform were that the reduction of the corporate tax applied to a very narrow and not so “national” sector of economy (solid companies along with a huge number of small enterprises in the Greek market are monopolized). A VAT growth and reduction of the list of the sectors enjoying preferential rate of VAT tangibly pressed the trade and tourism sectors. It is not hard to guess what the Greeks thought of the need to pay from their own pockets for the non-Greek “fat-cats.”
The austerity measures proved mythical. The experience of the 2008 crisis made investors be much more cautious when dealing with problematic countries. To pay off the old and “inexpensive” debts, Greece had to borrow new and more expensive funds, with the growing taxation pressure having accelerated the economic decline. Actually, GDP fell by 5.4 percent, the number of the unemployed increased by 100,000 people (accounting for more than 11 percent of the employable population).
Eventually, the repay exceeded 350 billion, amid falling credit ratings of Greece
- This time the credit rating was downgraded by 7 points to an obviously junk status (CC). The country had to develop another plan in summer of 2011 and correct it later in October. The second plan anticipated financing for Greece from the IMF and the Berlin-managed European Financial Stability Facility. The total volume of financing was to be increased to 130 billon EUR through 2015 (IMF’s financing accounted for 28 billion EUR - $36.7 billion of total). In exchange, the country was required to agree with private investors over debt restructuring i.e. a debt buyback of 50% (100 billion EUR) as part of the PSI (private sector involvement).
GDP of Greece fell 7.1 percent in 2011, amid 21 percent growth of unemployment.
In February 2012, the Eurozone finance ministers approved the plan. An agreement was made with private investors on a debt payback of 50%. In fact, 86 percent of the holders of a 177 billion EUR package of the Greek government bonds agreed on the debt restructuring willy-nilly. Later, in March 2012, the so-called collective action clause (CAC) was implemented and the PSI participation rate was increased to 95.7 percent in an enforcement procedure.
In fact, the plan was even over-fulfilled and private investors lost 106 billion EUR having agreed to receive 53.5 percent with an extension of the repayment term to 30 years. Actually, the direct loss and missed benefits totaled 75 percent.
As a result, 75 percent of the debt holders were Eurozone government organizations and the IMF that had little taste for charity. The IMF immediately recommended Greece to reduce the VAT and bring it back to 19-20 percent (in 2010 the “donor” funds were provided for budget deficit reduction that implied a VAT hike).
For the corrected plan of assistance that inherently came down to expropriation of private investors, Greece paid with mass layoffs in the public sector, a 22 percent reduction of the minimal wage, a 5-15 percent reduction of pensions, a 20-30 percent reduction of salaries in public sectors and increase of the pension age to 67.
The budget allocations for drugs were reduced from 4.7 billion EUR in 2010 to 2.88 billion EUR in 2012 and to 2 billion EUR in 2014. The corporate tax exceeded the pre-crisis level growing to 26 percent.
GDP fell 6.6 percent in 2012, with the unemployment reaching 27 percent.
During the following two years the Greek economy had “tested the bottom” – in 2013 economic decline totaled 3.3percent, in 2014 the European Commission registered a 1 percent growth. As imports fell, the trade balance became positive in 2012. Unemployment reached the highest ever level in mid-2013 (28 percent) and fell to 26 percent at the beginning of 2015. Yet, the formal employment did not mean a true employment, for instance, doctors in rural communities in Greece were paid their wages once in six months.
This was backed with years of efforts to make the hard-line European Commission understand that if the Greek public catering sector is deprived of VAT preferences, the price hike in the indigent country will lead to a disproportional outflow of visitors and the Athens will face reduction of incomes. However, the European Commission behaved like the Reich soldiers on the occupied territory when even the wrong instruction of a German could be cancelled - Übermensch is infallible.
Meantime, the Greek economy stopped falling, which became a reason for the European bureaucracy to push it down the stairs again.
The terms of the next tranche were as follows: liquidation of all the options for early retirement, increase of fines for early retirement, and restriction of assistance to the extremely vulnerable pensioners.
In addition, it was required to increase the corporate tax to 28 percent. VAT preferences were to be cancelled for many sectors, including for the notorious restaurant business and the islands that earlier enjoyed the VAT preferences, as Greece considered it necessary for the tourism sector. The local VAT preferences recompensed the transport costs and infrastructure shortcomings, which is reasonable. By cancelling it, Greece would have an analogue of the native monotowns or something very close to it.
Government of Tsipras that came to power after the parliamentary elections earlier this year tried to dispute the abolishment of VAT preference for the island and suggested increasing the corporate tax by additional one percent instead of halting the assistance to the vulnerable pensioners among other similar measures. However, “the negotiations” therein were just formal, as Tsipras said (quite believably) the opponents actually refused to discuss the issue. Observers say Brussels perceived the government of the Left in Greece as a challenge and decided “to crush that demarche in the bud.”
Everyone knows what happened next. The Greek crisis story breaks at least several stereotypes. First, the myth on “hardworking Germans” and the EU as a victim of “the Lazy Greeks” is just myth. In fact, they gave fish to Greeks and seized the fishing rod, and then they began to seize the fish too. The EU did not miss the opportunity to demonstrate red tape and usury approach in the Greek crisis.
Second, the fairly criticized IMF appeared to be quite a compassionate and responsible organization comparing to the European Commission that showed a mix of incompetence and self-conceit. A grotesque Fourth Reich as it is. In this sense, we should not be surprises either at their specific manner to applying their internal regulations where they even have not been approved or at the “fair” indignation of “partners” over RETALIATORY and symmetric sanctions.
Third, the Greek scenario clearly demonstrates the true price of the paranoia over all-mighty “banksters” and “speculators,” global fight of Rothschilds and Rockefellers and Runet’s other everyday absurdity. In fact, what we can see is quite open expropriation and indifferent attitude of the Brussels bureaucrats to private interests. That “calm” attitude of Europe to the property rights is a result of waves of nationalizations and privatizations and applies to “outsiders.” The property rights can fall a victim to political decisions at any moment.
Perhaps, one of such decisions is the decision to crush Tsipras’ Government, though it would have evident unpleasant side effects. Along with short-term problems of single currency and markets, Greece’s default and its withdrawal from the Eurozone would automatically result in a rise of the debt service cost for its PIGS (Portugal, Spain, Italy) neighbors. In fact, a crisis in Spain or Italy will be disastrous for the Eurozone.
As to Greece, for it the riot is not as absurd as it may seem. Besides the evident “hostage effect” – the post-Greek problems of its Mediterranean neighbors may turn much more costly for the “hardworking Germans” than a partly remission of the Greek debts would do, as the crisis has fundamentally modified the structure of its foreign trade - EU now accounts for less than 1/3 of the country’s total export. Foreign financing, not considering the debt factor, is not critical any longer.
Yet, withdrawal from the Eurozone is not the same as withdrawal from the EU. Greece will preserve the right to vote in the Organization. At the same time, the decisions on a wide range of issues need a consensus. In other words, the Greek sabotage was fair. Let us wait and see how successful it will be.
EADaily Analysis