Greece at the precipice-again.
As the year comes to an end, Greece has managed once again to move to the brink of economic disaster. The stock market fell precipitously, and the government bonds, already reduced by the credit agencies to below investment grade “Junk” status, saw interest rates rise to 9%.
The precipitating event was the third rejection of Prime Minister Antonis Sanaris’ nominee for President, Stavros Dimas. Dimas’ nomination was only able to reach 168 votes in the Parliament, 12 shy of the 180 needed. This rejection led to the call for a “snap election” to be held on January 25.
After six years of recession, Greece’s economy was showing a promising, if slow, recovery, despite the overall recession engulfing the rest of Europe. But the latest round of austerity policies failed to make enough of a dent in Greece’s unemployment rate, which had improved from a monumentally high 28%, only to 25.8%. The austerity policies were part of the financial bailouts of Greece by the so-called “Troika” of the International Monetary Fund, the European Central Bank and the Eurozone countries. So the rejection of Dimas was not only a rejection of P.M.Sanaris, but of the Troika’s bailout terms.
Recall that following its third straight recession, in 2010, with Greek public spending leading to a debt-to-GDP ratio of nearly 150%, and Greece about to go into default on their current debt, the Troika came to their rescue with a 110 billion euro bailout loan. As conditions for that bailout, Greece agreed to austerity measures and the privatization of many government assets. This bailout was intended to take care of the about-to-be defaulted government debt and satisfy other government needs until 2013. By the end of that time the recession had grown worse, the banks were about to fail, and a second bailout of 130 billion euros, which included a 48 billion bank bailout, was made. Terms this time required not only the austerity measures, some of which hadn’t been enacted, but that Greek government bond holders agree to new terms forgiving 53.5% of the money owed them, extend maturities, and lower their interest rates. Due to the continuing recession the Troika, in December of 2012, agreed to provide debt relief, and the IMF provided an additional 8.2 billion euros of loans to be executed between January, 2015 and March of 2016.
Improving economy has allowed Greece to sell some bonds to private buyers for the first time in years.
However, the IMF and Eurozone agencies have refused to make required payments under the terms of the bailout, or to renegotiate terms until a complete Greek government is in place. As Shakespeare said, “ay there’s the rub.”
Opposition to Prime Minister Sanaris and his presidential nominee comes from an unlikely alliance of the far-right nationalist politicians, who have pushed for Greece to withdraw from the European Union, and the leftist, some say radical leftist, Syriza Party, who have objected to the austerity measures. In a fluid situation, polls show Syriza with a small lead. Meanwhile, P.M. Sanaris claims to be sure of victory. Debt which was due at the end of December has been given a two-month reprieve, but a Syriza victory would likely result in the cessation of all payments by the Troika.
The current world-wide vogue of central bankers is clearly supply-side economics, with its “trickle down” underpinning. In my opinion the unemployment rate in Greece is unacceptable and yet reality requires that the “devil” must be dealt with. I feel that Greece’s long run interests would be best served by staying in the EU. The least obstacle-to-chaos path would seem to be the re-election of the Samaris coalition and then renegotiation with the Troika for direct measures to significantly reduce the unemployment rate, as a first priority. Some wiggle-room for additional public expenditures for those in need must also be a condition. Reality therapy is needed for both the Greeks as well as the Europeans. Meanwhile Greece stands, once again, at the edge of a precipice.