Greece’s Debt Crises Looms Large Again

Greece’s Debt Crises Looms Large Again

Greece’s Debt Crises Looms Large Again

Recall, that before the Italian banking crisis and referendum, before Brexit, there was Greece’s debt crisis, the 1st crack in the EU socialist armor, it has not been fixed.

If you wish to know why anti-EU sentiment and nationalism have developed in many of these countries you do not have to look at migration or other controversial topics. Just look at Greece and how it has fared after adopting the EU’s austerity terms.

The Greek experience with austerity-linked financial support from the EU has been painful and, ineffective. While Greece is on the periphery, its problems are hardwired into the whole of the EU, and those problems are spreading.

When the Greek debt crisis broke in Y 2010, Athens turned to the EU for help.

That assistance has been and is contingent on Athens making domestically unpopular reforms. Nearly 7 years, 13 austerity packages, and 3 bailouts now worth $366-B and running later, the Greek economy is still struggling.

The debt burden now registers at about 177% of GDP.

Non-performing loans total $119%, accounting for 45% of the country’s loans. Unemployment is still around 23%, and about 75% of unemployed people have been jobless for at least a year.

The Greek government regularly finds itself in a Catch-22.

Either it carries out unpopular European Central Bank (ECB) reforms, or it tries to keep the economy running without full backing from the EU. The very institution Athens initially looked to for help is now seen as dubious and problematic.

The Eurogroup recently met in Brussels and offered Greece some immediate short-term relief for its debt burden. The measures are supposed to facilitate debt repayments and forego an interest rate hike planned for next year.

If all goes according to plan, these measures will reduce Greece’s debt burden by 20% by Y 2060.

While this may be a practical timetable given the size of the debt, it is not the most realistic solution. A lot can happen in 43 years. The proposal does not give Greece the debt relief it seeks now.

Equally important is what did not happen at this meeting.

Greece wanted the Eurogroup to sign off on a 2nd review of the current bailout program. Athens and Brussels once again find themselves at an impasse over the reforms.

The Greek government wants to reintroduce collective bargaining and layoffs, as well as reduce the primary budget target to 2.5% of GDP in Y 2018. EU creditors are against the labor reforms and call for a budgetary surplus target of 3.5% in Y 2018, hence a standoff.

A successful bailout review would have opened 2 additional means through which Athens could access more credit. Athens was looking to use a successful review to justify the inclusion of Greek bonds in the EU’s QE (quantitative easing) program next year. Such a move would better position Greece to return to bond markets when its austerity package ends in mid-2018. The review would also pave the way for International Monetary Fund (IMF) participation in bailouts with Greece.

The IMF did not commit to the Y 2015 bailout but has been closely accompanying the program. The fund said it would participate in the program if this proves to be the final bailout, if Greece’s debt is deemed sustainable in the long term, and if Greece receives debt-relief measures.

The IMF argues the 3.5% target set by the EU is not sustainable in the medium term and either the target should be lowered or Greece would need more austerity measures. It has also called for a fixed-interest rate average of 1.5% for Eurozone loans to Greece for the next 30 to 40 years.

The Key obstacle to the EU-Greece talks and IMF participation is Germany.

German Finance Minister Wolfgang Schäuble has stated that reforms are a prerequisite for any EU funds, and he is staunchly against debt relief for Greece.

As the largest economy in the Eurozone, Germany is a major source of revenue for ECB funds. Given the combination of slowing global trade, high dependence on exports, and an influx of refugees, Germany cannot afford to continue funneling money into the EU to bail out other countries.

Such spending also would not sit well with the public as Germany enters an election year. At the same time, Berlin cannot allow a Eurozone economy to collapse or leave the monetary union. German exports depend on easy access to European markets, and the departure of a country from the Eurozone could jeopardize the common market.

And so the epic “Tug-of-War” between Greece and the EU continues as distrust of the EU mounts in Greece.

Last May, Greece passed austerity measures worth EUR 5.4-B ($5.7-B) that greatly impacted taxes, health services, public utilities, and pension funds.

The Greek government has stated that no more reforms will be accepted.

Meanwhile, Germany flexed its EU muscles on 8 December and convinced the single currency block to propose that EU countries in March 2017 should start sending migrants back to Greece as part of a larger effort to prevent asylum-seekers from moving North.

Such a move would exacerbate the political, social, and economic pressures already facing the Greek government.

Athens now runs the strong risk of not having the funds to pay its bills by June 2017.

This does not take into consideration large debt payments that are also due in July. A 4th bailout is not on the ECB’s radar, and after 7 years, Greece is running out of capital to enact further austerity reforms.

If the IMF and Germany can’t agree on terms for IMF participation in supporting Greece, the Eurozone will be forced to bear the full burden of propping up the Greek economy. The latter option is undesirable for members of the Eurozone as it will clash sharply with rising nationalist sentiments in countries both funding and receiving economic support.

The crises is rising in Europe, it foreshadows the collapse of the long running socialist experiment.

Merry Christmas, Happy Hanukkah and Good Wished for Success in Y 2017

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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