In the last few days Greece and Cyprus occupied the headlines again in newspapers like The Wall Street Journal, the New York Times, and the Financial Times. I apologize for being the bearer of bad news, but the deus ex machina does not exist for Greece or anyone else (at least not at this present stage). For four years now the Greek economy has been in a depressionary limbo, but it seems that it has not sunk in yet that prosperity bought on credit is not real prosperity. The anchors on Greek TV channels sound like that someone cheated Greece of its entitlement regarding the new tranche from the troika (the EU, the ECB, and the IMF).
It seems that more than three years after the first tranche was given to Greece and after more than $330 billion in new loans, bonds’ haircuts, and numerous pronouncements that the situation has reached bottom, not only the bottom cannot be seen but the leviathan gaps of uncertainty, illiquidity, lack of jobs, shrinking incomes, and productivity are getting bigger and bigger.
The tranches have been used to bailout the perpetrators of the crisis (mostly foreign but also domestic banks), real structural reforms are still in absentia, investors are discouraged in putting their monies at work, while credit and real production keep declining. Under these circumstances we should not be surprised if GDP growth rate drops by another 5.2% this year and official unemployment reaches 29% (the unofficial well exceeds 33% currently).
What could a brief diagnosis of the Greek situation look like?
- Questionable faith in the rule of law
- A sclerotic state that suffocated the private sector while advanced the interests of special groups
- Too many regulations that created business atrophy, while allowed those special interests groups to become the fat cats due to government contracts
- An educational system that did not push for creative and interdisciplinary thinking, but rather produced mind-parts of a machinery that advances lethargy
- A business climate that discouraged competition and innovation and which inflicted the virus called reliance on government handouts
- An inefficient tax structure that advanced the interests of few while kept squeezing the middle class, which was extended consumer loans and “prospered” through credit extensions
- An uncompetitive business environment which had the illusion that because credit was abundant it could “prosper” in perpetuity
- A badly designed and executed Euro – see several pertinent commentaries and newsletters in our website – that was too expensive for Greek standards and which trapped the economy into a fetish mentality where staying in the Euro became an end in itself
- A policy of riding on the bandwagon of bailouts that included unacceptable terms and conditions that sacrificed national sovereignty, imposed measures that suffocated hopes for exit from the crisis, while suppressed incomes and allowed no room for flexibility
- The policies applied completely neglected the competitive advantages of the nation
The above list focuses on some fundamental issues/problems that have been keeping Greece in a captive situation. Certainly we could add many more reasons, but my belief is that a correct prescription presupposes an accurate diagnosis of the fundamental problems.
At the current stage, the malignancy will remain and the prospects will deteriorate after October (German elections and tighter EU credit standards). If a prediction could be made is that if Cyprus exits the Euro in the next 15 months, then the repercussions will be felt in Greece too in the form of a pressure to exit the Euro zone too. It is very unfortunate that Cyprus chose to bow down to the idol called Euro and now it ends up having a nominal Euro that is not the same as the Euro in other countries. I have been talking to Cypriot businesspeople every week, and the situation there deteriorates by the day.
After October, the Greek economy will have to face the music again due to the following facts:
- First, the debt is not sustainable at the projected 124% level, let alone the current165% of GDP
- Second, the non-compliance with the austerity measures (public sector layoffs, privatizations, missing revenue targets, etc.) will force either cuts in the tranches or the demand for new measures, either of which will create not just economic but also political turmoil
- Third, national central banks in the EU do not seem willing to roll over the Greek bonds, which in turn will force the IMF to withdraw its support. Both events will leave a huge funding gap for Greece
- Fourth, healthcare costs and other unfunded liabilities will start showing their true face which in turn will create a budget hole
- Fifth, Greek politicians expect the deus ex machina called OSI (official sector involvement a.k.a. haircuts in the bond holdings of central banks among other official institutions)to show up and they will be disappointed due to the no show
- Sixth, the existed financing fatigue will materialize in the form of “let it go and see what happens” (similar to the fatigue that brought down Lehman Brothers on September 15th 2008)
- Seventh, the lack of any realistic prospects for growth undermines the coalition’s cohesiveness and once the summer months pass and reality kicks back in, the street complaints will pick up pace
- Eighth, the credit environment will tighten even further in the EU and thus they cannot upfront funds to Greece (as they are doing currently in order to save face and avoid turmoil before the German elections)
- Ninth, the lack of any serious foreign investments will demoralize the business environment which at the same time will discover that it cannot expect any liquidity from the recapitalized Greek banks since those funds were already committed to cover existing holes
- Tenth, the incoming tremors in the French, Italian, and Spanish banking systems along with disagreements related to the EU’s banking union, will force the troika to focus on those countries rather than trying to recover their money from Greece.
In conclusion, I choose to reiterate London’s tube pronouncement: “Mind the Gap”, because the light at the end of the tunnel may be the incoming train.