More Greek Tragedy

Yves here. Even though this post is indeed mainly about Greece, it has a whopper of a factoid about Spain at the end: that retail sales are down nearly 11% year to year. That economy is in free fall.

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

The economic and political troubles of Greece appear to have no end. The “plan” for the country under the original Troika program was for government debt to GDP to decline to 120% by 2020 under a framework of internal devaluation supported by external funding. As we now know the assumptions of this program were based woefully incorrect and now, even after a private sector write-down on sovereign paper, debt to GDP is nearly 170% and increasing. At this point even the most optimistic predictions suggest it will take Greece at least another decade past the target date to reach the initial goals and even then it is dependent on increases in external funding. I’ve stated previously that providing additional loans to Greece is completely counterproductive for the country’s creditors and what is required is an additional debt write-off. Last week the Troika suggested just that, pre-empting its own official report on its mission in Greece which is likely to show significant slippage in both estimates and policy implementation.

The issue is that the ECB has already stated that it is unwilling to participate in any debt write-off, although it may forgo profits made on its existing holdings, and other non-private creditors have little appetite for write-offs preferring to focus on plans to kick the can down the road again:

A restructuring of Greek sovereign debt held by its public sector partners “is out of the question” for Germany and “not in Greece’s interests,” Steffen Seibert, Merkel’s chief spokesman, told reporters in Berlin today. At the same time, Seibert noted that Finance Minister Wolfgang Schaeuble said yesterday that a buyback “is worth serious discussion.”

The comments suggest the German government has changed its view on debt buybacks. Schaeuble said earlier this month that he had “a number of questions for which I don’t see an answer yet” on the buyback proposal. The Frankfurter Allgemeine Zeitung reported on Oct. 13 that the government rejected the idea, citing officials it didn’t name.

On the other side of the fence is the Greek society which continues to suffer the fallout. High levels of unemployment and continuing economic retrenchment is seeing a shift to the political far-right and it is now a real question of just how long the Greeks will endure the situation without a significant political backlash. These tensions are in full view as the Greek parliament struggles to agree on the latest round of demands from the Troika:

Greece’s foreign lenders have refused to make any further concessions on changes to labour laws contested by a junior coalition partner, the country’s finance minister said on Sunday, prolonging an impasse on a crucial austerity package.

Athens has been locked in talks with its European Union and International Monetary Fund lenders on the austerity package for months, but a final agreement has been held up by the small Democratic Left party’s refusal to back the new wage laws.

The party, which says the changes undermine labour rights, has said it will vote against the measures when they are put to a parliamentary vote next week.

With delays in the package and new statements from the Greek finance ministry that the possibility of Greek banks being able to swap out their Greek bonds for bonds issued by the ESM under a recapitalisation program was “ruled out”, down again went the banks:

Shares in Greek banks plunged, dragging down the entire Greek stock market on Monday on new tensions over recapitalisation of Greek banks and delays to quarterly results.

The Greek banking sub index plummeted 13.59 percent over unresolved recapitalisation, tied to last-minute efforts to complete conditions for new debt funding to avert bankruptcy for Greece.

And the main market index was showing a fall of 5.88 percent in afternoon trading after the finance ministry said that Greek banks would not be able to swap their holdings of national debt.

Greece, of course, isn’t the only country struggling in under similar circumstances and this is really just the fallout and just one example of the ‘chicken and egg’ debt scenario in the Eurozone that I have been posting about for over 2 years. That point was touched on overnight by Mario Draghi in an interview with Der Speigel:

SPIEGEL: We fear that you are getting entangled in hopeless political discussions with the European governments. In order to put Monetary Union on a firm footing, you are in favour of, for example, greater centralisation of economic and financial policy. Up to now we have seen little of this.

Draghi: This is not how I see it. Governments are on the right path. They have committed themselves to transferring more competencies for budgetary and financial policy to the European level. They need to take the necessary decisions on this at their summit meeting in December.

SPIEGEL: Up to now, governments have only been ready to concede greater powers to the Commission regarding the control of their budgets. The actual decisions will continue to be taken at the national level, however.

Draghi: The governments have taken decisions that would have been inconceivable even one year ago. This is progress, but it is not enough.

SPIEGEL: Why not?

Draghi: If you want to restore confidence in the euro area, you need rules. But that is only the first step. You also need to ensure that the rules are adhered to. This is what was lacking in the past and what governments need to work on.

SPIEGEL: Finance Minister Wolfgang Schäuble has proposed giving the EU Commissioner for Economic and Monetary Affairs a direct say in national budgets. What do you think of that proposal?

Draghi: I am fully in favour of it. Governments would be wise to seriously consider it. I firmly believe that, in order to restore confidence in the euro area, countries need to transfer part of their sovereignty to the European level.

SPIEGEL: But it is precisely that that many governments are unwilling to do. Why are they so against it?

Draghi: A lot of governments have yet to realise that they lost their national sovereignty a long time ago. Because, in the past, they have allowed their debt to pile up, they now need the goodwill of the financial markets. That sounds like a paradox, but it is nonetheless true: it is only once the euro area countries are willing to share sovereignty at the European level that they will gain sovereignty.

Actually, nations gave up their economic sovereignty when they joined the euro, the debts were the side effect of an incomplete monetary framework that was unable to deal with imbalances across various economies. Political weakness and lack of macro-prudential tools exacerbated this failure. To claim the source of the issue is debt is misleading, but that doesn’t surprise me, the ECB was actually implicit in creating the problem because inappropriate interest rate settings in many areas were part of the problem.

Mr Draghi is obviously skipping over the point that a nation can also regain its sovereignty by leaving the euro. This obviously would be a painful process, but after 5 years of depression-like conditions and with the same forecast into future it’s not difficult to imagine that it is will at some point be considered in Greece. Mr Draghi himself is well aware of this fact, “convertibility risk” was one of the reasons he outlined for the need for the OMT.

The reality is that much of southern Europe has already spent the last few years slowly handing their economic sovereignty to the EU under emergency programs due of the strict fiscal guidelines. The result thus far is anything but inspiring and we continue to see the fallout in economic data, as we did again overnight from Spain:

Spanish retail sales fell at their fastest pace on record in September as already battered consumer confidence took another hit from a hike in value added tax, driving many shoppers to trade down to cheaper products.

Sales fell 10.9 percent year on year, Monday’s National Statistics Institute data showed, reflecting an economy struggling through its second recession in three years and plagued by chronically high unemployment.

The drop was the biggest in calendar-adjusted terms since current records began in January 2004, and marked the 27th monthly decline in a row.

Certainly not a surprise, but it demonstrates that national governments are being forced to make fiscal decisions that are counter to their national interests.