Posts Tagged ‘Austerity’

Back to the Drawing Board for Greece

Monday, July 9th, 2012

International lenders and Greece will renegotiate the program on which the second financial bailout for Athens is based because the original has become outdated, according to a senior Eurozone official.  Greece received a €130-billion bailout in February from the European Union and the International Monetary Fund (IMF).  General elections in May and June delayed the bailout’s implementation.  The United States, the IMF’s largest member, supports discussions to review the Greek bailout program, but German Chancellor Angela Merkel countered that any relaxing of Greece’s reform promises is unacceptable.

“Anybody who would say that we need not, and cannot renegotiate the MoU (memo of understanding) is delusional, because he, or she, would be under the understanding that the whole program, the whole process, has remained completely on track ever since the weeks before the Greek first election,” the official said.  “Because the economic situation has changed, the situation of tax receipts has changed, the rhythm of implementation of the milestones has changed, the rhythm of privatization has changed — if we were not to change the MoU –it does not work.  We would be signing off on an illusion.  So we have to sit down with our Greek colleagues and say: this is where we should be in July, and this is where we are in July, and there is a delta.  Let’s find out what the delta is and then how to deal with the delta — that is a new MoU,” according to the official.

According to the official, representatives of the IMF, the European Central Bank and the European Commission will visit Greece as soon as a new government is in place to review the program’s implementation and prepare for negotiations.  “It is no secret, quite logical in fact, that due to the time passed without a functioning government in place that can take the required decisions, because of this, there have been significant delays,” the official said.  “The conclusion is that they have to engage in discussions on the memorandum of understanding and bring it back onto an even keel.”

Meanwhile at the G-20 summit in Mexico,  leaders of the world’s most powerful economies say they have produced a coordinated global plan for job creation, which it calls the top priority in fighting the effects of the European economic crisis.  The draft says “We are united in our resolve to promote growth and jobs.”

An editorial in the Australian Financial Review warns Europe not to misrepresent the issue. “The optimism that followed Greece’s election has proved to be short-lived as investors acknowledge the poll result doesn’t really change all that much in terms of Europe’s ongoing debt crisis.  Less than a day after Greece pulled back from installing anti-austerity parties in office, European bond markets were once again in meltdown on concerns that Spain, Italy, Portugal and Ireland may need more financial aid to prevent default.  The European Union’s financial ‘firewall’ is clearly not up to the task, with the yield on Spanish 10-year bonds soaring to a Euro-era high of 7.29 percent.  In Athens, talks are under way to form a pro-EU coalition government between the center-right New Democracy party and the socialist Pasok party, reducing the likelihood of a near-term Greek exit from the Eurozone.  Yet rather than insist that Athens stick to the tough conditions it agreed to as part of the EU’s €240 billion ($300 billion) rescue packages, there are signs that European leaders may again be preparing to fudge the issue.  German Chancellor Angela Merkel insists that Athens must stick to its austerity commitments and that there is no room for compromise.  But other European politicians are starting to talk about giving Greece more time to fix its problems.  This appears to confirm the Greeks will never live up to their austerity conditions and that the exercise was all about kicking the can further down the road.”

Devaluation would be the optimal way for Greece to jump start its economy.  Because that option is not on the table this time, achieving competitiveness is going to be much harder.  One of the bailout’s stipulations requires the government to cut pensions, slash the number of public servants and control costs – in other words, the “austerity” option.  Others prefer a program to stimulate growth and boost revenue, although one that would likely involve increased spending.  This is the “growth” option.  Angela Merkel favors austerity while French President Francois Hollande prefers the “growth” option.  In this debate, the Germans are in control because they are the ones that are going to cough up the money.  They have the ability to help because, contrary to most of Europe, they practice austerity and thrift.  If German taxpayers are going to have to pay higher taxes to save nations like Greece, they think their European brothers and sisters should share some of the pain.

According to a Washington Post editorial, Germany and other creditworthy E.U. governments were right to tell Greeks before the election that they could not choose both the Euro and an end to austerity and reforms, as several populist parties were promising.  Yet now that voters favored parties that supported the last bailout package, it’s time for Angela Merkel and other austerity hawks to make their own bow to reality. For Greece to stabilize, some easing of the terms of EU loans will be needed, at a minimum; an extension of deadlines for meeting government spending and deficit targets may also be necessary.  Unless it can deliver such a relaxation, there is not much chance the new administration in Athens will be able to push through the huge reforms still needed to make the economy competitive, including privatizations, deregulation and public sector layoffs.

“In the end, a Greek slide into insolvency and an exit from the euro may still be unavoidable. That’s all the more reason why EU leaders must at last agree on decisive measures to shore up the rest of the currency zone, beginning with Spain and Italy.  Measures under discussion for a summit meeting next week, including euro-area bank regulation, are positive but not sufficient.  In the end, banks and governments must be provided with sufficient liquidity to restore confidence — something that will probably require the issuance of bonds backed by all Euro-area countries, or greatly increased lending by the European Central Bank.  As German officials invariably point out, bailout measures will be wasted unless they are accompanied by significant structural reforms by debtor nations.  But without monetary liquidity, and the chance for renewed growth, the Euro cannot be rescued.”

Is Hard-Hit Ireland Resolving It’s Economic Crisis?

Wednesday, February 8th, 2012

Ireland was one of the nations that was hardest hit by the Eurozone crisis, but now it’s being seen as leading stricken nations in their efforts to turn their economies around.  International Monetary Fund (IMF) and European Union (EU) officials are impressed by its austerity measures, imposed after the massive 2010 bailout.  For the average Irish person, however, the gain is hard to see.  Public services have been slashed, and housing prices have declined 60 percent.  Approximately 1,000 young Irish people emigrate every week, and there’s extensive cynicism whether economic medicine being taken by the once-mighty Celtic Tiger actually works.

Ireland’s unemployment is currently upwards of 14 percent.  At the start of Ireland’s second year of austerity, there have been tax rises, wage freezes, layoffs and more.  This is being supervised by the so-called Troika, the European Commission (EC), the European Central Bank (ECB) and the IMF.  These entities bailed out Ireland after the property bubble burst and its banks collapsed.

Larry Elliott, economics editor of The Guardian, describes Ireland as “the Icarus economy.  It was the low-tax, Celtic tiger model that became the European home for US multinationals in the hi-tech sectors of pharma and IT.  Ireland was open, export-driven and growing fast, but flew too close to the sun and crashed back to earth.  The final humiliation came when it had to seek a bailout a year ago.  In a colossal property bubble, debt as a share of household income doubled, the balance of payments sank deeper and deeper into the red, the government finances become over-reliant on stamp duty from the sale of houses and the banks leveraged up to the eyeballs.

During the time running up to the bubble bursting, Elliott says that “A series of emergency packages and austerity budgets followed as the government sought to balance the books during a recession in which national output sank by 20 percent.  In November 2010, the Irish government asked for external support from the EU and the IMF.  Again, it had little choice in the matter.  The terms of the bailout were tough and there has been no let-up in the austerity.  The finance minister, Michael Noonan, plans to put up the top rate of VAT by two points to 23 percent.  At least 100,000 homeowners are in negative equity, and welfare payments (with the exception of pensions) have been slashed.  In recent quarters there have been signs of life in the Irish economy, but the boost has come entirely from the export sector, which has benefited from the increased competitiveness prompted by cost-cutting.  The best that can be said for its domestic economy is that the decline appears to have bottomed out.  At least for now.

“Around a third of Ireland’s exports go to Britain, which is heading for stagnation, a third go to the eurozone, which is almost certainly heading for recession, and a third go to the United States, which will suffer contamination effects from the crisis in Europe.  That’s the bad news.  The good news is that the supply side of the Irish economy is sound.  Much attention is paid to Ireland’s low level of corporation tax, which has certainly acted as a magnet for inward investment, but that is not the only reason the big multinationals have arrived.  There is a young, skilled workforce and Dublin does not have London’s hang-up about using industrial policy to invest capital in growth sectors.  Ireland had a dysfunctional banking system, but most of the multinationals — which account for 80 percent of the country’s exports — don’t rely on domestic banks for their funding.  The problem is that you can’t run a successful economy on exports alone, no matter how competitive they might be.”

In fact, Ireland’s prime minister, Enda Kenny, recently called for even deeper budget cuts.  Kenny outlined savings of up to €3.8 billion needed to slash its national debt under the terms of 2010’s EU/International Monetary Fund bailout.  Kenny appealed for understanding from the Irish people and stressed that the nation may have to endure a further two or three harsh budgets to put the country’s finances in order. He said on Saturday that the Republic “was in the region of €18 billion out of line”.

“It is the same old story with Ireland in our view – doing good work and will continue to do so,” Brian Devine, economist at NCB Stockbrokers in Dublin said.  “But the country is still extremely vulnerable given the level of the deficit.”  The anticipated adjustments total approximately eight percent of Ireland’s economy, and follow spending cuts and tax rises of more than €20 billion since the economy began to decline in 2008.

And how are the Irish people dealing with austerity? “We’re squeezed to the pips,” said Tommy Larkin, a 35-year-old mechanic changing tires and oil on the double in northside Dublin.  “I never had to watch my money in the good times, but that’s all I do with my money now.”

Wages for middle-class families have been cut around 15 percent, while the nearly 15 percent unemployed have seen welfare and other aid payments cut.  The government recently imposed a new household tax, and is planning new water charges next.  Driving a car can mean an annual fee of anything from $205 to $3,045, while recent fuel-tax increase haves taken gas upwards of $7.25 per gallon.

As Economic Woes Deepen, Greece Seeing More Suicides

Wednesday, October 19th, 2011

Greece’s dire financial crisis is taking a toll on the nation’s psyche in more ways than mere worries over whether the economy will survive. A team of technical experts, primarily from the European Union (EU), are in Greece monitoring the state of its debt-stricken economy – and they are well aware of how dire the situation is.

One sign of exactly how bad things are is the fact that the rate of suicide – especially among men desperate because they can no longer provide for their families – has increased by 40 percent in the last year.  Suicide help lines report a deluge of calls  – 5,000 in the first eight months of 2011 compared with 2,500 for all of 2010.  The typical caller tends to be male, age 35 to 60 and financially ruined.  “He has also lost his core identity as a husband and provider, and he cannot be a man any more according to our cultural standards,” clinical psychologist Aris Violatzis said.  “Our times are dominated by depression and even mourning for the loss of everything people had managed to achieve in their lives,” Violatzis said. “Suicide is always due to a combination of several reasons but the economic crisis is becoming a major factor,” he noted.  According to the World Health Organization, Greece traditionally occupied last place in the global list of suicides, but the numbers currently are rising fast.

Exact statistics are difficult to confirm, but unofficial figures showed a rise to 391 suicides in 2009 from 328 in 2007.  Experts believe that the reality is much worse.  To avoid traumatizing their families, some crash their cars in what police typically report as accidents.  Additionally, families often cover up a suicide so their loved ones can be buried in the Greek Orthodox church.  “The real suicide rate is many times the official one,” Violatzis said.  “Right now we have the biggest increase in Europe.”

The Greek health ministry and Klimaka, a charitable organization, place the number of suicides even higher.  They believe that the suicide rate has doubled since the crisis began to approximately six per 100,000 residents a year.  A suicide help line at Klimaka at one time received from four to 10 calls a day, but “now there are days when we have up to 100,” according to Violatzis.

With speculation that Greece is on the brink of default more than 16 months after it received the biggest bailout on record, the country is the focus of the International Monetary Fund’s (IMF) talks.  Some do not believe that time is running out to solve a crisis that began two years ago but, with markets far from appeased and enormous job losses, tax increases and out-of-control inflation, Greeks no longer believe what their politicians say.

“The belt is now at the eighth notch, it’s become so tight there are only two more left, but nothing has improved,” said Georgios Valsamis, a taxi driver who joined a barrage of strikes that brought public transport to a halt.  “People in power, MPs, they’re like robots, they do whatever those foreigners (the EU, ECB and IMF) say.  We are no longer willing to be a laboratory for failed policies.  Low-income earners, those who have been really hit, can’t endure much more.”

“The worst part is perhaps psychological because there is no light at the end of the tunnel, no source of hope,” said Dr Thanos Dokos who directs Eliamep, a think-tank in Athens. “When you make sacrifices and you know they will come to something you don’t mind. But that is not the case.”

In addition to desperation, there is a collective sense of guilt and depression – more dangerous, say analysts, than even the social tensions that threaten to tear Greece apart.  A short time ago, hundreds of Greeks crowded a lecture hall to hear Fotini Tsalikoglou, a noted psychology professor, speak on “the power of loss”.  “Greeks feel like they are in a bad dream,” she said.  “You wake up not knowing what will be overturned today of what was overturned yesterday.  A common thread that unites people is the experience of fear and desperation.”

World Bank Head Predicts No “Double-Dip” Recession

Wednesday, September 28th, 2011

World Bank President Robert Zoellick believes the world will not slide into a double-dip recession.   Zoellick was in Singapore, attending an economic conference amid plummeting world stock prices and worries over a slowdown in U.S. economic growth.  Zoellick believes the United States and the world will avoid a “double-dip” recession, but admitted that growth is likely to remain sluggish and prospects are uncertain.  Zoellick said the world is entering a “dangerous period,” noting that the United States could reassure markets with steps to put the brakes on increasing its debt, rather than making deep cuts in spending.

Zoellick’s comments add pressure on European officials who are trying to contain a sovereign debt crisis that threatens Italy, whose government bonds in euros have declined a record 11 consecutive days.  Finland has fostered division among policy makers by looking for collateral for loans to Greece, the first of the three euro-region nations to receive bailouts so far.  American and European economies are stalling and feeble global growth are impacting Asia, Singapore’s Minister of Finance Tharman Shanmugaratnam said.  Growth in the U.S. and Europe may be just one percent.

“We’re already at stall speed in the U.S. and Europe, which means we’re now more likely than not to see a recession,” Shanmugaratnam said.  Companies are holding back spending and consumers globally lack confidence.  Zoellick tamped down the likelihood of a “double-dip” global recession in comments to reporters in Singapore today.   Still, “we are now seeing a particularly sensitive time in the euro zone,” the World Bank chief said.  “A number of issues are converging.” 

“These things are very hard to predict because if you have events trigger uncertainty in Europe, that will flow back to the U.S.,” Zoellick said.  The eurozone’s performance “depends on the political decisions moving forward,” he said.  The euro will survive in the next five years, although the question over membership of the common currency is one that Europeans must answer.  “Sometimes people hope that you can muddle through by providing financing and liquidity, in the case of Europe, from the European Financial Stability Facility or the European Central Bank,” Zoellick said.  “They now recognize that’s not going to happen and instead what you see is with some of the weaker economies, that the austerity policies are pushing them into slower and slower growth and so this could be a downward spiral.”

According to Zoellick, recent European Central Bank government bond purchases have given temporary monetary liquidity to markets.  “The policies that have been pursued by the EU up to now can buy time, but parliaments and the public have to come to terms with fundamental questions,” Zoellick said.  One direction is to deepen the fiscal union.”

“They’ve tried to pump money into it, they’ve tried in the past month.  The ECB bought a lot of bonds.  But, I think dealing with these problems through liquidity measures will not be sufficient,” Zoellick said.  “Christine Lagarde of the International Monetary Fund (IMF) and I from a different position at the World Bank have been trying to prod people to recognize some of these questions.”  Lagarde, who told the Federal Reserve’s annual conference that European banks need urgent capitalization, angered some European policymakers and politicians with her opinions.

“People should not underestimate the European response, but Europeans should not be fooled that that type of response will deal with the fundamental questions that still need to be addressed,” Zoellick said.  The markets have been hoping for additional monetary stimulus from the Federal Reserve to relieve global growth concerns, but Zoellick said that monetary policy alone won’t do the job.  Rather, he said, the real solution to Europe’s crisis must be found to deal with the crisis.  “This one is really even beyond the finance ministers’ pay grade.  These are going to be the decisions that have to be made by the heads of government and supported by their parliaments,” he said.

American markets analyst Peter Kenny of Knight Capital said “We have a eurozone that is an apoplectic frenzy of just trying to right the ship.  If you can find some stabilizing influence in the eurozone to give the global markets some confidence, I’d be shocked.”  Parliaments in Germany and France currently debating the extent of their countries’ contribution to the European Financial Stability Facility, the fund set up to bail out any eurozone nations struggling with their debt obligations. 

Richard Jeffrey, chief investment officer at Cazenove Capital Management, said that “Money that the key worry for the markets was the health of the world economy.  “If the world economy is slowing down or perhaps even moving into recession – I think that is less likely, but that is what people fear – then that has negative implications for the financial system and the banking sector.  The debt problems in the peripheral European economies rumble on, of course, but again their debt problems are helped if there is growth.  If there isn’t growth in the economies, then their debt problems become more difficult to support, so this is all interlinked.”