Wednesday, April 6, 2011

Rapidly deteriorating conditions in Greece

The latest EU 'Grand Bargain' illustrates how temptations and denial of individual responsibility is transforming the Eurozone into a pure Hell for its member states. The new ESM is pitifully underfunded and requires unanimous consent of its members to grant a facility, making it a colossal joke. The ECB is taking a hawkish stand on interest rates when its periphery laggards are insolvent and held alive by 'pretend and extend' loans that they refuse to restructure. Greece is about to collapse.  Nouriel Roubini's RGE forecasts Greek debt restructuring within 2011, which would mark a watershed for the EZ.

The Greek clientee-based political system has created a crushing national debt burden of 130% GDP and still rising. Their politicians systematically use public money to buy votes and have created a vast, corrupt state bureaucracy. They unleashed a class warfare mentality extremely hostile to private investment and entrepreneurship, which they view subservient to the state and their political purposes. They promised the people endless entitlements to be paid by other people's money. The Eurozone was seen as as means of perpetuating this dysfunctional system, where their European partners would cover them paternalistically.

As a result, Greek people were totally unprepared for austerity. Their politicians after years of dependency on the EU as a pseudo 'developmental' policy are terrified and have no idea how to face the present reality. They desperately need new money to fund the overbloated public sector.

The IMF is increasingly frustrated with the slow progress of their efforts to rebalance public finances and control public debt levels. Internally they seem to be pressing for immediate debt restructuring, but the EU is terribly afraid of a Greek default and refuses to discuss the issue. So as in previous EZ cases, the IMF and EU are at loggerheads.

With debt servicing needs of 6,4% GDP, it is hard to believe how growth will ever cover such a debt load, which is twice the amount in the late 1990's Russian default.  The growth rates for Greece would have to exceed China for a sustained period of time in a circular situation where the debt load and default risks inhibit productive investment.  The Euro 50 bn privatization plan seems dauntless given the slow progress and poor history of previous privatization efforts, where there is considerable political and local resistance.

Meanwhile the ECB is adding misery by its hawkish stand on interest rates despite little evidence of potential inflation, the deep recession and deteriorating financials of its laggard members. They seem to be firmly in favor of 'pretend and extend' and unconcerned about the massive debt pyramid that they are creating within the EZ.

Core Eurozone members like Germans, who are the payers in the system, are beginning to worry that their contingent liabilities on the mountains of debt in the system will lead to credit downgrades and increased funding costs for them. They are positioning themselves to limit their losses by reducing the initial paid-in capital to the new ESM facility and extending subscription over time. They have also pressed for a mechanism that would force debt restructuring on laggard EZ members and private creditors would share in the losses.

The Greeks domestically see the IMF/EU as an 'occupying' force. The composer Mikis Theodorakis has created a political movement 'Spitha " (spark) calling openly for overthrow of the system, debt repudiation and Cuba-style nationalizations.  The PASOK (socialist) government is in increasing disarray where Vaso Papandreou, a leading MP openly called for debt restructuring.  Politicians are frequently facing street attacks in public appearances. 

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