6/14/2012

A short blog explaining Greece to a follower

Greece’s popular uprising takes aim at the austerity measures undertaken by the previous government in trying to bring Greece’s finances under control. These have to a large extent been dictated by the Troika, the EC, ECB and the IMF as to the size of reduction in deficit or addition to revenue however, without reference to the mix those policy measures might take. Greece is currently running a budget deficit of around 10% of GDP and a debt to GDP ratio of around 150% after the recent haircuts.  


Unfortunately, the previous government imposed the simplest form of implementation but probably also the harshest, reducing pensions and salaries in the public sector and increasing taxes across the board. This resulted in a severe contraction in economic activity and brought what little dynamism Greece’s economy had to a standstill. Unemployment in the private sector increased dramatically whilst revenues from higher taxes did not have the desired effect as the economy contracted. At the same time the budget deficit although initially contracted reversed direction as  government was unwilling to reduce its bloated size falling hostage to  its own predicament. Equally banks stopped lending as it became apparent that they were insolvent thereby accelerating the contraction.


Instead of putting blame therefore on their own incompetency and inadequate half measures, politicians blamed the Troika and the signed Memorandum of understanding which had an aim at deregulating markets and creating a more competitive environment for entrepreneurial Greece.   


So coming back to your two points laying blame on the greedy banks and or the lazy protesters unwilling to forego their hard won privileges my comments are:



1-      As far as banks are concerned Greeks have never really identified them as the cause of their problems only in as much as they form part of the world financial system which was to blame for the initial financial crisis. To a large extent Greek banks did not participate in this frenzy of lending which was commensurate with the crisis, if anything the banks were quite prudent in their lending practices. The mistake was that they were forced to invest in Greek government bonds as a gesture of solidarity, a quid pro quo, a token for their existence. This meant that as these securities were marked down by more than 50% owing to the well documented haircut, they became insolvent as banks had a very large proportion of their assets invested in them. It was the spendthrift government that brought down the banks as opposed to the banks creating the problem in countries like Spain, Ireland and of course the US.

2-      In the case of lazy protesters there is a lot of truth to this assertion. Over the course of the last three decades we had to a large extent a socialist government run by PASOK with a manifesto of deficit spending and promises of increased electoral public employment in exchange for votes. The centre right NEW DEMOCRACY party also lay claim and embraced this modus operandi effectively condoning this behaviour. This was effortlessly carried out as Greece was the beneficiary of very low interest rates courtesy of the Euro and the party euphoria that ensued having no regard to the longer term structural imbalances prevalent throughout this period. Equally, massive transfers of wealth occurred to help the periphery catch up with the core. It goes without saying that this money did not find a home in productive investment but rather in excessive consumption, lavish living and Swiss and local bank accounts. Europe turned a blind eye as it was in many ways easier. At some point Greece had to pay the ferry man. Lending seized and the Troika imposed its lending conditions. The problem is this bloated Government sector of spoilt (un)public servants has never been cut to size, a large part of which earn excessive salaries, a large part of which is totally redundant and of course is being maintained at the expense of the private sector which in neglect is being asked to pay an ever increasing share of taxes. It is self-evident that this process has a dead end and we have reached it.


This  is what is currently happening in Greece.  I hope it is of some use

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