Tuesday, 23 June 2015

The politics of a Greek breaking point

Greece’s financial crisis has now firmly it a political phase. The numbers still matter, and there’s a lot of zeros flying around, but both Greece and the country’s creditors know it’s time for a political agreement.

New Zealand prime minister John Key said a few months ago that Greece should simply default and leave the Eurozone because the country was “so deep in the hole that not even daylight can reach them”. Mr Key, perhaps a bit crudely, painted the Greek problem correctly: this is about whether Europe is viable as an idea and what ultimately happens to members which don’t follow the rules.

This week, Greek Prime Minister Alexi Tsipras presented an updated list of proposals for economic reform to Eurozone finance ministers. He is slowly understanding that the lessons of crisis are spreading. The European Union is looking more like a deeply unhappy family as the day’s progress.

Greek media reported Mr Tsipras’ proposals could increase the retirement age and reform taxes and pensions. The true details will be interesting to dissect, but the key point is that they show Greece opting for greater controls. The true question is whether the Greek government can enforce those reforms, especially since the ruling Syriza party’s core support base is already grumbling.

The siege has been boiling for much of the year and coverage of the Greek crisis oscillates between disaster and inertia. In reality no one really knows whether Greece will stay in the Eurozone. However, if the situation is political, not simply fiscal, then how the story is framed is integral to understanding what’s going on. And as emotion steams up the media, it appears plenty of power realignments are still to come as the conflict crawls to a conclusion.

An initial estimate must centre on the collapse of the Greek economy earlier this year. Its tax take has faltered numerous times since January, with a shortfall of more than 40% or €1.5 billion registered in that month alone. Most people don’t want to say it, but the term “failed state” often comes to mind.

Exacerbating this, capital flight has accelerated over the past few days forcing the government to discuss the introduction of capital controls. The ability of the European Central Bank (ECB) to continue supplying emergency liquidity depends on Greek banks remaining solvent and providing eligible collateral. Capital flight won’t be helping with that at all

Of course, the country is free to borrow as much as it wants on private markets to cover these shortfalls, however private markets are no longer willing to lend to Greece. If the ECB hadn’t stepped in and replaced much of that lost lending, the debt terms would not have been renegotiated.

Then there’s a larger dynamic at play, and that is the problem of moral hazard – both at the micro and macro levels. Kerin Hope at the Financial Times reports one banker saying around 70% of Greece’s restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners.

That banker says he still owes a serious amount of money, including a “holiday loan” he’d “forgotten about”. In other words, at some point the lender needs to be blamed as well as the borrower. A “holiday loan” isn’t too different from loading a credit card, but it’s easy to get lost in the macro events when the entire Greek system consists of micro decisions similar to the banker’s.

Both sides of the debate know the status quo can’t be maintained beyond June 30 when the bailout expires so the conflict needs to be settled soon. Greece held out for a long time, refusing to budge on reforms, but Mr Tsipras’ pension reforms are an indication the country is responding to some punishment.

Keeping Greece in the EU to uphold the integrity of Europe is a convincing argument, yet all this new money teaches some very important lessons. As with any debate, it’s not the other side which needs convincing, it’s the audience. And the European audience is learning that an inability to control its finances doesn’t may not lead to harsh punishment after all.

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