Tsipras' Syriza Should Not Survive

Read "Comparing Greece’s New Proposal With the Creditors’ Previous Offer" by Liz Alderman and ask yourself how Tsipras, coming so soon after the 61% "Oxi" vote, can muscle his austerity capitulation through Parliament:

Prime Minister Alexis Tsipras of Greece largely capitulated late Thursday to austerity demands by his country’s creditors.

The move came only four days after Greek voters heeded his call to repudiate an earlier European bailout blueprint known as the Juncker plan, which had been put forth by Jean-Claude Juncker, the European Commission president.

With the Tsipras proposal, which the Greek government submitted under a tight deadline before a weekend of meetings that could determine whether Greece could remain in the euro currency union, the country is seeking a three-year bailout loan of 53.5 billion euros, or about $59 billion.

The proposal includes terms that are virtually identical to the Juncker plan.

Here is a look at some of the main provisions:

STIMULUS AND DEBT

Greece, whose total debt exceeds €300 billion, proposed running a small primary surplus — the amount of money in its coffers before expenses and interest payments — as a way to free up more money for the moribund economy rather than diverting it to paying off debts.

Greece would agree to the levels in the Juncker plan: 1 percent of gross domestic product this year, 2 percent next year and 3 percent the year after.

Greece also asked for a restructuring of debts due after 2022, although it did not specify the changes it would seek.

TAXES

Mr. Tsipras’s proposal includes a series of new taxes and structural adjustments throughout the Greek economy that are identical to the Juncker plan.

They include a 23 percent value-added tax — a consumption tax — for most goods, including restaurants and processed foods; a rate of 13 percent for basic food, energy, hotels and water; and a 6 percent value-added tax on pharmaceuticals, books and theaters.

In a move that may spur a social backlash, Mr. Tsipras also reversed course and bowed to creditor demands to eliminate the 30 percent discount on the consumption tax for the Greek islands, starting with the most lucrative tourist destinations.

The plan would also eliminate preferential tax treatment for farmers. But there is a difference in the timing: Greece would do this by 2017, not by the 2016 date proposed by creditors.

Greece pledged changes in the country’s notoriously lax tax system to make collection more thorough and efficient. The proposal uses language identical to Mr. Juncker’s, including the promise to create an autonomous revenue agency and produce “a comprehensive plan with technical assistance for combating tax evasion.”

Other provisions would include closing loopholes for income tax avoidance, adopting outstanding overhauls to the income tax code, and introducing a new criminal law for tax evasion and fraud.

There is one difference between the plans that indicates Mr. Tsipras means to have businesses share the pain: He proposes raising the corporate tax rate to 29 percent. The Juncker plan called for a corporate rate of 26 percent to 28 percent.

PENSIONS AND HEALTH CARE

Dropping its earlier opposition, Athens acceded to creditors’ demands for further cutbacks in the Greek pension system. Mr. Tsipras has adopted nearly the same terms as in the Juncker plan, including a pledge to gradually raise the retirement age to 67 by 2022 – or allowing retirement at age 62 if a person has made 40 years of contributions to the pension system.

The Greek plan agreed to create “strong disincentives to early retirement, including the adjustment of early retirement penalties.”

The government would phase out a supplementary allowance for Greece’s lowest-income retirees by 2019. But unlike the Juncker plan, that phaseout would begin next spring, rather than this year.

Health insurance contributions paid by pensioners would rise to 6 percent of the cost, from 4 percent today. Those contributions would also be required for the first time on supplementary pensions.

In all, the pension measures are meant to save the government up to 1 percent of gross domestic product through next year — in line with creditors’ demands.

LABOR OVERHAULS AND PRIVATIZATION 

Greece agreed with the Juncker plan’s proposal to not roll back previously agreed-to overhauls to the labor market. And it said it would begin to review existing labor market arrangements, including collective wage bargaining, in the fall. 

The new Greek plan backs off previous opposition to the privatization of lucrative state assets, agreeing to creditor demands to sell the state-owned electricity transmission company.

GOVERNMENT SPENDING 

One of the few differences between the Tsipras and Juncker plans involves military spending. The government pledged to cut military expenditure by €100 million this year and €200 million next year. The creditors had asked for an immediate cut of €400 million. 

But the government for the first time agreed to take additional steps, if necessary, to cover revenue shortfalls, including increases to income and corporate taxes.

All in all total, abject surrender. There is nothing else to call it. Unless Sunday's 61% "Oxi" was a mirage, Tsipras' government cannot survive. Tsipras' government should not survive.

Default Does Not Equal a Grexit: Get Ready for Additional Acts in the Greek Debt Drama

It appears to me, and what I have said on this page in the past, is that there is no alternative to a Greek default on its debt obligation to the troika -- International Monetary Fund, European Central Bank and the European Commission; either that or a complete about-face by the troika, capitulating on its demands to cut pensions and loosen labor laws. Germany's strict allegiance to austerity, as well as antipathy towards Greece shared by eurozone states Finland, Spain, et al makes a troika capitulation a long shot.

Several stories this morning (James Kanter and Niki Kitsantonis, "Tsipras Attacks Greece’s Creditors as Pressure Grows on Debts"; Peter Eavis, "Greek Exit Would Shake, but Most Likely Not Shatter, Eurozone") sound the alarm on the coming Greek default. The one story that caught my eye though was an AP piece ("Will Greece Leave the Euro? A Look at Its Options") that problematizes the notion of any clear resolution of the Greek debt drama once the country defaults at the end of this month:

Here are some questions and answers on Greece's future. They could come in handy during Thursday's meeting of eurozone finance ministers in Luxembourg.

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HOW DOES A COUNTRY LEAVE THE EURO? 

Technically, it can't. These are uncharted waters. European Union treaties legally allow members to leave the 28-nation EU, but no mechanism was foreseen to let countries leave the euro. Theoretically, if all 19 nations agree that it's time for Greece to go then a "Grexit" could be negotiated. Some argue the country might have to leave the EU altogether to leave the single currency. 

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WHEN IS THE POINT OF NO RETURN? 

That would be when the European Central Bank decides to cut off emergency credit to Greece's banks, according to Zsolt Darvas, senior fellow at the Breugel think-tank in Brussels. 

That could happen if there is a run on Greek banks — in which case the ECB might not want to risk its money supporting them. Concerns over a run on banks could grow if it becomes clear that Greece will default on its next debt repayment, due June 30.
The ECB could also cut Greek banks loose if the country defaults on debt repayments due to the ECB in July and August. 

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WHAT WOULD HAPPEN THEN? 

Banks would probably have to close for a while and when they reopen, the government would likely put limits on how much money depositors can take out. "People would try to take their money out of the banks. The banks would not be able to pay," Darvas says. "People would try to store their euros at home, not pay taxes, and the whole financial system would come to a halt." 

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HOW CAN GREECE AVOID SUCH A DISASTER? 

Apart from pay its debts on time, some experts believe Greece could limit the damage by engineering its departure in secret. A small group of officials could make the exit preparations and then act on them almost immediately. They would inform their eurozone partners just hours before Greece walks out the door, according Roger Bootle, who heads the research analysis group Capital Economics. The public would be the last to know.

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WHAT MONEY WOULD GREECE USE? 

Greece could go back to using the drachma or introduce a new currency. Either way, volume is essential, and that implies serious challenges. Iraq faced similar issues when it introduced a new dinar in just three months following the U.S.-led invasion. "You would need a huge volume, very quickly. There's also the transportation that is a very big challenge. A lot of police, troops would be required to attend to the cash needs of a country the size of Greek. Logistically it would be a huge challenge," Darvas says. 

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WHAT WOULD HAPPEN TO ITS DEBT? 

Greece's bills won't go away, and the jury is out on whether they could be converted to a new currency, although Greece would probably try to redenominate and renegotiate the debt. The one advantage in this for Athens is that all kinds of loans would probably be written down by its creditors. But Darvas says that "all of these technical issues can be resolved. The economic costs of a euro exit — GDP fall and the rise in unemployment — will be far higher."

If you are burnt out on following the debt-negotiating drama don't expect any relief come end of the month. I don't think Greece has any intention of exiting the eurozone; if it had, if preparations were being made to issue drachmas, there would be leaks by now. Once Greece defaults, that is when another round of negotiations will get going. The ECB could force Greek banks to collapse by freezing Emergency Liquidity Assistance (ELA). But by making such a move, the troika would lose the political battle; Syriza would be vindicated.

Germany's Love-Hate of the Euro

The slow-motion collapse of the eurozone continues. A recent development is the formation of anti-euro party, Alternative for Germany, to challenge German Chancellor Angela Merkel from her Right in the September parliamentary elections. Nicholas Kulish and Melissa Eddy report today in their story, "German Elites Drawn to Anti-Euro Party, Spelling Trouble for Merkel," that 

The fragile solidarity between the 17 euro-zone members has been sorely tested by the years of crisis and the growing list of bailouts. The countries needing help complain about diktats from Brussels and Berlin, while Germany and its northern allies grumble about the costs. Here in the German capital, the images of demonstrators in Athens, Madrid and now Nicosia, Cyprus — some of them waving swastikas or pictures of Ms. Merkel dressed as Hitler — have begun to try people’s patience. 

Pollsters and political analysts doubt that the new party will attract more than 5 percent of the vote, the threshold for representation in the next Parliament. But it does not need that many votes to play the spoiler for Ms. Merkel. 

“They don’t need to get 5 percent to make things very tight for the chancellor,” said Wolfgang Nowak, a fellow at the North Rhine-Westphalia School of Governance in Duisburg. “And every swastika on the street in Athens helps this new party.”

A good naked capitalism post from this past Saturday, "Why Germany (Mistakenly) Thinks it Can Kill Its Export Markets Through Austerity and Still Prosper," shows that Germany runs a deficit with Russia and Asia but racks up a huge surplus with eurozone deficit nations. The quote comes from a cross post off Yanis Varoufakis' blog:

In 2012, mostly on account of energy imports, Germany had a net trade deficit of €27 billion with Russia, Libya, and Norway. In addition, it sported a €4.7 billion trade deficit vis-à-vis Japan and a sizeable €11.7 billion trade deficit with China. In total, Germany’s trade deficit with these net exporters summed to €43.4 billion. Meanwhile, Germany’s trade surplus with the Eurozone’s deficit nations (France, Italy, Spain, Greece, Portugal, Cyprus and Ireland) came to a still staggering €54.6 billion – despite the sharp diminution of this number following the sharp decline in imports in these crisis-hit nations. 

Put differently, Germany’s net exports to the countries that the German press likes to lambast as ‘laggards’ that constitute a drain on German ‘progress’, sufficed to pay for Germany’s net trade deficit vis-à-vis China, Japan, Norway, Russia and Libya, with €11.2 billion to spare: enough to cover for the €3.4 billion transferred to German factories in the Czech Republic and in Slovakia and a large chunk of German companies’ transfer payments to their Dutch partners or subsidiaries (which are in a surplus of more than €15 billion with their German partners).

In short, despite all rumours to the contrary, German global trade surpluses are still being financed by the deficits of the imploding Eurozone ‘stragglers’. It is in this sense that Germany’s denial of the systemic nature of the Eurozone crisis, and its leaders’ commitment to the principle of ‘the greatest austerity for the weakest Eurozone member-states’, is perhaps our epoch’s most spectacular own-goal.

In the lead unsigned editorial on today's Opinion page, "Europe's Bitter Medicine," the New York Times points out, in the case of Portugal, the folly of austerity. The editorial, I think correctly, makes the case for euro bonds as a solution to the sovereign debt crisis:

In Portugal, the government of Prime Minister Pedro Passos Coelho cut spending and raised taxes so much that the fiscal deficit has fallen by about a third from 2010 to 2012. He also pushed through reforms to phase out rent control for tenants and legal changes that make it easier for companies to fire workers. The result is that the country’s unemployment rate has risen to close to 18 percent, from 12.7 percent in 2011. Economists say Portugal will likely have a bigger fiscal deficit this year than it agreed to in exchange for loans from other European countries and the International Monetary Fund, because national policies, not surprisingly, have made the recession deeper than anticipated. 

What would help is if leaders like Chancellor Angela Merkel of Germany stopped insisting on austerity and helped bolster demand by, for instance, allowing weaker countries to issue bonds backed by the euro zone. That could put more into the economies and help lift them out of a downward spiral. Policy makers in Portugal and Italy would have a much easier time selling their people on the need for reforms if they weren’t also cutting popular government programs and benefits. Faster growth and lower unemployment would provide the resources that could later be used to pay down debts and reduce deficits.

We Need New Political Formations

Today's Economic Scene column by Eduardo Porter, "From Mexico, Some Lessons for Europe," looks at Europe's allegiance to austerity and compares it to Mexico's attempt to deal with its sovereign debt problems in the 1980s. Porter was a college student in Mexico City at the time. 

Tweak a few of the details and Mexico in the 1980s looks a lot like most Southern European countries today. In Mexico’s case, runaway government spending in the 1970s, fueled by high oil prices and greased by foreign debt, threatened to bankrupt the country after the Fed sharply raised interest rates to curb rampant inflation in the United States, increasing Mexico’s interest payments even as oil prices crashed to earth. 

Similarly, money poured into Spain and Greece when investors persuaded themselves that the bonds of all members of the euro zone should be as safe as Germany’s, the region’s most creditworthy country. In Greece, this allowed a government spending binge. In Spain it ignited a housing bubble. Both countries were left with an unbearable burden when the world economy hit a wall, creditors took flight and the money stopped.

In the five-plus years it took me to get a degree (Mexican degrees take longer) the Mexican economy contracted about 2 percent. By the time I got my graduate degree two years later, gross domestic product per person was 8 percent less than it was in 1982. Yet despite the enforced austerity, Mexico’s foreign debt in 1988 still amounted to 56.5 percent of Mexico’s economic output, more than it had six years before. 

This must sound familiar to Europe’s unemployed. If anything it’s far worse there. The Greek economy has shrunk more than a fifth over the last five years. Government debt amounts to about 170 percent of the economy; it was 100 percent when the crisis started. The economies of Ireland, Portugal, Spain and Italy are smaller, too, than they were five years ago. Their debt burden is heavier. And still, European leaders insist that more of the same must be the solution.

Porter says that Brady Bonds helped solve the Latin America debt crisis, but then he questions the applicability of a similar solution in Europe's case:

What can Europe learn from this experience? Proponents of austerity will probably note that the harsh years planted some of the seeds of Mexico’s recovery. Bankers will remark that Mexico’s absolute debt reduction package was small — much less than the 50 percent or so already granted to Greece. Economists will note that Mexico had a degree of freedom that no member of the euro area has: it could devalue its currency to gain export competitiveness. 

Nonetheless, the Brady plan was a crucial ingredient. It not only reduced Mexico’s interest costs, it also produced a jolt of confidence that pushed down domestic interest rates and buoyed the peso — reducing the burden of foreign debt. It prompted flight capital to return to the country and set off an investment boom.

The cold war, Porter argues, was a critical ingredient in getting the nations to agree to debt restructuring. Leaders in the West were afraid of Mexico tilting socialist.

The only hope of that we have today is for a genuine transformation in our politics. Occupy Wall Street for a month or two in the fall of 2011 fulfilled this hope. Political parties are captured by business-as-usual money; we need a clean sweep. Then, as a result of a police crackdown and the presidential election of 2012, Occupy evaporated seemingly overnight. Now, from what I can tell, our best hope for a political reboot is Italy's Five Star Movement.

Rachel Donadio has a story this morning, "Upstart Party in Italy ‘Occupies’ a Parliament That Is Already Paralyzed," about the continuing gridlock in Rome. The parties can't form a government and soon there will be an election to select a new president:

The pressure is rising because the seven-year term of Italy’s 87-year-old president, Giorgio Napolitano, ends in May, and his replacement must be elected with a two-thirds majority of the same divided Parliament.

Italy’s Constitution forbids a president to dissolve Parliament and call new elections in the final six months of his term. 

The presidency has traditionally been a largely symbolic office, but Mr. Napolitano has become a bulwark against political instability. Last month, he named a committee of 10 politicians, experts and technocrats and asked it to produce a list of issues on which the squabbling parties could find consensus. They are expected to issue their findings this week.

On Tuesday, some of the Five Star Movement lawmakers “occupied” the Senate, meaning they remained in their seats after the day’s session. The group said they would stay until midnight to protest a decision by the presidents of the Lower House and Senate not to form permanent committees until Parliament forms a government. 

They passed the time by reading aloud from a legal code. 

Mr. Grillo, who does not serve in Parliament but runs the Five Star Movement with what critics say is an autocratic hand, accused the two parliamentary leaders of having carried out “a coup” by blocking the creation of committees.

The last paragraph of Donadio's story is not encouraging:

Mr. Bersani [leader of the center-left Democratic Party] has so far failed in his efforts to try to persuade some of the Five Star lawmakers, all of them first-time politicians, to support a center-left coalition. But as time passes, the movement appears to be splintering and may not vote as a bloc.

New political formations are hard to hold together. Grillo is smart to keep the Five Star Movement in motion doing actions like its occupation of the Senate. My experience with the Green Party coming out of the 2000 presidential election is that we did not do enough actions to keep people focused and engaged. We spent our time in a tedious bylaws revision process which lasted months, created division and killed any flame. So far the Five Star Movement seems to be avoiding these mistakes. The best thing for the Five Star Movement would be new elections as soon as possible.

Portuguese Judiciary Deals a Blow to Austerity

Portugal is in the news because its constitutional court tossed out part of its austerity package. This from a story today by Raphael Minder, "Portuguese Debt Crisis Brings New Trouble for Euro":

In an address to his beleaguered nation on Sunday, Prime Minister Pedro Passos Coelho warned that his government would be forced to cut spending more and that lives “will become more difficult” after a court on Friday struck down some of the austerity measures put in place after a bailout package two years ago. 

The renewed tension in Portugal raised the threat of further trouble elsewhere in the euro zone, where ailing members have struggled to rebuild economic growth after enduring wrenching spending cuts. 

“The risks in the euro zone have increased markedly over the past six weeks or so,” wrote Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based consultancy that assesses risk on sovereign debt. 

A critical moment for the latest trouble took place on Friday, when Portugal’s Constitutional Court struck down four of nine contested austerity measures that the government introduced as part of a 2013 budget that included about 5 billion euros, or $6.5 billion, of tax increases and spending cuts. The ruling left the government short about 1.4 billion euros of expected revenue, or more than one-fifth of the 2013 austerity package. 

Specifically, the court, which began reviewing the legality of the government’s austerity measures in January, ruled as unconstitutional and discriminatory the government’s plans to cut holiday bonuses for civil servants and pensioners, as well as to reduce sick leave and unemployment benefits.

Minder also quotes Jens Weidmann, the head of Bundesbank, saying Cyprus may need an additional bailout:

Cyprus received a bailout of 10 billion euros from international creditors last month. It may need even more to save its banks, a top German policy maker said on Sunday. 

“The situation in Cyprus has stabilized in the last few days,” Jens Weidmann, president of the Bundesbank, the German central bank, told Deutschlandfunk radio. “However, I wouldn’t rule out that the need for liquidity in Cyprus could increase.” 

The crisis in Cyprus reflects how urgent it is for the euro zone to establish a means to shut down failed banks without burdening taxpayers or endangering the financial system, Mr. Weidmann said. 

“There continues to be a problem with banks that may be too connected and too big to wind down without creating a danger for the financial system,” he said.

Last Friday Landon Thomas Jr. had a story, "Ex-Bank Officials Named in Cyprus Inquiry," about the findings of an investigative report commissioned by the central bank of Cyprus. Known as the Alvarez report after the financial consulting firm Alvarez & Marsal that the central bank hired to look into why the Bank of Cyprus doubled down on risky Greek bonds, it establishes what has already been widely reported. According to Thomas,

The Bank of Cyprus, long considered the better run of the two large banks that have been at the center of the Cypriot bailout debacle, decided to speculate in high-yielding Greek bonds by accumulating a 2.4 billion euro position from late December 2009 until June 2010, just as the Greece government was running out of money. 

That decision resulted in a loss of 1.9 billion euros, or about $2.4 billion, when bond investors were eventually forced to take a 75 percent haircut under the final terms of the Greek bailout, worked out last year. 

That loss and a larger one at the other big Cypriot bank, Laiki Bank, on a similarly misguided investment foray, totaled 4.5 billion euros. That was more than Cyprus, with a gross domestic product of 18 billion euros, was able to sustain. And the losses resulted in a near-collapse of the Cypriot banking sector, leading the country’s government to seek a 10 billion euro bailout from the troika of international lenders: the International Monetary Fund, the European Commission and the European Central Bank.

The Alvarez report provides new details on the extent to which Bank of Cyprus officials were hoping that the high yields generated by the Greek bonds would cover the bank’s imploding loan book. 

Alvarez investigators said that, according to the records they were able to secure from the bank, the decision to buy the bonds was based on a last gasp effort by the bank to generate profits as their loan book began to sour in late 2009 and through the spring of 2010. 

Investigators also said that the bank, like others in Europe at the time, made use of cheap financing from the European Central Bank to make these bets. As a result, executives in the bank’s treasury department bought the riskiest high-yielding bonds available and found willing sellers in banks eager to reduce their exposure to Greece. 

When it became clear not long after the Greek bailout in May 2010 that some form of debt restructuring would have to take place, the Bank of Cyprus found itself stuck with a 2.4 billion euro portfolio of Greek bonds.

Annie Lowrey has a story today, "Lew to Press for Growth in Europe," about Treasury secretary Jacob Lew's trip this week to Europe to ostensibly jawbone leaders there to dial back on austerity. What's interesting about the story is that the normally excellent Lowrey undercuts her lead halfway through the article:

But countries like Germany have shown little willingness to ease the constraints of austerity for peripheral European countries, or to engage in stimulus spending themselves. And for years, European officials have bridled at being lectured by officials from Washington — particularly because many feel that their financial crisis was largely caused by American financial products exported around the world by American banks. 

Though Mr. Lew will travel to Europe with a familiar message from Washington, it may not be delivered as urgently as in the past. The European crisis continues to weigh on American growth, cutting into exports, but many economists believe that the United States has entered a cycle of self-sustaining economic growth driven by a turnaround in housing and improving household budgets. 

Moreover, American companies have over the last few years steeled themselves against Europe’s financial woes, and the risk of contagion is perceived to be relatively low. 

Europe was the primary international concern for Timothy F. Geithner, Mr. Lew’s predecessor as Treasury secretary and a familiar face on the Continent. But perhaps as a sign of Europe’s diminishing threat to United States economic stability, Mr. Lew’s first overseas trip as Treasury secretary, last month, was not to Paris or Berlin or Brussels, but to Beijing.

Apparently what Lew is really in Europe to do is continue negotiations on a free trade agreement between the United States and the European Union. In other words, it is neoliberalism full speed ahead. Talk up stimulus, continue with austerity, and finalize the free trade agreement.