published at http://www.spiegel.de By Martin Hesse and Christian Reiermann
Graffiti in Athens: The troika is more hated in Greece than in any other crisis country. Greeks view the body as the equivalent to an occupying power.
Graffiti in Athens: The troika is more hated in Greece than in any other crisis country. Greeks view the body as the equivalent to an occupying power.
The new government in Athens is intent on forcing Europe to change its approach to Greek debt — thus far in vain. A confrontation is brewing, and both sides stand to lose.
After new Greek Finance Minister Giannis Varoufakis had been repeatedly rebuffed on his introductory tour of European capitals, he opted for flattery and solicitation during his visit to Berlin last week. German Finance Minister Wolfgang Schäuble, Varoufakis said, had been an object of his admiration since way back in the 1980s for his dedication to Europe. He said that his host’s career, focused as it has always been on European unity, has been impressive.
Varoufakis went on to say that Germans and Greeks are linked by their experiences of suffering. Just like the Germans, who were yoked with the burdensome Versailles Treaty after losing World War I, his country too has been humiliated by agreements forced onto it from the outside. Both countries, he said, suffered from deflation and economic depression, the Germans in the 1930s and the Greeks today. “The Germans understand best how the Greeks are doing,” Varoufakis said.
Schäuble’s sympathy for Varoufakis’ plight was limited. Indeed, the German finance minister sees Greek demands for an end to the troika and for a renegotiation of previous agreements as an affront. “We agreed to disagree,” is how Schäuble summed up their meeting, a tête-à-tête that took 45 minutes longer than the one hour that had been scheduled.
Just one day prior to his meeting with Schäuble last Thursday, Varoufakis had been given the cold shoulder at European Central Bank headquarters in Frankfurt. ECB head Mario Draghi rejected virtually all of Varoufakis’ requests, including his demand for more leniency on debt repayments. That evening, the ECB opted to stop accepting Greek government bonds as collateral, a move which will make it even more difficult for banks in Greece to access liquidity. The move came as a surprise to Varoufakis. Draghi had told him nothing about it during their meeting that morning.
Where Greece Stands
New Greek Prime Minister Alexis Tsipras had no better luck during his own round of inaugural visits to European capitals. While he received demonstrably cordial welcomes in Brussels and Paris, he was unable to make any headway toward changing Europe’s approach to Greek aid.
Initially, Athens had demanded a debt haircut. That, though, would require Greece’s nation-state creditors to undertake immediate write-downs and either take on more debt themselves or raise taxes to make up the difference. Finding support for such a plan proved impossible, even among those governments that view Tsipras’ rejection of German Chancellor Angela Merkel’s focus on austerity with a certain degree of benevolence.
The most recent idea propagated by Greece is that of bonds that never have to be paid back — but it too was rejected. The European Union and the ECB have already made several concessions to Greece and are now insisting that treaties and agreements made with previous Greek governments be respected. The German government, meanwhile, believes that the Greek economy will return to health as long as the current path is strictly adhered to.
Tsipras and Varoufakis, however, do not feel bound by past agreements, saying that they are invalid because they have done nothing but cause suffering and hardship.
So who is right? With almost five years having elapsed since the first aid package for Greece was established, it is time to take a look at where the country stands.
WHERE DID ALL THE MONEY GO?
One of the myths of Greek aid is that the billions of euros made available by Europe only helped the banks rather than the country and its people. In other words, it wasn’t Greece that was bailed out, but German financial institutions and insurance companies, for example.
That isn’t wrong. But it isn’t totally correct either. It is true that only the smallest portion of the aid package flowed into the Greek budget to help Athens meet its spending obligations. The largest portion went toward paying back debts. That means that private investors who held Greek sovereign bonds — particularly banks, insurance companies and funds — were the greatest beneficiaries of the aid efforts.
In 2010, Greece was no longer able to pay their debt claims because Athens wasn’t able to obtain sufficient liquidity on the international capital markets. The country’s euro-zone partners sprang into the gap, along with the ECB and the International Monetary Fund. Later, the European emergency backstop fund, which was founded specifically for the purpose, took over. The result was an almost complete turnover of Greek sovereign debt. Prior to the crisis, almost 100 percent of Greek debt was held privately whereas now, 80 percent is held by public institutions. Four-fifths of Greek debt was essentially socialized.
Without this aid, Greece would have gone bankrupt and an exit from the euro zone would have been unavoidable.
WHO WERE THE BIGGEST LOSERS?
The share of Greek debt held by private creditors plunged rapidly in 2012 following a €107 billion debt write down which also forced investors to accept longer loan terms and lower interest payments. The move only came following six months of negotiations involving Greece, the troika — made up of the ECB, the European Commission and the IMF — and Greece’s private creditors.
“Had the write down taken place earlier and more rapidly, it would have been possible to push a lower share of the debt burden onto public creditors,” says Guntram Wolff from the Brussels-based European think tank Bruegel. But by the time an agreement had finally been reached in early 2012, many creditors had already sold off their shares, often at a loss.
German institutions, which held around €20 billion in Greek debt, were among the biggest losers of the debt haircut, but it was still taxpayers who bore the brunt of the losses. The bad bank FMS Wertmanagement, which took over liabilities from the nationalized holding company Hypo Real Estate, lost more than €9 billion. The bad bank associated with the Düsseldorf-based financial institution West LB as well as several state banks were forced to relinquish claims on several hundred million euros. Commerzbank, which is also partly owned by the German government, had already written down €2.2 billion.
But without the debt haircut, it is possible that banks and other financial institutions would have lost even more, Bruegel economist Wolff says. “The debt write-downs and rescheduling along with the troika aid programs ultimately helped private investors to limit their losses in Greece and in other euro-zone member states.”
NEW WRITE DOWN OR RESCHEDULING?
The ECB holds around €20 billion in Greek debt, the result of the European Central Bank’s sovereign bond purchasing scheme designed to lower the interest rates crisis-stricken euro-zone countries had to pay on international financial markets.
A further €227 billion in debt is the result of bailout packages made available by Greece’s EU partners, by the EFSF bailout fund and by the IMF. The first bailout fund, assembled in 2010, was made up completely of bilateral aid payments from EU member states and the IMF. It had a volume of €73 billion. The German share, made available to Athens by the state-owned development bank KfW, was worth €15.2 billion and was guaranteed by the German federal government. Greece pays interest of roughly 1 percent on the loan and does not have to begin repaying it until 2020. It has a period of 30 years.
The second aid package followed in March 2012. The European backstop fund EFSF had been established by then and it made €144.6 billion available to Athens, €141.9 billion of which has now been paid out. The IMF contributed a further €19 billion, of which €7 billion remains available.
Greece only has to begin paying back the EFSF loans in 2023 and they have an average period of 32.5 years. The interest rates on these loans, too, are extremely low. Recently, the Troika calculated that the average interest rate Athens pays on its sovereign debt is 2.4 percent. Germany, by comparison, must pay an average of 2.7 percent interest on its debt.
In total, Greece must dedicate around 2 percent of its economic output to interest payments, according to Bruegel. That is more than Germany, at 1.8 percent, but less than France, at 2.3 percent.
Partly because of these low interest rates facing Greece, the country’s creditors do not believe an additional debt haircut is necessary. Furthermore, with the exception of MONEY Athens owes to the IMF, Greece only has to begin paying down its debt in 2020. Similar skepticism surrounds Greek proposals for debt swaps that would see current debt traded in for “perpetual bonds” that wouldn’t have to be paid back and bonds whose interest payments are tied to the country’s economic performance.
HOW IS GREECE DOING?
Whether Greece will ever be able to pay back its debts on its own is a question about which experts have been arguing since the beginning of the crisis. Meanwhile, Greece’s debt burden, when measured as a share of gross domestic product, has only grown due to the country’s massively shrunken economy — to 175 percent.
The IMF isn’t worried. Original forecasts called for Greece’s debt load to shrink to 120 percent of GDP by 2022. But with the economy now having returned to growth and looking stronger than experts thought it would, IMF officials now believe the country’s debt load could shrink to 112 percent of GDP by 2022. Furthermore, Greece won’t end up needing as much MONEY to recapitalize its banks as originally thought.
To be sure, Greece suffered the most dramatic setbacks of any of the euro-zone crisis countries. The country’s economy shrank for 16 consecutive quarters, with output plunging by over 25 percent since 2008. Furthermore, unemployment rose to unheard of levels, with the jobless rate averaging 27.5 percent in 2013.
But last summer, the economy returned to growth and the troika believes it will expand by 2.9 percent this year and 3.7 percent in 2016, though such projections assume a continuation of the reform path Greece currently finds itself on. Even joblessness has begun dropping, though only slowly.
“Labor market reforms, such as a lower minimum wage and the reduction of incidental wage costs, have made it possible for Greece to almost completely recuperate lost competitiveness when it comes to unit labor costs,” reads an analysis undertaken by the German Finance Ministry. Exports have begun rising and tourism is booming. The current ACCOUNT deficit has noticeably decreased.
But Greece’s most impressive achievements have come in getting its federal budget under control. Last year, the Greek government brought in significantly more than it spent, once interest payments and debt payments are factored out — achieving a so-called “primary surplus.” In 2014, that surplus was 2 percent of gross domestic product, the second highest result in the EU behind Germany.
Still, this notable achievement was only made possible via drastic spending cuts. INCOMES sank significantly, youth unemployment remains over 50 percent and long lines can still be found outside of the country’s soup kitchens.
THE END OF THE TROIKA?
Berlin and Brussels have been at pains to note that the troika was not exclusively responsible for deciding where cuts would be made — for example, the fact that shipping magnates were largely untouched whereas the tax burden on pensioners and average earners was increased. The EU has sought to allow individual governments to decide where cuts should be made. The troika is only interested in ensuring that promised budgetary targets are achieved.
Nevertheless, the troika is hated to a greater degree in Greece than in any other crisis country and its visits to Athens are seen by Greeks as those of an occupying power. As a result, the Tsipras administration has made it clear that input from the troika technocrats is no longer desired. Furthermore, European Commission President Jean-Claude Juncker has expressed understanding for Athens’ point of view. German Finance Minister Wolfgang Schäuble, by contrast, believes the troika must stay and that the system has proven successful. More than anything, he is skeptical that the troika can be simply eliminated with the stroke of a pen.
The term troika, to be sure, does not appear in any EU treaties. But the agreements that established the two European bailout funds — the EFSF and the ESM — are clear about the cooperation between the IMF, the ECB and the European Commission. As such, Berlin sees the troika as being anchored in European law. “If you want to change that, you have to change the European treaties,” Schäuble says. And that can only be done unanimously. Germany’s parliament would also have to agree.
Still, Schäuble would like to accommodate the Greeks on this point, even if only on the surface. He has no problem with renaming the troika. And he has also said that the overseers don’t actually have to travel to Athens — they can just as well work from Paris, as they have often done in the past.
OUT OF THE EURO ZONE?
Should the conflict between Greece and its creditors continue to worsen, an old question will once again surface: Should Greece stay in the euro zone or not? And how dangerous would a so-called “Grexit” be for the country and for the remainder of the common currency union? The second question is vital for determining who has the better cards in the POKER game between Greece’s new government and the country’s creditors.
A possible Greek exit from the euro zone is not, obviously, a new concern. Three years ago, it looked like a realistic possibility until Berlin became convinced that the risks of contagion for other euro-zone countries was too great. But since then, the situation has changed dramatically. Both Greece and the euro zone are in better shape than they were in 2012 and would be better prepared to handle a Grexit.
Still, Greece’s departure from the common currency union would almost certainly be more problematic than Schäuble has made it sound. Josef Ackermann, the former head of Deutsche Bank who led the debt haircut negotiations in 2012 on behalf of Greece’s private creditors, continues to believe that a Greek exit “is still a very risky proposition. It would very probably lead to bank insolvencies and enormous social costs in Greece.”
Euro-zone countries may have established a functioning bailout fund and made progress on a banking union scheme, but a Greek exit could attract speculators. “International investors would quickly begin asking which country might fall next,” Ackermann believes. Markets could gain the impression that the currency union is a club that countries could join or leave as they liked.
Speculators could begin testing just how durable the rest of the euro zone really is and focus on countries like Portugal, Spain or Italy. “Their interest rates would increase drastically, which would thwart the policies of ECB head Mario Draghi, who would like to prevent exactly that,” says Jochen Felsenheimer, CEO of the investment firm Xaia.
Greece’s departure would also be just as expensive for the remaining euro-zone member states as a debt haircut because Athens would hardly be in a position to fulfill its financial obligations. Its currency would be drastically devalued and its economy would be threatened with collapse.
As such, both sides have an interest in Greece remaining part of the common currency union. But it remains possible that Athens could accidentally stumble out of the euro zone rather than actively deciding to leave. Such a scenario is referred to in Berlin as an “exit by accident.”
HOW DANGEROUS IS THE SITUATION?
A senior German government expert believes the chances of an “exit by accident” are significant. And Felsenheimer, from Xaia, confirms that Berlin isn’t alone in its fears. “Currently, investors believe there is a 50 percent chance of default on Greek sovereign bonds within the next year. That indicates that a Greek exit from the euro zone is seen as a real danger,” Felsenheimer says.
How, though, might such a situation unfold? In the coming months, Greece badly needs fresh liquidity to, for example, service its debts to the IMF. Should the new government continue to refuse to bring the second bailout package — which is still running — to an orderly conclusion, the situation could rapidly get out of hand.
To begin with, Greece would not receive the final outstanding payment from the second bailout package, a sum of €1.8 billion. Athens could initially withstand such a blow due to its primary surplus and Finance Minister Varoufakis would be able to continue paying pensions and civil servant salaries for some time.
Ultimately, though, the surplus would be used up and the new government would have to borrow MONEY on international financial markets. That, though, could prove difficult to do at a price that Athens could afford. “Because of the turbulences that the new government has caused in recent days, interest rates have climbed into double-digits and the strategy followed thus far, that of replacing IMF debt with private debt, can no longer be implemented,” says Wolff, the economist from Bruegel.
Greece would likewise be unable to turn to its euro-zone partner countries. They are only prepared to MAKE MORE MONEY available if Athens adheres to terms requiring continued reforms and austerity. In such a scenario, Greece could even be forced to issue state promissory notes which could then serve as a replacement currency. That would be the first step towards reintroducing a Greek currency in lieu of the euro.
Athens can also not rely on aid from the European Central Bank, as last Wednesday’s decision made abundantly clear. The ECB is only prepared to assist Greek banks so long as the country remains a part of a bailout program. Yet Greek banks are in vital need of liquidity from the ECB, partly because Greeks continue to withdraw money from their ACCOUNTS out of concern about a banking system collapse. Indeed, the new government will only be able to prevent the looming run on Greek banks by rapidly reestablishing trust or via the introduction of controls on capital flows.
The ECB’s tough stance has ratcheted up the pressure on Greece’s new government, raising the question as to whether Athens will give in and seek to reach an agreement with its creditors or whether it will risk a damaging confrontation that could end in a Grexit.
Thus far, there has been little sign of panic on THE STOCK MARKETS, indicating that financial markets are, for the moment, betting on a peaceful solution.
And even a banker like Ackermann is able to see Tsipras in a positive light. “The new government, unburdened by the past as it is, could represent an opportunity to cease whitewashing the situation and to finally do away with old, incrusted structures,” he says. “Nevertheless, initial measures under consideration would seem to be more designed to drive investors and companies out of the country or to discourage them from becoming involved there in the first place.”