Sunday, 28 November 2010


Preconditions to exit the crisis

left-red-arrowThese last few days, we are experiencing an upsurge of the international financial crisis. In fact, we stand now where we were two years ago on an international level. We are back in 2008 when this was just a banking crisis, when we had not realized at full extent that it would become a fiscal crisis, a crisis of government debt

From banking to fiscal crisis and back

In this last year, the crisis has indeed become fiscal on a global scale. Suddenly, the Irish tiger turned inwards revealing the frightening extent of the crisis in the world’s -and certainly in Europe’s- banking system. Because we're addicted to Greek macroeconomic and fiscal data, because we’re talking too much about the extent of our budget deficit, because we’re struggling hard to register even one tenth of a percent less in the 2010 deficit, as it will officially be announced by our partners from the European Commission and Eurostat, we’ve come to believe that we might be the only ones with such a high deficit in our budget.

You know this is not true. There are many EU member-states, within or outside the eurozone, with their budget deficit approaching or exceeding ten percent of GDP.

We also have a strongly held belief that we are the only problematic nation within the EU and eurozone with a huge public debt which is already reaching 140% of GDP. Moreover at the end of the stability program in 2013 it will probably exceed 160% of GDP, after the last adjustment to the levels of 2009, as announced by Eurostat a few days ago.

Public and Private Debt

But now we should think the other way around: Greece is indeed a country with a huge public debt, but fortunately its private foreign debt is not as high as in other eurozone countries. For traditional and cultural reasons, its banking system has been much more conservative. Certainly, there are some disturbing elements. Some loan repayments cannot be made, namely consumer, home and business loans. But the Greek banking sector was never involved in the derivatives bubble and in no case did its size become a liability in relation to the national GDP.

The situation is quite different in other countries. Portugal’s public debt might be much smaller but the country has a huge private debt and this is certainly the case of Ireland too. We all understand now that the exposure of the Irish banking sector and of those outside Ireland who gambled in it, mainly in derivatives, is potentially huge. Some say it is worth $350 billion, others say $750 billion, but in any case it is now becoming clear that if the Irish problem becomes a fiscal problem, Ireland’s public debt will surge.

The clash of formal and informal characteristics

On the other hand we must not forget, and I quote, that Greece, in the middle of this unprecedented crisis -this is our own generation’s war- is still a country attracting enormous interest, with very large endogenous forces of growth. Greece remains one of the thirty largest economies in the world in real figures. It remains among the 20 or 25 nations with the best social growth indexes –based on the UN’s complex criteria. But it is also a country that finds itself constantly -since 1830 when the modern Greek state was founded- in the middle of a fierce fight between formal and informal characteristics. Real and grey economy are clashing, law-abiding and law-defying societies are also clashing one against the other and so are institutional and shadow politics.

Greece’s big challenge is to actually reconcile the two conflicting elements and achieve a mild, gradual and organized transition from the grey to the real economy. This is much more complicated than fighting tax and contribution evasion or the everyday fight against the grey economy. This is because this fight involves practices, habits and structures that have taken shape over several decades.

Crisis as an opportunity

The crisis is getting worse, leading to insecurity all over the EU, the eurozone and the global financial system. The incapacity of the so-called global economic governance –and of the EU itself- is becoming clearer. Nevertheless, there is hope. This crisis can lead to solutions to pressing problems, which we had been trying to resolve in a proper negotiating time. You cannot accomplish everything at once or at a time of your choosing, especially when you are the weak link in a negotiation for a loan or when your lenders, your partners and your overseers can dictate their own terms and, above all, impose their own viewpoint.


Unfortunately the problem is not solely Greek. And I say “unfortunately” because we cannot influence several critical parameters. It’s not even a European problem, it’s global. That is the reason you see IMF willing to participate in all the rescue attempts, in all the rescue mechanisms. This reminds us of what has been taking place over the past sixty years in the European Security and Defence field, which, in reality, is organized around the existence and operation of NATO; In other words, the approach is Euro-Atlantic.

If you switch “NATO” with “IMF” you can better realize that to a great extent the problem we are now facing is Euro-Atlantic, not just European; this is a problem of the eurozone but also a problem of the US, which is interdepended on China, in terms of its public debt; and this is also a problem faced by all monetary zones, not just the eurozone.

Conflict of Sovereignty

The problem now acquires dimensions that are unmistakably contradictory. As provided by the €110 billion rescue plan for the Greek economy, Ireland and Portugal are lending Greece with interest rates lower than their own borrowing interest rates. Ireland has already ceased borrowing from the markets and joined its own rescue plan. You all remember Slovakia’s reaction to the Greek rescue plan. What is taking place now is acquiring political and institutional dimensions. In reality we are confronted with a conflict between states and markets, a conflict for sovereignty.

The question is who is in charge. Next question is whether all this will take place within a system of perceptions, institutions, practices and assumptions that allows markets to have the final say, subverting countries and international organizations –the EU as a regional entity, the IMF, the World Bank and so on. Another question is whether Europe or jointly the EU and the US will take the necessary political initiatives. Obviously, however, what is under discussion is the need for major political and institutional initiatives at a European level and at the level of global financial governance.

The need for major initiatives in international politics

In 2007 and 2008 we were in search of a Security Council of a financial and monetary nature and we thought that the G20, or even the G8, could play that role. They couldn’t. The decisions and the rhetoric of 2008 and 2009 did not materialize into institutional and, eventually, legal changes. What needs to be done is to start this process from a more compatible level, that of the European Union.

EU’s “genetic” contradictions

Unfortunately, the European Union is being held hostage by a “genetic” contradiction. It advanced its financial institutions and pushed for the monetary union. The eurozone and the European Central Bank are both very advanced examples of federalism. On the other hand, Europe has done nothing towards its political and institutional union.

  • How is it possible to have a currency like euro and a central bank like the ECB and not have mechanisms for internal redistribution of surpluses?
  • How is it possible to have a monetary policy by the ECB without the necessary political support or, as is often the case, fortunately in contradiction to political directives and decisions of the Council?
  • How is it possible to not have a “common” policy for taxation, social matters and growth as well?
  • How is it possible to leave Europe hostage of such structural imbalances that no EU budget of a mere 1% of EU GDP can address?
  • How is it possible to accept the dubbing policies taking place within the EU? Ireland is a perfect example of tax dubbing. Countries that have joined the EU recently are, in effect, exercising a kind of a social dubbing, namely in payroll and social insurance.
  • And above all, how is it possible to tolerate, without further negotiation, the incontrollable turn that the intra-EU trade balance has taken?

In the United States, the primary example of a big federal state –a continent by itself in fact- interstate commerce is a huge political, legal and growth-related topic. So it has to be put on the table in Europe as well, under different terms. But we must also possess a social and political framework that inspires us and pushes us towards that direction.

Perceptions of size and the position of Greece

This is the very challenge for the European Union and its political personnel. It would be of dire consequences if Europe’s fate –in the second decade of the 21st century and during such financially polemical circumstances- started developing financial nationalism and state protectionism. This is what is now happening: we have mechanisms of state protectionism.

There are major issues for which we need to take a stance and Greece cannot think bigger than what she is. Greece is fully aware of the correlation of forces. But she’s also fully aware of the situation too. That’s what we are doing as a country. We say in a clear voice, in Europe and overseas, what the situation is and try to participate in initiatives related to the necessary defence mechanisms.

In reality, the question is whether a political, institutional and transparent viewpoint will prevail. Or whether we let anonymous, incontrollable and shadowy markets dominate politically. It is a conflict of power, victims of which are the national economies and, in the end, the citizens.

Income and property

The major problem in Greece right now is that incomes have been curtailed. We are obviously concerned about lower and medium-size incomes because restituting high-end incomes is easier. But this is not the case for the lower and medium-size incomes and we know that dropping from the middle-class to the lower is more than easy -actually can be dramatically easy. Nevertheless, property ownership in Greece is still strong and resistant to the crisis.

Let me be clear, once again: Greece, even with a 160% of GDP in public debt predicted for 2013 (in the worst case scenario) has private equity invested in real estate worth over 400% of GDP. I’m referring to the private property and not the much talked about state’s real estate property. As you see, in terms of the private property there is potential, there is hope. And certainly despite the fact that some people are forced to spend their savings, still the high level of household and business savings is a very important factor. Figures show that citizens save while the state borrows, but statistics can be tricky in hiding many imbalances and injustices. This is what we all know.

A line of defence

Therefore, our first priority must be to have a line of defence. We must be ready and flexible to manage the spread of the crisis in the best possible way. This could involve the extension of the €110 billion loan repayment period; *[2] or the interest rates; or the interaction of different support mechanisms; or the functions of the ECB; or perceptions on inflation and monetary expansion. It could involve a number of things that can affect Greece and we hope to be affected positively, provided we have a line of defence and we are on alert –I repeat- because the developments are rapid and contradictory and they cannot be controlled centrally.

At an institutional level, there is no such control mechanism. The most trusted points of reference are our lenders: the IMF and the ECB. This is where it has come to: international financial institutions have acquired policy roles far more crucial than the roles of the political institutions themselves.

Three parallel and equal axes

With this goal as primary, it is obvious that we are compelled to formulate a national plan, the very plan we are following as a government and as a country. It is comprised of three parallel and equal axes:

a. The consistent implementation of the memorandum

The first axis consists of the strict and consistent implementation of the memorandum terms. The memorandum is a political text. It is both a political accord between Greece and its lenders and a contractual foundation of the loan agreement, which is governed by English law, as connoisseurs of the area would attest to. So what happens with the memorandum and the loan? Something very simple, which surprisingly is not understood well: We have not taken the loan yet. If we had received the total of €110 billion, a third of our debt would be in fact in the hands of institutional lenders (IMF, ECB, eurozone), allowing us thus to negotiate on other terms. But the loan is disbursed in stages. We have received only €29 billion and are now awaiting the third installment and expecting the fourth in March to cover our borrowing needs for 2011. In 2011 we will need €40 billion. We have maturing bonds and must consistently comply with the loan conditions in order to avoid problems with the installments. We do not know if the expansion of the crisis to other European countries will enable us or not to improve the loan conditions. The fact is that this way or the other we must meet the terms as they’re presently set.

I often hear things about the fiscal policy mix we have been implementing. There is a well-established global perception: It is believed that our problem is not just fiscal, but it is also structural, meaning a problem of interaction between the real and the grey economy. At the end of the day, it is a competitiveness problem. So lenders want changes that affect public finances and establish a tax system which is logical, implementable and fair; they want measures that enhance competitiveness.

Of course, we could suggest –and this is what we are constantly doing- measures of equal results. It is obvious that we can cut down public spending to the very end. But there is a problem of production costs that keeps lenders preoccupied and we must be convincing when we say that Greek competitiveness can be restored without further reducing incomes of the workforce. This is a very complex effort.

For example, the Defence Ministry’s contribution to the government’s efforts to reduce the deficit was more than €1.6 billion, not counting the horizontal cutbacks in payroll and operational costs. Everybody talks about the “peace dividend” but no-one realizes that we have drastically reduced military spending. In addition to reducing payments by €800 million, we have cut another €800 million from the 2010 deliveries, which affect the determination of the deficit according to the Eurostat rules. This contribution equals that of the civil servants salary cuts. But it’s not enough, since this alone does not contribute to competitiveness. The matter should be handled on fiscal terms. To a large extent this is a very important accounting operation for the national economy, but it does not affect the structural characteristics of the Greek economy.

b. Policies beyond the memorandum: the role of the state and banks

The second axis is equally important and consists of the implementation of policies beyond the memorandum. Take for example the major reform of the Local Government System (Kallikratis project) that divides the country into new Regions and Municipalities. This only means one thing when it comes to the memorandum: €500 million less spending for regional policies! This is what our lenders care about. But for us, the Regions and the Municipalities mean tools for growth, as a new de-centralized institution that can take crucial initiatives concerning the local and regional model of development, the co-operation between local authorities and the production forces and the correction of the deficiencies of the welfare state.

This is not in the memorandum. In the crucial domain of public administration, the memorandum calls for benefit restrictions, for a Single Payments Authority, for a single payroll; it does not mention that the public administration should be functional, should provide solutions, should help the citizen, should be investment-friendly and development-oriented and at the end of the day should respect the citizen. These are policies not described in the memorandum. Everything related to the state reform is actually outside the memorandum but front pages focus mainly on the measures included in it. The major structural change is not only in the domain of the Public Utilities Companies (DEKO) and the financial cost of their damages, neither is in the decision to open up the regulated professions. These are very important changes, but the operations of the state both in the form of public administration and as policies for the social welfare and cohesion are far more important.

It is equally important to ensure more transparent and effective relations with the banking system. We have of course the capital support fund and the supervision mechanisms but we must take a closer look at the link between the banking sector and the real economy, in other words how the banks support the real economy. Both banks and the Greek government are fully aware of this. There is no auto-pilot here… Money given to banks to maintain the system’s balance is not infused to the real economy in the form of liquidity. Both banks and businesses are in search of liquidity and in effect, are managing citizens’ deposits. The EU, the ECB and the state, as well as the banking system, guarantee these deposits and this is what the major Irish rescue plan is all about. There is greater concern to save a bank than to save a country.

Therefore, unfortunately the fiscal problem is becoming a problem of the banking sector. On the other hand, supporting the banks is a shield for the fiscal rescue of the states. Both assumptions are in force. This is where major initiatives on a regional level are necessary, as is the case of the city of Thessaloniki and the region of Central Macedonia in northern Greece. These initiatives are a challenge for the newly elected representatives of the local societies and businesses on a regional and municipal level. Greece is a small country of course and national often coincides with regional.

c. Light at the end of the tunnel - measures to deflect the crisis

The third axis is of crucial importance. It is about having an exit point from the crisis. You need to tell people where the desired end is. A prospect is needed, a specific date must be set, because people need to feel there is a way out, there is hope. And indeed there is! This is related to the first part of my speech; it is connected to the new, starker developments that can, somehow, have a positive effect. Because extending the loan repayment period is obviously on the table. Because our loan needs for the years 2014, 2015 and so on, must be manageable, in order to go out to the markets and be a fiscally sovereign country. We must have primary surpluses, which we can achieve through deficit reduction. But what will be the cost for paying the debt? How much money from the budget revenues can you pay each year to service the public debt that is over-expanded anyway? Last but not least, you must have high growth rates.

Unfortunately, the Commission’s projections seem worse both for 2010 and for 2011. Half a percent more recession creates a problem of balance in all macroeconomic and budgetary figures. So back-checking measures against recession are very important. But what does “measures against recession” mean? These are legislative, administrative measures that are related to the locomotives of the Greek economy. The old model of development gives way to the new through construction, tourism, shipping and retail trade. Everything is included: research, innovation and green growth; but primarily tourism and construction are the most crucial areas based on the degree of their contribution to the GDP. The measures announced by the Government alongside the budget aim at exactly those areas: revoking the income source declaration system for purposes of primary residence acquisition, suspending the real estate price adjustment program for buildings already included in the urban planning designated zones, reducing VAT in certain areas of tourist services, and so on.

But all these measures require a very complex endeavor which must stem from smart and well-focused market efforts. The market asks for very specific, simple, emblematic and tangible results which should actually change the mood in the aforementioned areas. Naturally, we take all these under serious consideration, as we should, because we have to be adjustable, fast and in a constant dialogue with society.

Changes in relation to bond holders

In the context of this third axis we now see a significant change, as far as the bond holders of Greek public debt are concerned. Should the whole €110 billion is given to us it will be owed to our institutional partners, the ECB, the eurozone (through the Commission) and the IMF. That’s about one third of the total debt –in fact it’s less than that now because public debt is increasing in real figures. There’s debt in the hands of the ECB, not in the form of bonds by Greek banks held as collateral but bonds that the ECB has acquired in its own portfolio. There are Greek bonds in the hands of Greek institutional investors, Greek banks and Greek insurance funds. Those comprise two thirds of the total debt. You know that these bonds are in the hands of five institutional players, therefore, there is plenty of room for introspection, in consultation with the Commission, the ECB and the IMF. There is no room for improvisation, for sloppiness or for moves that create political and fiscal disorder and expose the country to several international hazards.

Consensus climate

We need to be ready, radical and “cautiously” conservative and defensive, because above all people seek security and certitude first and foremost for their properties and then for their income. Secondly, they need some perspective. They need justice and need to know that the fiscal measures are balanced -this is an area where there’s plenty more for us to do. And thirdly, we must use our comparative advantages. Because we have some very distinct comparative advantages.

First of all, we can adapt in difficult situations. Secondly, we have political stability. Among the three countries in the eye of the storm, Greece is the only one that enjoys such a degree of parliamentary and political stability. And our society is receptive. It could be some sort of stamina, on the part of society, or tolerance. Certainly it’s not full-hearted acceptance of a situation that is very hard. But the preconditions for national consent and a sense of a national campaign are there. It’s all about the overall mood. But mood is very important. Social, political and fiscal psychology is translated into real figures that affect our fiscal behavior and have a real meaning. It is very important that we all know what we’re doing and we’re all part of this national campaign.

This is the message that this government is sending to all: political parties, social forces and citizens.

But let me tell you something since I’m in Thessaloniki, in northern Greece today. Thessaloniki is a city which has all the advantages and disadvantages that derive from the fact it is located far away from the decision-making center. It is a city of the private sector, whatever that means –some believe it is a bad thing. This crisis gives the area, the region, the municipality, the people, businesses and organizations, an opportunity to brainstorm and produce ideas, take initiatives. Many small steps can lead to one major change. Don’t just wait for an idea that will tear down prevailing perceptions. This could only happen if initiatives on the relations between state sovereignty and market sovereignty are taken on a European level. Initiatives concerning the introduction and establishment of global economic governance institutions and the establishment of another perception for Europe, which I do not see coming.

And I don’t see that because throughout the crisis European integration is going backwards and not moving forward. Unfortunately, political and institutional voluntarism, upon which the entire course of European integration since Maastricht –in the course of the last twenty years- was built on, is reaching its limits.

If we cannot control events, uncontrollable crises occur. And the only way to intervene is partially, without unity, outside the EU frame, giving way to the G8 or G20 member-states -much like the Security Council member-states on global security issues. Then, the EU is non existent as such and you are left with little margin for initiatives that have a truly European meaning.

This is the point. We are at “war”, as I previously said trying the Defence Minister’s hat. There’s no question that this “war” is far more preferable to the real war experienced in other parts of the world. Europe remains the “happiest” of the continents, but it is an old and complacent continent. Europe must now realize that nothing is taken for granted, nothing is easy. The European giant must wake up. And you must not forget that we too are part of this giant and we too have a role to play. redsq


* This speech was given in the Money Show 2010 event organized by NORTHERN GREECE PUBLISHING, on Saturday, November 27 2010, at the Hyatt Hotel, in Thessaloniki.

The speaker thanks Mr. Alexandros Bakatselos, publisher of “Aggelioforos” daily newspaper for his honorary invitation and the paper’s managing editor Mr. Traianos Hadjidimitriou, a childhood friend, for his warm and very well-targeted salutation.

* It should be noted that the very next day following this speech, on Sunday, November 29 2010, Eurogroup spoke in favor of an extension of the repayment period for the €110 billion loan given out to Greece in installments, so that the disbursement and the repayment periods equal those for the Irish loan. In principal, this is a particularly critical decision that makes Greece’s borrowing requirements for the years 2014-2015-2016, much more affordable, thus facilitating the country’s a return to the markets. Therefore the end of the tunnel becomes clearer, provided that other conditions, such as primary surpluses and strong growth, occur.      

Tags: Speeches