In These New Times

A new paradigm for a post-imperial world

A Greek rescue means grave problems …for Britain

Posted by seumasach on February 16, 2011

City hopes of the fragmentation of the eurozone seem to be fading fast: enter the great sterling crisis.

Dionysios (Dennis) Kefalakos

New Europe

13th February, 2011

During the last EU Summit of 4 February, France and Germany presented their plan to settle Eurozone’s long term financial problems. The “package” is meant to drastically reduce the large discrepancies that exist in the fiscal and the competitiveness fronts, between the seventeen Eurozone member states, make the zone cohesive in the long run and guarantee its creditworthiness. As it has already left to be understood by Paris and Berlin some three weeks ago, the short term Eurozone problems, stemming mainly from the Greek woes, are also to be settled with carrot and stick. The carrot is the support to reduce this country’s state debt, and the stick being the introductions of rules making impossible for all future governments to run unsustainable budget deficits. Let’s take one thing at a time.

According to the Franco-German plans, state budget deficits in all Eurozone member states will be made subject to constitutional constrains to be introduced soon- in countries where they do not exist yet – while in the competiveness facet indexation of wages to inflation will be abolished. There are more ideas in the Franco-German long term planning, like the introduction of a common lower profit tax rate in all Eurozone member states. What characterizes these proposals is that they all have created strong reactions. For example Luxemburg runs an indexation of wages to inflation but this has not impeded the country from being competitive and run very low state budget deficits.

While however those proposals are meant to cater for the future, since they are expected to come into force after 2013, there are short term problems that need to be urgently attended. Greece and Ireland, despite having entered under the protection of the financial umbrella created by the troika of EU, ECB and the IMF their medium term problems cannot wait. Actually, due to the fact that the Greek case is the worst of all, Athens will show the way to Dublin through…Berlin and Paris.

In more details now, in the case of Greece its state debt will be 157.3% of the GDP in the year 2013, exactly when Athens should theoretically start taking care of itself, that is, to be able to refinance its debts in the open market. Such a prospect however has being termed by all analysts as impossible. Paris and Berlin however have a plan for a way out, and their proposal has reportedly being already accepted by all the other countries. There is however a “catch 22” clause, because France and Germany have bonded the short term way out tightly together with their long term plans. One cannot have the one without the other.

Decision in spring
This means that Greece and Ireland in the first place – and who knows which country may need a similar treatment in the future – have all to sign up for the entire package now. Actually, it has to be a unanimous decision within the Eurozone and the whole thing must be agreed upon before the next EU leaders Summit in spring. According to well informed sources the only point that the Berlin-Paris axis can make concessions is the indexation of wages, allowing it under very strict conditions.

Briefly it must be reminded that the Franco-German short term plan for Greece is reportedly thought to contain more finance for this country through the EFSF mechanism, to the tune of at least €50 billion. It will be used by Greece to buy back a good part of its debt in the secondary market, paying prices below par, but not asking its creditors for any kind of rearrangement. The target is to lower both the outstanding debt and the cost of servicing it.

The usual eurosceptic sources however, having as a reference point the City of London, object the extent of this reduction and insist that Greece needs a clear and deep “hair cut”. Their obvious target is to put a question mark over the creditworthiness of Eurozone as a whole by exploiting, digging and betting for a Greek, if not default, at least a debt rearrangement. This is actually the only handy British defense, against euro’s omnipotence vis-à-vis the pound sterling.

However the truth about the Greek debt is that, together with the announcement of the buying back operation financed by the EFSF, it will be also revealed that the troika’s initial €110 billion soft loan maturity is to be extended to 30 years instead of 5 now. By the same token EU and ECB are contemplating a reduction of interest rate to this loan bellow the agreed 5%.

30% debt reduction
In short, the prediction of the Greek debt as a percentage of GDP ranging from 152.6% for 2011, 157.0% for 2012, 157.3% for 2013 to 154.2% for 2014 should be soon reduced to much lower levels. How much and how? At least 30% down says an analysis appearing in the Greek economic daily, “Naftemporiki”. The idea behind is that, out of the €370 billion of the entire Greek state debt as it is predicted now for the year 2013, at least the 110 billion troika loan will not be negotiable and will not appear in the secondary markets. And this is really something the London financiers should worry about. But then again the whole €110 billion loan maturities will also be extended and interest charges reduced.

After all these operations, the Greek state debt will appear at least 30% less than it is predicted to be in the coming years. And this brings it near the 100% of GDP neighborhood, a sum that can be manageable by using the traditional tool of prime budgetary surpluses. But the Greek government runs already positive prime results in 2010 and 2011 state budgets. And all that will happen without Greece asking for a straight forward debt rearrangement, something that London would love to see happen for two very good reasons.

First, because the City would have gained hefty commissions out of a rearrangement of such debt, and secondly, because the pound sterling would have been greatly helped, had a Eurozone member state defaulted. In such an improbable event there would not be an obligation for the Bank of England to support the national currency, possibly by increasing its interest rates, and thus send the always fragile British economy to a new round of recession.

In short Greece’s rescue would mean problems for Britain. The reason is now obvious. If the pound’s parity with the euro cannot be maintained at non inflationary import price levels through the traditional tools of competitiveness and state budget surpluses, then it remains either a good Greek tragedy or a pound sterling interest rates increase to stop its dive vis-à-vis the euro.

Lastly one should note, that as the Greek tragedy develops, some English language “sorcerers” cannot hide their helping to he banking goods fighting to gain the war against men, no matter what this help costs to the whole of Europe and the western world, including Britain.


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