Greece has only a couple of weeks left to convince its creditors

The Economist :Jul 28th 2012 | ATHENS |

ON HIS visit to Athens this week, José Manuel Barroso, the head of the European Union (EU) Commission, brought a stern warning for Antonis Samaras, the new prime minister of a precarious right-left coalition government. Greece has only a couple of weeks left to convince its creditors that it can put economic reforms back on track. Should its latest plans for making €14.5 billion ($17.6 billion) of spending cuts over the coming two years be judged unrealistic, the next €31.2 billion loan tranche will again be held back.

If that happens, Greece would be unable to finish recapitalising its big banks. Without credit, the economy will seize up. Pensions and public-sector salaries would not be paid. A “Grexit” from the euro could occur within weeks. The worry for Greeks is that with Spain and Italy coming under attack in financial markets, some euro-zone members may be tempted to sacrifice Greece.

Two previous Athens governments have failed dismally since mid-2010 to implement reforms agreed on with the Commission and the IMF, thanks to widespread official corruption and a lack of political will. Mr Samaras opposed the first Greek bail-out while in opposition; he still wants, at some point, to renegotiate parts of the second.

Yannis Stournaras, the technocratic finance minister, has the difficult job of persuading Greece’s creditors that his government can do better than its predecessors. The troika of officials from the EU, IMF and European Central Bank were especially dismayed by a looming €3 billion gap in privatisation revenues this year, as well as by the lack of progress in cutting jobs in the public sector.

Just after the troika arrived, on July 25th, Mr Stournaras announced new bosses for the privatisation agency. And Antonis Manitakis, the public-administration minister, declared that five public-sector entities would be shut immediately and another 16 merged. Their 5,250 employees would retire or be transferred to other jobs. That is still far short of the 15,000 dismissals in 2012 agreed to by the previous government. Annual savings would be a modest €40m. Mr Manitakis promises another 180 mergers, with much bigger savings, within weeks. The civil service union is already threatening to strike. Will Mr Barroso and the troika think it is enough?

The Euro Zone Won’t Fail...but the crisis will only make it stronger.

Source : Stefan Theil | NEWSWEEK


Speculators have begun betting on an early euro-zone exit by Greece, a politically corrupt, basket-case country that has long cooked its government-debt figures and now faces years of stagnation—if not deflation and depression—as it slashes public deficits and shrinks wages in an attempt to regain competitiveness. In a confidential paper leaked last month, the European Commission warned that "imbalances" between stronger and weaker euro states risk the very existence of the euro itself.

They are wrong. Currency unions don't collapse because weaker members leave them. Were Greece to start printing new drachmas, they would immediately plummet in value against the euro. A super-weak drachma would make Greek wines and vacations very cheap for foreigners, but that gain for Greek competitiveness would be more than offset by bank runs, rampant inflation, and the burden of having to pay back old euro-denominated debts and mortgages with a newly worthless currency. Even if Greece's inept political class decides to take the risk—not unthinkable, since it might be a way to shift blame to outsiders—it would not break the euro zone. The euro would hardly be less stable without Greece, or even without Spain and Portugal. (Together, the three make up only 18 percent of euro-zone GDP.) On the contrary, a euro centered on Germany, France, and a few of the more advanced Central European economies like Poland would make the union stronger, not weaker. The risk of this is not so much the result but the financial and political upheavals in getting there.

The euro zone would break up not when weaker members leave, but when stronger ones no longer see gains from the arrangement. Today, that cornerstone is Germany. Europe's largest economy has emerged from the crisis bruised but with comparatively healthy public finances and an economic model unquestioned by its people. With the German political class so thoroughly invested in the common currency—and German companies dominating Europe more than ever—that scenario seems highly unrealistic.

On the contrary, Germany is working hard to impose its monetary and fiscal discipline on the rest of Europe. At home, it already has a new constitutional amendment prohibiting deficits starting in 2016. Chancellor Angela Merkel vetoed EU bailouts of weaker economies, forcing countries like Latvia and Hungary to seek the tough love of the IMF. The Frankfurt-based European Central Bank, unlike America's Federal Reserve, has a strict inflation-fighting mandate and is prohibited from using monetary policy to jump-start the economy. It has pumped far less money into the EU economy than the Fed has done in the U.S., even at the cost of allowing the euro to rise against the dollar by 20 percent since the start of the crisis. ECB chief Jean-Claude Trichet has told Greece that it must reform on its own, and denied there would be a bailout. Now Merkel is pushing to install German Bundesbank chief Axel Weber to succeed Trichet when his term ends next year to make sure the ECB doesn't soften its course.

As the focus of the economic crisis shifts from the financial to the public sector, there will be more risk and pain. In Latvia, whose currency is pegged to the euro, slashed public spending has accelerated the country's path to depression; GDP is down 24 percent in the last two years. Ireland, which is paring back its deficit with across-the-board cuts in civil-servant salaries, has seen GDP slide by more than 8 percent in the same period. Back in Greece last week, farmers rioted against a planned freeze in their subsidies.

It's no accident that the countries with bubble and deficit problems have also lost labor competitiveness, especially within the euro zone. Ireland, Spain, and Greece have let their wages rise about 20 percent faster than Germany's since the euro's introduction. With Germany now so much more competitive, it has accumulated China-style trade surpluses with weaker euro-zone members. Without the currency safety valve, those countries will have to make deep wage cuts, along with tough product- and labor-market reforms that help raise productivity.

Working out these problems could leave Europe stronger as a political institution. Just as the Great Depression forced the U.S. to impose a tighter federalism, today's economic crisis will likely force Europe into a closer union. Already last week, the EU Commission began pushing reforms on Greece. Through the back door of an economic crisis, the euro zone might then get the kind of political governance that skeptics always warned was necessary for a currency union to work. At the end of the tunnel could be a more integrated Europe, reformed problem economies, and ultimately a more competitive Europe.

Greek crisis may not have major impact on India, says Subbarao

Source :Newswire18 / Thiruvananthapuram May 21, 2010, 0:17 IST



Reserve Bank of India Governor D Subbarao today said the debt crisis in Greece was unlikely to have a major impact on the overall sentiment in India.
But, warns that trade and services exports may be hit.
“We do not see much of an impact in the base case scenario on financial flows and overall sentiment,” Subbarao told reporters after RBI’s central board meet here.

“Using the base case scenario, there will be an impact on the trade side as Europe accounts for 27 per cent of India’s trade. More importantly, it might have an impact on services exports,” he said.

There could be some “knock-on impact” on India but it would be transient, he said. The governor said the central bank had been studying the developments in Greece for the last one month. “We have been discussing internally about what impact it will have on our economy.”

RBI Deputy Governor Subir Gokarn said the crisis in Greece could result in two absolutely diverse situations. The crisis in the European nation might trigger large outflows from India if foreign investors became risk averse, he said. Also, India could attract large inflows since it was a stable emerging economy with high growth potential, he added. “We are keeping a watch on both the situations. We have the capacity to manage the shocks.”

Led by Greece, Europe has been caught in a severe debt crisis that has hit the euro. On Wednesday, euro, the 16-nation common currency, tumbled to a four-year low against the greenback after it slid below the $1.2150 level.

Today, it recovered slightly and is trading at $1.2324. However, currency dealers speculate the euro may continue to remain under pressure until there are concrete measures from the European countries.

Earlier this month, the European Union and the International Monetary Fund put together a nearly $1 trillion package to rescue the continent from financial collapse.

On fears of a possible liquidity crunch arising from credit outgo to telecom companies which have bid for 3G spectrum for a mammoth over Rs 67,000 crore, Subbarao said there was no possibility of the general liquidity getting affected and banks could lend credit to telecom companies as part of this process.

Greece, debt and a lesson for the U.S.

Source :IHT:May 12 2010

It is easy to look at the protesters and the politicians in Greece —and at the other European countries with huge debts—and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that.

Only benefit cuts or tax increases can.

Yet in the back of everyone’s mind comes a nagging question: How different, really, is the United States, the world’s largest economy? The numbers on U.S. government debt are becoming frighteningly familiar.

The debt is projected to equal 140 percent of gross domestic product within two decades. Add the budget troubles of state governments, and the true shortfall grows even larger.

Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they are paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

The American people are.

Americans have not figured out the kind of government we want. We are in favor of Medicare, Social Security, good schools, wide highways, a strong military— and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and the United States.

Many people, including some who claim to be outraged by the deficit, still have not acknowledged the disconnect.

Consider the different fates of two parts of President Barack Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts in agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored those proposals.

The message seems clear: Woe unto the politician — in Washington, Athens or London—who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously cannot continue, as Robert Greenstein, perhaps the leading liberal budget expert in the United States, points out.

‘‘Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’’’ said Mr. Greenstein, head of the Center on Budget and Policy Priorities.

‘‘But the bottom line is, there really is no avoiding the hard choices.’’ For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout—chiefly Germany—are demanding big cuts in the welfare state. Greek citizens will soon have a harder time retiring in their 40s.

In the United States, we are likely to have the chance to solve our problems before our lenders demand it. Those lenders continue to see the American economy as a haven.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. After the recession in the early 1990s, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue is not the nearterm deficit — the one created by the recession, the wars in Iraq and Afghanistan, the tax cuts enacted under President George W. Bush and the Obama stimulus. The main issue is the longterm deficit.

As societies become richer, citizens tend to want better schools, better medical care and other government services. The United States is following that pattern, but without paying the necessary taxes. That combination has it on a course to Greece-like debt.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer it waits, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs departments are less than $600 billion.

That is why fixing the budget through spending cuts alone, as congressional Republicans say they favor, would be so hard.

Democrats have more of a strategy —raising taxes on the rich and using health care changes to reduce the growth of Medicare spending—but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of that may be unpleasant. But by no means will it doom the country to reduced living standards or even slow economic growth. Americans can still afford to spend more on Medicare than today, and more on education, the military and other areas, too. We just cannot afford the unrealistic promises that the government has made. We need to make choices.

‘‘It’s not a matter of whether we have the resources to solve our problems,’’ as Alan Krueger, the chief economist at the Treasury Department, said. ‘‘It’s a matter of political will.’’ For now at least, elected U.S. officials are hardly the only ones who lack that will.