Lots to report today, starting with the G8 consensus on the two Gs, Greece and Growth, more troubles brewing in Spain, the latest polls from Greece, a dire warning from a Mexican banker, and more.
G8 wants Greece in the eurozone, growth
Germanys’ Iron Chancellor found herself on the outs with the other leader of the G8 nations during their Saturday session at Camp David before many of them jetted off to Chicago for the NATO summit which gets underway today.
From Ewen MacAskill of The Guardian:
Barack Obama and the other G8 leaders wrapped up their negotiations on the European crisis at Camp David on Saturday with a pledge to keep Greece in the eurozone and to promote growth.
The communique, which had the growth promise at the top, represents a victory for Obama and the new French president, François Hollande, over German chancellor, Angela Merkel, who has resisted calls for a stimulus package.
But it may be shortlived. The communique was short in detail and Merkel could re-establish her dominance next week at an informal European meeting.
The eight leaders meeting at the US presidential retreat in Maryland issued a communique declaring in its opening paragraph: “Our imperative is to promote growth and jobs.”
And from France 24, a telling detail:
Following Obama’s ringing endorsement of Hollande’s ideas, British Prime Minister David Cameron, who met with Hollande for the first time on Friday evening, was the next to align himself with the French president, suggesting the two shared the same views on growth.
“There is no conflict between austerity and growth,” Cameron told reporters. “You need to have a strong deficit reduction program in order to get growth. President Hollande believes that, and I believe that.”
Cameron did, however, set up a future clash with Hollande over the Frenchman’s promise to introduce a Tobin Tax on financial transactions, saying he would not support the move.
Yeah, God forbid that we tax reckless speculators on the same kinds of speculations that tanked the world economy.
Spain predicts a larger deficit
While most of the attention’s been on Greece, there’s plenty of trouble brewing in Spain, and with deficit-trimming the primary demand of austerians as a condition for further assistance, the latest development bodes ill for the nation.
The Spanish government has revised up its 2011 budget deficit.
Madrid said last year’s annual deficit amount to 8.9 per cent of output, up from the 8.5 per cent initially stated.
The figure was revised after it emerged that the three of the country’s regions modified their own figures.
The country’s budget ministry said it still expects to hit this year’s target of 5.3 per cent, higher than the EU threshold of 3 per cent.
Spain orders massive cuts
Already devastated by severe reductions in public spending, Spain’s about to undergo still more grief in the form of cuts by regional governments combined with another tax increase.
The Finance Ministry has approved the programme for the deficit reduction of all Spanish regions, save the Asturias Principality for a general spending cut of 18 billion euros, 13 of which on public spending and 5 in tax increase.
The agreement adopted in the Fiscal and Financial Policy Council ensures that almost all the map of autonomous regions in Spain “take part in credible plans with the objective of reaching the deficit mark decided for this year” of 1.5% of GDP, said with satisfaction the competent Minister, Cristobal Montoro as he spoke to the media today.
The agreement aims to dissipate Brussels’ and the markets’ worries concerning Mariano Rajoy’s government capable of keeping regional budgets under control.
The grim choices facing Span
Under the current austerity regime, Spain’s future looks grim, and just as in the case of Greece, some are beginning to say that the nation may be forced out of the eurozone.
Here’s an analysis from Michael Pettis, professor at Peking University’s Guanghua School of Management, writing at EconoMonitor:
[T]here are really only three ways Spain can regain competitiveness sufficiently to raise savings and reverse the current account:
- Germany and the other core countries can take steps to reverse the policies that led to the European crisis. They can cut consumption and income taxes sharply in order to reduce domestic savings and increase domestic consumption. These would lead to a reversal of the German trade surpluses and higher inflation in Germany, the combination of which would allow Spain to reverse its trade deficit and regain competitiveness via lower inflation relative to that of Germany and a weaker euro.
- Spain can force austerity and tolerate high unemployment for many more years as wages are slowly pushed down and pricing excesses are ground away. It can also take measures to reduce costs by making it easier to start businesses, reducing business taxes, and by improving infrastructure, but these latter provide too little relief except over a very long period, especially given the difficulty Spain will face in financing infrastructure and reducing taxes.
- Spain can leave the euro and devalue. This would leave it with a problem of euro-denominated debt, whose value would soar relative to GDP denominated in a weakening currency. In that case Spain would almost certainly be forced to halt debt payments and restructure its debt.
I want to stress that these are, practically speaking, the only three ways for Spain to regain competitiveness
More talk of a Spanish euro exit
From the BBC’s Justin Webb:
No-one expects that an economy as large and as central to the economy of Europe would be forced out of the single currency.
But if the costs of staying were too great then Spaniards themselves might take the decision to go it alone again.
Gayle Allard, an economics teacher at the IE Business School says the psychological impact of that would be devastating.
Spanish people, she says, have never before doubted the euro. “There was never any questioning that this was a good thing for Spain and this was a permanent thing for Spain.”
If that were to change, everything would change.
The bank run threat in Spain
A bank runs is one of the most feared phenomena of modern economics, a massive wave of withdrawals that strikes at banks’ critical capital reserves.
We’ve already seen a bank run in Greece, and signs of another run in Spain. Public warnings of possible withdrawal from the single currency eurozone played a part in the Greek run, and the same might be happening in Greece.
Why are bank runs so fear?
Stefan Kaiser report for Spiegel:
The reason a bank run is so feared is because it could land every bank in the world in trouble — even the healthiest ones. The banking system depends on the fact that banks only hold a small portion of customer deposits in cash that is ready to pay out. The rest is invested or passed on to other customers as loans.
Now, rumors are circulating that in Spain, too, people have begun to clear out their accounts at certain banks. The newspaper El Mundo reported that customers had withdrawn over €1 billion from the beleaguered major savings bank Bankia last week. The government in Madrid has denied the report, but the situation remains tense. On Friday, the Spanish newspaper Expansion reported that the US investment bank Goldman Sachs has now been tasked with providing an independent assessment of the problem bank.
Some financial experts are now calling for rapid intervention by the European Central Bank (ECB) in order to prevent mass panic. “Once a bank run begins, it is very hard to stop without a credible deposit guarantee,” Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, told the news agency Dow Jones. “Given the fragile fiscal position of Spain, the European Central Bank is under increasing pressure to step in to calm depositors’ nerves.”
But the ECB’s options are limited. It has already provided Europe’s banks with extremely cheap money in the form of three-year loans within the scope of its Long Term Refinancing Operations (LTROs). At that time, the banks borrowed a total of around €1 trillion in two auctions in December 2011 and February 2012. The ECB could provide another cash injection now. But some banks in crisis-hit countries are clearly running out of assets to give to the ECB as collateral for the loans. Eligible assets mainly include government bonds, though under certain conditions corporate loans can also be submitted.
On Wednesday, the ECB confirmed that a number of Greek banks have now been cut off from its refinancing operations. They apparently lack sufficient capital to use as collateral. Now those institutions will have to be kept alive through emergency loans from the Greek central bank in Athens.
And now, on to Greece. . .
Wolfgang weighs in on Greece
Germany’s Wolgang Schaueble maintains the toughest line on Greece of the European financial ministers, and he’s not letting up, despite the conciliatory line starting to come out of the G8..
From A. Papapostolou of Greek Reporter:
German Finance Minister Wolfgang Schaeuble said cash-strapped Greece needed to implement EU and IMF-imposed austerity measures as European solidarity was “not a one-way street.”
“To tell the Greeks that they need not apply austerity deals to which they have agreed is to lie to them,” Schaeuble told the weekly Bild am Sonntag.
“European solidarity is not a one-way street … And then structural reforms in Greece are necessary in any case, there’s no more ‘we’ll muddle through as usual’.”
Schaeuble said he would not interfere in the Greek campaign ahead of June 17 repeat elections. “But I can say that the direction we and Greece have chosen must be pursued and will be pursued” by the Greek people.
“Some people in Greece seem to believe that they can evade responsibility because ‘those in Brussels’ will not budge,” said Schaeuble, referring to the potentially high costs for EU taxpayers should Greece quit the eurozone and default on its debt.
The grim reality in Greece
Just how bad is it? And how much worse could it get in Greece is booted or voluntarily leaves the eurozone?
From Harry Papachristou and Giles Elgood of Ekathemerini:
In Athens, the homeless are on the streets in growing numbers, soup kitchens feed twice as many people as a year ago, and the poor are diving into garbage bins in search of scrap they can sell.
Greece is close to breaking point as it struggles with austerity targets set by creditors, but this is just a foretaste of the nightmare of unrest, hunger and even anarchy that could engulf the debt-crippled nation if it is forced out of the euro.
If the exact economic impact of such a move is hard to nail down – newly issued drachmas devalued by up to 70 percent, runaway inflation, a banking meltdown, a collapse in trade – the implications for ordinary Greeks crushed by the debt crisis are even harder to predict.
Without international bailout cash, salaries and pensions would go unpaid and violence, political extremism and uncontrolled emigration could quickly follow.
Fears of Greek bank run reflected in polls
Greece’s conservative New Democracy Party seems to be the major beneficiary of the growing financial panic and the heightened publicity given to the country’s bank run.
The threat of a bank run in Greece, where savers have started pulling money from their personal accounts over fears of a return to the Drachma, is having an effect on voting intentions ahead of a snap election next month.
Greek voters are returning to the establishment parties that negotiated its bailout, a poll showed yesterday (17 May), offering potential salvation for Greek people concerned about the impact of a return to the Drachma over their personal savings.
The poll, the first conducted since talks to form a government collapsed and a new election was called for 17 June, showed the conservative New Democracy party would win 26.1% of the vote compared to 23.7% for the radical leftist Syriza party, which has pledged to tear up the bailout.
Crucially, it showed that along with the Socialist PASOK party, New Democracy would have enough seats to form a pro-bailout government, which it failed to win in an election on 6 May, forcing a new vote and prompting a political crisis that has put the future of the euro in doubt.
Greek polls show mixed results
While polls taken immediately after the first round of elections gave a solid lead to the left coalition Syriza, New Democracy has been coming on strong over the last week.
There’s been a whole raft of polls of late, and here’s a summary from Keep Talking Greece:
RASS – May 19/2012
ND 20.2% – SYRIZA 21.7% -PASOK 11.7% – INDEPENDENT GREEKS 7.3% – DEMOCRATIC LEFT 6.2% – KKE [Communists] 5.5% CHRYSI AVGI [Golden Dawn] 3.7%
PUBLIC ISSUE 20 May/2012
ND 24% - SYRIZA 28% -PASOK 15% – INDEPENDENT GREEKS 8% – DEMOCRATIC LEFT 7% – KKE 5% CHRYSI AVGI 4.5%
METRON ANALYSIS 20 May/2012
ND 19.7% – SYRIZA 20.8% -PASOK 14.4% – INDEPENDENT GREEKS 6.5% – DEMOCRATIC LEFT 5.2% – KKE 4.8% CHRYSI AVGI 4%
Samaras challenges Tsipras to TV debate
Bolstered by his party’s rise in the poll numbers, the leader of New Democracy wants a televised debate with Syriza’s leader.
The leader of conservative New Democracy Antonis Samaras on Saturday proposed a televised debate with the head of the Coalition of the Radical Left (SYRIZA), Alexis Tsipras, in the week running up to general elections on June 17.
Samaras, whose party placed first in the May 6 polls but far short of a majority, made the proposal during an interview with Vima FM radio station.
Sources in SYRIZA’s camp indicated that Tsipras would be open to a debate though it remained unclear whether this would be a head-to-head between Samaras and Tsipras or a debate involving the leaders of all the main parties or both.
So what does Syriza want?
George Gilson of Athens News interviewed newly-elected Syriza Member of Parliament Nadia Valavan, an academic and an author. Here’s a key excerpt:
All of us in Syriza are Europeanists – in the real sense of the word. We are internationalists. We want to fight alongside the peoples of Europe. None of us believes Greece can take a lonely, brave and proud road and become self-sufficient in a period of globali-sation. The dividing lines that pass through the entire Greek left exist in Syriza as well. Some seek radical improvement of the existing European unification process. Others believe we should stay within the framework of the existing unification, but see the currency issue in a different light, with a plan B [possibly leaving the euro] if things get out of hand. Others believe that the future of European peoples is outside the existing EU. No one speaks about returning to the drachma.
Sensing that the climate for a revolution or a government of the ‘pure’ left was not right, Syriza leader Alexis Tsipras gradually toned down his rhetoric on May 10, shifting his emphasis from the repeal of the whole bailout loan pact and austerity programme to the cancellation of its controversial “internal devaluation” component, namely the recent wage and pension cuts and the dismantling of collective pay agreements.
“We can’t realise our dream to form a government of the left,” Tsipras told Syriza MPs before handing back the mandate to form a government to President Karolos Papoulias. “But we shall continue to be at the forefront of the struggle.”
The five points that form the basis of a Syriza government platform are:
- Cancellation of pending bailout measures of further cuts to private sector wages and pensions.
- Cancellation of laws abolishing collective labour agreements.
- Abolition of MPs’ special privileges and immunity from prosecution as well as reform of electoral law.
- Immediate publication of the audit performed on the Greek banking system by BlackRock.
- An international auditing committee to account for public sector over-indebtedness, with a moratorium on all debt servicing until the publication of the audit findings.
New Democracy politician calls for austerity revise
Here’s an excerpt of an essay by a prominent New Democracy member of parliament, for Athenian Mayor Nikitas Kaklamanis, writing in New Europe.
What’s notable is that even a member of the party campaigning the hardest for the maintenance of the status quo is arguing for a revise in the austerity mandate forced on the caretaker, bankster-installed government voted out in the first round of elections:
Apart from the internal actors, one can also reasonably wonder about the role and involvement of the EU organs, especially the European Commission. It is clear that Greece didn’t build up all of its €360 billion debt in one day; neither its public companies, like Greek Railways’ procurement and construction subsidiary ERGOSE, which runs a 10 billion accumulated loss, destroyed their financial situation overnight. Didn’t all this public procurement happen under the “supervision” of EU Commission, theoretically under Directives 17 and 18? Why didn’t the services of the Commission, which were supposed to follow and to supervise compliance of Greek state entities with internal market and competition practices ever issue a strong warning? What exactly was the contribution of the dozens of EU experts travelling back and forth between Brussels and Athens, during the last 10 years?
It is certain that the Greek problem is mainly an issue of the Greek political and administrative elite. However, it seems hard to deny the failure of the European Commission in its role as a supervisor of proper use of EU funds. One also can’t help but wonder about the utility of such an expensive EU bureaucracy, if it is not even able to prevent such an upcoming catastrophe of a member state, one that can potentially develop into a major threat to the entire European construction.
In this context of multiple errors and responsibilities, it seems difficult to deny Greece the possibility of renegotiating the austerity package in order to bring it to a more realistic and sustainable basis.
And a dire prognostication from Mexico
The former boss of Mexico’s central bank predicts that a Greek eurozone exit would lead to a crisis even worse that the one that began on Wall Street five years ago.
From Athens News:
If Greece leaves the euro zone it could detonate a global financial crisis even worse than the 2008 credit crunch, dry up global trade financing and spur another U.S. recession, former Mexican central bank governor Guillermo Ortiz said on Friday.
“There is no legal exit clause for a country that wants to leave the euro zone, so if it occurs, it is going to be necessarily traumatic, and have global repercussions,” Ortiz told Reuters at a banking conference in the Mexican resort of Acapulco.
“Of course this will affect us as the consequences of Lehman’s bankruptcy affected the world, only this will probably have an even bigger impact,” he said.
The collapse of U.S. investment bank Lehman Brothers in late 2008 sparked Mexico’s deepest recession since the 1995 Tequila Crisis.