Greece: saving the Summer season but not the economy

Yesterday's narrow confidence vote is a first step for Greece to let the austerity plan approve by the Greek Parliament. In our view, Greece and Europe were faced with a catastrophy: a Greek default in the midst of the Summer, and worse the midst of the Greek touristic season. Such a disaster can still happen. The EU needed however a minimum Greek "Yes" to push the button for extra financial support.

But the Greek austerity plan can perhaps help to give new bailout money, it fails in three ways:

• The plan is so massive, that it is unrealistic. It will eventually hit resistance, if not next week, somewhere over the next 5 years.
• Never a country has taken such drastic budgetary measures without a substantial economic sideplan (and depreciation)
• The Greeks are asked to sell their crown jewels, most likely to foreigners.
• The austerity measures are likely to prolong the economic slump, and increase deflationary policies.
• Even with declining interest rates (let's say 5%), the Greek interest rate charges will take around 8% of GDP. That is unsustainable for any country, and creates massive transfers

The Greek austerity plan is comparable to a family that is forced to sell its furniture, to be able to stay in a house, and pay a high rent to a foreign landlord. On top of that, it sees its income cut, and their job prospects will remain dim.

This is not a plan for hope, it's a plan of despair. The EU will have to accept that it has to reengineer the euro fundamentally.

With the plan, the Greeks might save the Summer season, and 2011 Tourism in Greece. It will not save the country , and bring it on a sustainable path however.

The full PDF with the Greek austerity plan can be found here. It shows that Greece has taken important measures in the past few years, in spite of serious economic headwinds (negative growth in 2009-2010 and 2011).

The Greek macro-economic environment has -of course- been extremely difficult. With negative growth of -2%, -4,5% and -3,5% (and probably more) in 2009, 2010 and 2011, the country has suffered a serious recession. Given the loose monetary and budgetary policy in the period 2001-2008, it is far from sure that the "Big Shrink" is over. Greece hopes that it will stabilize the economy in 2012, in spite of further big budgetary cuts. That is rather optimistic, especially in an international environment where the risk of a slowdown (China, US, ...) has significantly increased.

The Greek budgetary plan for the period 2011-2015 has a revenues/expenditures side, and an asset disposal chapter. Greece will "privatize", let's say sell their crown jewels, for an amount of 50 Bn euros. In reality, it risks to be much less, as all potential buyers will be aware of two things:

• a "fire sale" never yields a fair value on the assets, let alone the expected revenues
• there will be few potential buyers from Greece (difficult to set up financing in a country with a bankrupt banking system)

As a result, Greece is forced to sell its strategic assets, for probably a ridiculous price to foreigners. From that moment onwards, it will start to generate financial flows that leave the country and therefore risk to aggravate the current account deficit. Greece could for instance become a "colony" of the Chinese, the French or the Germans, or combination of all of the above. That is not really a rosy prospect for the young Greeks. You sell your furniture to save the house, you continue to pay a high rent, and on top of that your landlord is a foreigner. Populations have rioted for less.

The asset disposal plan is planned as follows:

My comment this morning on VRT radio (De Ochtend with Gilles De Coster, click on link to listen)

The Belgian franc lost almost 40% of its value between 1970 and 1985 against the Deutsche mark. From 1980 until 1985, the franc went roughly from 16 BEF/DEM to 21 BEF/DEM. Afterwards it stabilised on the back of stronger fundamentals, and after a small hiccup in 1994 (Global Plan), Belgium could enter the eurozone. But let's face the truth: Belgium would never have been able to tackle the budget deficit, the current account deficit and the unemployment rate without a devaluation.

Any bailout plan for Greece will be impotent without an accompanying economic plan. In my view, Greece and the EU should learn from the Belgian experience in the Eighties but even more from the Argentinian experience after 1999. Argentina pegged its currency to the USD, and was hailed for that brave policy. When the financial crisis started in Latin America, it sticked too long to the peg, and finally it hit a wall. A financial heart attack resulted in a bankruptcy and a disrupted economy. Ten years later, the financial and economic system has not yet fully recovered. Brazil on the contrary, abolished the peg with the USD much earlier. At first, observers thought that would destabilise the Brazilian economy in absence of any monetary discipline. But the pressure on Brazil was able to evaporate progressively in the following years, and the economy received some extra oxygen. As a result, the Brazilian economy started to recover as from 2003, and helped by oil discoveries and a surprisingly positive policy from President Lulla, it is now one of the strongest economies in the world.

As a side remark, Brazil put a new rule in the Constitution which requires the government to respect the Golden Rule: current expenditures have to be covered by current tax (and other) revenues. A deficit is only allowed for matching investments (ports, railroads, etc).

Greece should be allowed to follow the Brazilian route, and not be forced to follow the Argentinian one, which leads the country on a suicidal course.

Greece should be offered hope, not only despair.

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