15 May, 2012

Greece – what next?

Join me as I gaze into my crystal ball and attempt to predict what will happen over the next while in Greece. Bookmark this page and come back to laugh at me when my predictions prove to be completely nonsensical.

First up, where is Greece now? Well it is not in great shape. Its public finances are in a disastrous state and its economy is contracting at an alarming rate. It has been unable to borrow on the open markets at affordable rates and instead has been borrowing from a combination of the European Central Bank and the IMF. These institutions have laid down stringent conditions to their loans, which have contributed to Greece's economic decline. But Greece has been a bit slack at meeting its lenders' targets, leading to a certain lack of confidence on their part.

The May 6th election result was inconclusive, largely thanks to a quirk of the Greek electoral system. 250 MPs are elected by proportional representation, but an extra block of 50 seats are given to the party with the largest share of the votes. That was New Democracy, Greece's long-standing centre-right party. Together with PASOK (the old centre-left party) and a small leftwing party a parliamentary majority in favour of continuing with the EU/IMF bailout programme could have been scraped together, but anti-bailout parties clearly won a majority of votes cast. A pro-bailout government would have lacked popular legitimacy and so could not be formed, while an anti-bailout government would have lacked a parliamentary majority. So Greece is calling new elections.

At the time of writing, my understanding is that these elections will happen on either the 10th or the 17th of June. This time I expect that they will produce an anti-bailout majority. Last time, nearly a fifth of Greeks voted for small anti-bailout parties that failed to pass the 3% threshold required to get into parliament. This time enough of them will switch to more popular anti-bailout parties. In particular, I reckon that Syriza, a far-left coalition in some ways akin to the United Left Alliance in Ireland, will finish ahead of New Democracy and pick up the 50-seat bonus. Together with the Communists and perhaps another anti-bailout party or two (but not the Golden Dawn, who are evil) they will form an anti-bailout government.

Things might get awkward if the election results fall in such a way that the far right nutters in the Golden Dawn are needed for an anti-bailout majority in parliament, but I am assuming that this will not happen.

Now, the anti-bailout lot in Greece are not actually against being lent money at advantageous rates by the EU/IMF, they just do not want to have to conform to the conditions attached to the loan. And they may also not want to pay the loan back either. So when they get into government they will basically say: "Keep sending us the money, however we are not going to stick to the austerity conditions agreed with previous governments". Their possibly naïve assumption is that Greece can tough it out with its creditors, because at the end of the day Greek bankruptcy would hurt the other European countries so badly that they will keep the money tap on to prevent thishappening.

The next tranche of bailout money is due to Greece in the middle of June, at the same time as the elections. If that money is not paid over, Greece will be bankrupt; apparently there is a possibility of the Greek state going bust even before then. My prediction is that one way or another, Greece will find itself with an anti-bailout government and no bailout money – the people who are stumping up the money for Greece (primarily Chancellor Merkel of Germany) would rather take the hit on the country leaving the Euro than give more money to a government that is repudiating the bailout conditions.

Things will then get very messy very quickly. With no one lending to it, the Greek government will only be able to spend money it can raise itself in Greece. This is not nearly enough to cover its expenditure (if it was, the Greek state would not need a bailout). It goes without saying that it will then be in the situation they call messy default – abruptly telling its creditors that they are not going to be getting any more repayments any time soon, if ever. But the problem for Greece is that it is running a deficit on current spending – the money it pays to state employees, social welfare recipients, and the other recipients of state spending is way more than what it is raising in taxes. With no bailout money it will have to start defaulting on these payments as well.

Now, in the normal run of things, if you are a country's minister for finance and you cannot borrow money and are spending more money than you are taking in there is only one thing you can do – print more money. Greece is in the Eurozone and cannot print more Euros. I think the only way around this conundrum is an abrupt introduction by Greece of a new currency, a neo-Drachma or some such. The Greek government will be able to print this up to their hearts content and pay people as much of it as they like. Perhaps initially the neo-Drachma will be a parallel currency with Greece still notionally in the Euro zone, but I reckon that the introduction of this banana money will drive the Euro out of circulation and lead to an effective Greek exit from the Eurozone.

Why will the Euro drop out of circulation in Greece? Well, the Greek government have introduced the neo-Drachma to get around the imbalance between its revenue and expenditure. Instead of cutting back on expenditure (easier said than done in a country as depressed as Greece), it will print money to make up the difference. But this gross expansion of the money supply, backed by nothing except the Greek government's not very convincing claims to be setting the country on a new economic tack, mean that the neo-Drachma will rapidly start collapsing in value relative to the Euro. Anyone holding Euro funds will hoard them or, even better, get them out of Greece as their relative value to the neo-Drachma soars.

So Greece enters into a period of hyperinflation. Public sector workers start striking in protest at being paid in increasingly worthless monopoly money and social welfare recipients fall ever further into poverty. The public sector generally starts to fall apart. Anyone with access to money outside Greece may well find that they are doing very well now, as their hard currency goes a long way, but for a lot of Greeks this period is nightmarish. Maybe further along, the devaluation of the neo-Drachma is good for Greek exporters, as their products are so much cheaper on the international market, but what exports does Greece potentially have? Maybe it will see a flood of tourists coming to spend their money in a country that is now amazingly cheap, but do people holiday in a country that is disintegrating?

Well, that's the best I can do. What do you think will happen?

From Hunting Monsters


William Whyte said...

I think you've basically got it right. On exports, there's actually reason for hope: Paul Krugman pointed out today (http://krugman.blogs.nytimes.com/2012/05/15/more-on-greek-and-argentine-exports/) that exports are 23% of Greek GDP, so there's clearly a decent amount of foreign currency that wants to buy Greek stuff. I wonder, though, how well placed the Greeks are to provide additional quantities of stuff, and how much of the inputs to the stuff they export must also be paid for in hard currency.

So, yes, I agree, anti-bailout parties get elected, Germany pulls the plug on the bailout, Greece reintroduces the drachma, the Euros flee the country out of fear of currency controls, everything stabilises at a low level. My main measurable prediction is that the number of Greek nannies in Germany will increase by more than 100% over the next five years.

The silver lining is that Turkey is led by relatively sensible people at the moment. Otherwise you could see Greece starting a war in response to a fake attack because they can't think of anything else to do. So that's my other prediction: no war with Turkey, unless the Turks genuinely get overadventurous.

Unknown said...

Ok, I have no idea, but I admire your bravery in making a prediction so I'm going to make a brazen one just for the crack.

I predict that firstly yesterday there was a run on the Greek banks. More risky, assuming Greece leaves the Eurozone I predict that Greece will go to some sort of socialist/ communist/ nationalist type of system a la Chavez, but it will not last more than a year or two, and that the next thing that will happen will be a military takeover, and a military dictatorship a la Pinochet. Europe will pretend not to notice. Ok that's enough predictions. You can all have a laugh at me when Germany bails them out shortly.

ian said...

William -
I can't see the Turks deciding to pick a fight with the Greeks. I don't think Erdogan gets enough credit in the West for his attempts to make friends or at least normalise relationships with Turkey's neighbours. If nothing else, I don't think Turkey wants anything from Greece. If the Golden Dawn nutters somehow came to power in Greece then they might pick a fight with Turkey, but that would a short-lived and one-sided struggle.

I am a bit vague on what Greece exports... I had the idea that it was basically agricultural produce and package holidays, but things I have seen since then suggest there is some kind of manufacturing sector.

For devaluation to aid a country, you need a couple of things. Firstly, you need to be producing something people will want to buy more of if it becomes cheaper. And secondly, it needs to be something you can make more of if people want to buy it. If Greek olive oil exports become cheaper then people will buy more it (instead of oil from Spain or Italy, say), but can Greece produce more of it? I don't know. The same is true of those mysterious other products Greece exports.

I have heard that the last few years have seen a boom in middle eastern restaurants in the USA thanks to the sudden arrival of loads of Greek cooks.

ian said...

Hi dere "Unknown" -

I carefully made predictions only for the next month or two, so that everyone will soon forget if I get everything horribly wrong. Predicting how politics will go over the next while is a much harder question. I reckon there will be a far left government for a bit, but it will be in while the country is falling apart so it might not last for very long. Or maybe it will somehow manage to whip up a populist hatred of Them, whoever They are, and convince the Greek people that it is Them who are responsible for their travails. That is a bit like Latin American populism, so yeah.

I don't really see a military regime returning to Greece, though. I could be wrong, but I have the sense that the age of the military regime is largely over. But we'll see.

William Whyte said...

Greece's other big export is shipping, but I don't know if this is goods (ie ships) or services. If it's services, a devaluation would help a lot -- the input is labour, which (a) doesn't have to be imported and (b) is plentiful in a country with high unemployment. (Although saying (b) makes me wonder why shipping isn't doing better already -- maybe there's an issue on the supply side after all).