Fri | Dec 9, 2016

New Greek PM strikes haircut fear in bankers

Published:Friday | January 30, 2015 | 12:00 AM

Aubyn Hill, Financial Gleaner COLUMNIST

Greece is acknowledged as the second most indebted country after Japan. Since the then newly elected Papandreou government disclosed in the third quarter of 2009 that Greece had a budget deficit of 12.5 per cent - it turned out to be significantly higher at a whopping 15.6 per cent, a public debt which stood at 130 per cent of GDP and unemployment growing at a dangerous rate.

Greece did not have the option of inflating away its debt by letting depreciation rip the value of its currency because it had voluntary given up its national currency, the weak and vacillating drachma, in exchange for the much stronger euro, over which it had no control.

A sustained precipitous loss of confidence triggered massive deposit outflows and economic growth became a forgotten experience as the economy gathered a fast pace on a downward spiral.

Greece became the first Eurozone country to seek official assistance in May 2010, followed by Ireland that November and Portugal the following May. Together they coined the acronym PIG and when Spain joined them it was pluralised to PIGS. Under the dark clouds of a sovereign default, the official debt exchange was completed in March 2012.

To travel that unprecedentedly painful journey, a lot of suffering had to be borne by bankers who loaned irrationally and blindly, politicians who borrowed foolishly and apparently without a spec of discipline and, regrettably, by ordinary Greek people who had little or no control or say over what the other two lots were doing - and earning.

Greece's 2012 deal turned out to be the largest debt restructuring in the history of sovereign defaults. It was the first in the Eurozone, and it became the largest ever sovereign debt relief at 66 per cent of GDP.

The troika - European Union, the European Central Bank (ECB), and the International Monetary Fund (IMF) - which parented the debt exchange put Greek governments under severe economic and political pressure. Since George Papandreou came to power in late 2009, Alexis Tsipras, whose leftist Syriza party won a very convincing victory at the beginning of this week, is the fifth prime minister to lead the country.

TROIKA MEDICINE AND BACKLASH

The IMF is part of the troika that administers distasteful and disruptive economic and, by extension, social medicine to the PIGS and Cyprus.

To us in Jamaica, the IMF stands supremely alone. The simplest of calculations told the Greeks, and Mr Tsipras and his party, that the economic situation in their country had become horrible under the troika.

Greek public debt moved from 130 per cent of GDP in 2009 to about 175 per cent in 2014. Bank deposits fell by 30 per cent.

The EU projected a negative 4.1 per cent GDP outturn in 2013 but even that difficult number proved to be too optimistic. Greek economic performance fell by 5.5 per cent that year. The effect on human beings has been depressing. The overall unemployment rate stands at 27 per cent while youth unemployment is a staggering 57 per cent.

Alex Tsipras and his Syriza party mined into a deep and malevolent seam of resentment and discontent. He gave voice to the Greek population's feeling that 'enough is enough' and the troika's relentless 'austerity programme must go'.

Well, in a country that does not generally give any party an outright majority at the polls, Syriza won a very clear majority.

REASSESS AUSTERITY

In 2012, Greek banks had to suck up a €60-billion haircut through the Private Sector Involvement programme, the PSI, which led to the recapitalisation of the banks. Today, Greek debt stands at about €320 billion and of that, €200 billion is carried by European governments and €85 billion is in the form of eurosystem's loans.

So with most of Greek debt held by government institutions, why should bankers be worried?

One reason is that the troika cannot easily swallow another Greece. And Italy is much bigger. When Cyprus faced its banking crisis in March 2013, German Chancellor Angela Merkle and her finance minister made it very clear that German taxpayers would not be bailing out depositors - lots of them from Russia.

Prime Minister Tsipras' victory and commitment to push back austerity will mean that other countries may follow that pushback offensive against austerity.

Combine that disdain for austerity discipline with the stated public position of Mrs Merkle concerning German tax dollars, and by extension European citizens' taxes, and the translation is that shareholders, bondholders and large depositors in banks will have to bear the pain of any haircut. In the past, most depositors and bondholders' money was safe - all in Jamaica was safe in our banking sector meltdown in the 1990s - and bankers have been relatively free to lend with as much risk they pleased. They still can, but the paradigm shift which happened with the Cyprus crisis is that their banks could suffer unsustainable haircuts and quickly go out of business.

As long as taxpayers suck up and agree to austerity, bankers and politicians can sleep easily.

The 'bail in' policy adopted by the Icelandic authorities towards depositors, bondholders and shareholders, which resulted in Iceland's three biggest banks being closed in 2009, has been enshrined as policy by the economic locomotive of Europe - Germany.

Austerity is literally killing some Jamaicans and many are destitute. Jamaicans cannot again pay for banks' lending mistakes - especially to the Government. If there is going to be any push back to austerity, Mrs Merkle's approach would likely be the only real option.

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the opposition leader's Economic Advisory Council.Email: writerhill@gmail.comTwitter: @hillaubynFacebook: facebook.com/corporate.strategies