by Martin Khor
Monday, 7 November 2011
Greek tragedy sours G20 Summit
The G20 summit
last week was scripted to celebrate a European strategy to exit the
debt crisis, but it was diverted instead into a new act of the Greek
tragedy that can lead to global recession.
Last week saw
pure drama on an epic scale, as the Eurozone plan to exit its debt
and currency crisis almost crumbled when the Greek Prime Minister
announced he needed a national referendum to approve a bailout programme.
This bombshell came last Monday on the very eve of the G20 Summit
in Cannes which had been expected to cheer the European leaders for
finally getting their act together.
Instead, the G20 summit became another new Act in the Greek and Euro
Tragedy. The summit concluded last Friday without any concrete results.
“Global recession grows closer as G20 summit fails,” warned the headline
of the London Guardian.
The Eurozone play will now stumble on at least until next February
and probably beyond. New scenes and acts will get worse, until it
finally gets better, hopefully.
The European plan, so painfully pulled together and announced on 27
October, had three aspects. First, Greece would get a new Euro 130
billion bailout loan, while its creditors (mainly European banks)
would take a 50% haircut (be repaid only half) on their loans to Greece.
This is a default, but (hopefully) not to be termed such, because
the creditors would be persuaded by their governments to accept the
haircut, and the debt restructuring would be “orderly.”
Second, it is recognized that European banks (especially those that
suffer a blow from the haircut) will require recapitalization to withstand
the growing financial storm. They should mobilize additional capital
themselves or else they would be assisted by their national governments
or if necessary by the European Financial Stability Facility (EFSF).
It is estimated that Euro106 billion is required for the banks’ recapitalization.
A combination of the first and second measures is supposed to stem
the Greek and Euro crisis (at least for now).
Third, the European
Financial Stability Facility (EFSF), which now has Euro 440 billion
but would have to use part of it for the first two actions, would
be boosted so that it can command more than 1 trillion euros. This
is needed for the next big battle – preventing a new and much bigger
debt crisis in Italy.
This multiplying of the EFSF’s firepower was planned to be done through
getting China and other developing countries to provide loans in a
“special vehicle”, and leveraging the EFSF’s funds through loan guarantees
to private creditors. The IMF is also asked to chip in with its own
The three-piece solution was to be presented to the G20 Summit with
the hope that China, other major developing countries and the IMF
would buy into the plan and cough out the needed billions.
But the Greek premier George Papandreou upset the apple cart through
his own plan to put the Greek bailout to the public in a referendum.
Just the prospect of a public rejection would have scuttled the whole
Even though Papandreou withdrew his referendum idea after being scolded
at a pre-G20 dinner by the furious French President and German Chancellor,
and even after he won a Parliamentary vote of confidence, the damage
had been done.
At the G20 summit, neither China nor any other country agreed to join
the European bailout. Understandably so, since the political uncertainties
heightened the possibility their money would not be safe.
The G20 leaders also did not authorize the IMF to increase its bailout
loans or to issue special drawing rights (SDRs) to the Europeans.
They forwarded the decision on this to the G20 finance ministers’
meeting next February.
Till then, more convulsions can be expected. The next fire to put
out, and a much bigger one than Greece, is Italy. It has 1.9 trillion
euro of debt, and it has to refinance Euro 300 billion in borrowing
in 2012. An early test comes this November and December, when it
has to raise Euro 53 billion, and many are nervous how that will proceed.
The interest to be paid is prohibitive: yields on Italy’s 10-year
bonds have shot up to euro-era record highs, being 6.4% at the end
of last week.
The Italian premier Silvio Berlusconi rejected an IMF facility, and
only agreed under pressure by other G20 leaders to subject Italy’s
economic performance to a quarterly scrutiny by the IMF.
What should not
be lost as events unfurl is the great tension between the proposed
technical solutions and the political reality on the ground.
The reason the Greek politicians are scrambling is because the Greek
citizens are up in arms in protest against the policies attached to
Big cuts in government jobs, social spending, pensions and wages,
privatization, and so on, have already caused the people hardships,
and this is just the beginning. Even by 2020, Greece’s debt will be
the equivalent of 120% of GNP. In other words, after a decade of
severe and increasing pain, they will be back at square one.
Something is surely wrong with the solution. In a perceptive column,
the renowned British economist Samuel Brittan wrote in the Financial
Times why he himself would vote No in a Greek referendum.
“The condition of financial support is ever more severe fiscal austerity,”
he wrote. “Never mind that Greek national output is already more than
9% below its 2008 level. Never mind that unemployment has hit 17%.
The Greeks are being asked told to squeeze, squeeze, squeeze. I know
how I would have voted in a referendum, had it gone ahead.”
The Greeks may have to decide, now or later, whether the pain is worthwhile
taking to stay in the eurozone. Or whether they should opt out, re-introduce
their drachma currency, regain monetary independence, and change economic
policy so that they can grow their way out of the crisis.
That may require a bigger default than the orderly 50% being planned,
and a period of being labeled a “pariah”. But as Argentina and Iceland
showed, a combination of default, clearing of the decks, and growing
again is possible, if done correctly.