Saturday, July 2, 2011

Well done Greece today, but you are Sisyphus

I read the commentary by a financial analyst on the Greek national debt crisis. His view was pessimistic, although Europe just heralded a success of the Greek parliament in passing a resolution and the laws needed for austerity measures to be taken.

What the Greek parliament did today was just a promise to save more and spend less, thus fulfilling a request by the European Union for lending bailout funds so that the Greek government could avoid default of the national debts due next month. Should Greece default payment of the national debts, many creditors would suffer heavy losses. Many of these creditors are the central banks of European countries, holding from $100 billion to $300 billion Greek debts. The present bailout would enable the Greek national finance to carry on, thus relieving the pressure on the banking systems of many European countries. These countries were not congratulating Greece, they felt lucky that they would be safe for the time being.

The real meaning of the bailout is merely the continuation of treating insolvency as if it were only a liquidity crisis. The Greek government is like Sisyphus who is condemned to roll a boulder up a hill only to have it roll back down again just before reaching the top. She has only survived one crisis in order to face the next, and will continue to face this Sisyphean task, unless or until someone such as a strong neighbour takes the boulder away or it succumbs to exhaustion and defaults all the debts.

Notwithstanding the promised austerity measures, Greece has to find a way to grow its way out of debt for the solvency issue to be properly tackled. The only durable solutions are default, outside assistance or currency devaluation so that Greece can become internationally competitive and earn enough overseas revenue to service and then pay back its debts.

The present bailout action by the European countries is only following a course of managed default. They are using liquidity measures as a way of trying to delay a default for as long as possible, in the hope that the banking system will be better placed to deal with it later. However, such delay in the form of bailout funds would mean shifting more peripheral debts from the private sector into the hands of European central banks. The outside assistance is now taking the form of lending Greece money at a lower interest rate. It is better for the loans to bear no interest, or for the Euro countries to take the responsibility of paying back a proportion of Greece's debt. It is doubtful that their political leaders could sell such a plan to their voters.

The attempt Greece is now taking is to become internationally competitive by reducing nominal wages very aggressively. But the Greek population is unlikely to comply with this approach. Eventually someone has to consider a far faster way to achieve international competitiveness; that is by currency devaluation. A small part of this may come owing to Euro weakness. However, the scale of devaluation that Greece needs can only come from exiting the Euro.

The problem with exiting the Euro is that the Euro-denominated debts would become even larger in currency conversion, and this would consequently trigger a default. A default would in turn wipe out a large portion of the capital held by the Greek banking system, which would have to be recapitalised, and would also have severe impact to the financial systems of other European countries.

Sisyphus is carrying on for the time being. It now depends on how long he could sustain the repeated tasks. There is no myth today, and Greece is not as strong as Sisyphus after all.

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