Caixin
Feb 05, 2015 02:27 PM

There's Magic in Greece, but Not a Solution

The new Greek government recently sent waves of concern through eurozone capitals. As promised in the election campaign, the new prime minister in Athens, Alex Tsipras, told Europe that Greece needs to write down its debt, take a so-called haircut. One cannot say that the message was a surprise, but when people are faced with reality it often comes harder than expected. This is particularly the case concerning macroeconomics and the financial markets, and the new Greek government confirmed this.

Then on February 2 a new debt plan suddenly pops out of the magic hat in Athens. Tsipras had promised his voters a write-down of the Greek debt, or at least to fight for it. Furthermore the new government wants to end the austerity that has caused the economy to shrink since the first bailout in 2010. So Tsipras travels around in Europe to lobby other European governments to reduce the debt by half, servicing those two simple goals. He needs to bark loud to satisfy the many voters who gave him the keys to the prime minister's office. He is also clearly trying to create the best position for negotiating new economic terms with his European colleagues, doing nothing more than trying to set a price that becomes an anchor for further negotiations. Tsipras is simply trying to place the anchor to Greece's advantage. This is primarily to get the government debt reduced plus to increase public spending, thereby ending the austerity program. However, just a few days after Tsipras went on his European tour, the new finance minister, Yanis Varoufakis, traveled the same travel path. The government suddenly had a new idea.

Instead of the suggested haircut, government bonds should be changed into another type of bond. The most beloved idea out of Athens is a conversion into "perpetual bonds" that never mature, or at least not before Greece repays its debt. Another suggestion is to link repayment to the country's GDP growth. The rumors say that privately held bonds should be exempted. In reality, this all means that Greece would be allowed to stop servicing its debt. Voilà, financial magic from Athens.

The government has promised to run a surplus on the primary budget, which is calculated before interest and servicing of the debt. But Greece has already achieved this goal, though the risk is that it drops into a deficit on the primary budget again. Tsipras promised his voters he would end austerity, raise some pensions, hire more people in the public sector and take other initiatives to reverse the economic decline. The only problem with this plan is, of course, it costs money. The government claims it will get funding by collecting outstanding tax payments, fighting corruption and find more money in the EU system.

Greek governments have also tried to collect missing tax payments. They have never succeeded, so it's doubtful the idea will work this time. On the contrary, more Greeks have already stopped paying taxes because they expected the new government to cut the income tax.

The government in Athens faces an uphill battle. The coming debt repayments will not disappear, and are due this and the following two months. Because Greece has ended its austerity program, the rescue troika consisting of European Union, European Central Bank and International Monetary Fund will not make the next payment in the bailout program. For the same reason, Greece might run out of cash in March, though the prime minister and finance minister have promised to have a plan ready by the end of the month. Greece needs nothing short of pure magic to save it from another rough ride.

During his campaign Tsipras advocated a haircut, and rightly so. Greece has not serviced its debt in years because it was refinanced. There is no chance this will change. Quite impressively, everyone is suddenly accepting that Greece will remain in the euro, something I find even more magical, since years it is struggling with a deficit in the balance of trade and weak competiveness. Salary levels have dropped for years, which should help to make Greek companies more competitive, though apparently not enough. The bitter, but only real, solution requires Greece to leave the euro. It has so far not been up for discussion. The subject is unlikely to be raised for some time while a bit of magic is performed. I expect the spell to involve a temporarily agreement with the other EU countries. This postpones Greece's problems for another six months, but the illusion will, of course, fall short of providing a solution.

Peter Lundgreen is the CEO and founder of Lundgreen's Capital, an investment consulting and advisory company

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