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Greece and the Troika’s Treachery

By Marshall Auerback

Here’s the draft of the supposed agreement to "sort out" the Greek debt problem once and for all. According to Bloomberg, here’s the essentials:

  • Greece’s 2012 GDP will shrink by as much as 5%.
  • Greece is expected to return to growth in 2013.
  • Greece will cut 15,000 in state jobs in 2012.
  • Minimum wage will be cut by 20 percent.
  • There will be no increase to sales tax.
  • The government will cut medicine spending will fall from 1.9% to 1.5% and merge all auxiliary pension funds.
  • It will also sell stakes in six companies—in particular, energy companies and refineries.

Of course, the current thrust of fiscal policy will almost certainly guarantee that there still will be a default, involuntary or otherwise, in spite of this agreement. If you don’t have a mechanism to allow growth, then how do the Greeks service their debt, even with the reduced debt burden?

Perhaps that’s the idea. Make the deal so miserable for the Greek people that the Spanish, Portuguese, Irish and Italians don’t even begin to think of trying to get a similar haircut on their debt.

Certainly, the deficit reduction won’t come. It can’t when you deflate a rapidly declining economy into the ground. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies.

Even with all of the concessions, the euro bosses have not officially signed off on the agreement:

Finance ministers of the 17-nation euro zone arriving for talks in Brussels warned there would be no immediate green light for the rescue package and said Athens must prove itself first.

"It’s up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

German Finance Minister Wolfgang Schaeuble, whose country is Europe’s biggest paymaster, told reporters: "You don’t need to wait around because there will be no decision (tonight)."

Greek Finance Minister Evangelos Venizelos flew to Brussels after all-night talks involving Prime Minister Lucas Papademos, leaders of the three coalition parties and chief EU and IMF inspectors left one sensitive issue – pension cuts – unresolved.

It is worth pointing out that Greece’s pension payments on a per capita basis are amongst the lowest in Europe. Still, apparently, this plunder hasn’t gone far enough The Greek people must feel like Sabine Women right now.

Game, set and match to the Troika.

While we’re at it, let’s address this "Greeks as tax cheats" canard once and for all. Greece’s tax revenue from VAT collapsed by 18.7pc in January from a year earlier. As Ambrose Evans Pritchard noted:

"Nobody can seriously blame tax evasion for this. It has happened because 60,000 small firms and family businesses have gone bankrupt since the summer

The VAT rate for food and drink rose from 13pc to 23pc in September to comply with EU-IMF Troika demands. The revenue effect has been overwhelmed by the contraction of the economy.

Overall tax receipts fell 7pc year-on-year."

We’re one step closer to ensuring that the birthplace of democracy becomes a form of national indentured servitude. That is of course, unless Greece regains some modicum of self-respect and tells the Troika to take a hike and leaves the euro zone.

This article was first published at New Economic Perspectives.

Marshall Auerback

About 

Marshall Auerback, has 29 years experience in the investment management business, serving as a global portfolio strategist for Madison Street Partners, LLC, a Denver based hedge fund. He also has also worked as an economic consultant to PIMCO, the world’s largest bond fund management group. He is a Fellow at the Economists for Peace and Security, a Research Associate at the Levy Institute, and a non-executive director of Pinetree Capital in Toronto, Ontario, Canada.

4 Comments

  1. David Lazarus says:

    I do agree that the plan is to make the medicine so distasteful that the other troubled states do not risk default the problem is that unless the debts are reduced even more then the sustainability of any program will consign Greece to third world status for decades. The social fabric of Greece is collapsing which children being abandoned on the steps of churches and long term that will create new unforeseen problems.

  2. ian says:

    “Perhaps that’s the idea. Make the deal so miserable for the Greek people that the Spanish, Portuguese, Irish and Italians don’t even begin to think of trying to get a similar haircut on their debt.”
    I think there is even more to it than that – to save the euro, you allow one country to default, but put them through hell first as an example to others.

  3. Norme says:

    I agree, the escrow account will ensure Greek debt get’s paid, but will also further strangle the “after tax” money Greece can circulate through it’s deflating economy. And it’s still on the hook for the entire tranche. Escrow accounts are often used in death and divorce cases. This may be what we have, It might be a firewall instrument. This looks like the death nail for Greece on the euro.

    Greece is retiring some debt held by the ECB as a result of this deal as those bonds will be in default and ineligible as collateral. Apparently the EFSF is involved and may take the hit, not the central bank. Not sure of the details. None of the other EFSF bail out special cases are faring so well, while those backed by ECB money (after Monti’s fiscal compact was accepted) are probably the chosen ones to remain in the EMU.

  4. roger erickson says:

    Seems the prior goal is to pressure Greece to let key assets like energy utilities go to private hands BEFORE the inevitable default. God forbid the Greeks let this happen. Have they forgotten their own tyrant/demos struggles from 2500 years ago?