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Why Greece won't go away | Why Greece won't go away |
(about 17 hours later) | |
By Laurence Knight Business reporter, BBC News | By Laurence Knight Business reporter, BBC News |
Expect a lot of noise in the coming days about a "breakthrough agreement" to forgive a big chunk of the Greek government's enormous debts. | Expect a lot of noise in the coming days about a "breakthrough agreement" to forgive a big chunk of the Greek government's enormous debts. |
But don't be distracted by it - Greece's real problems are as bad as ever. | But don't be distracted by it - Greece's real problems are as bad as ever. |
Greece's private sector lenders - banks and assorted investors - will probably agree to recognise a 50% write-off in the amount they are owed. | Greece's private sector lenders - banks and assorted investors - will probably agree to recognise a 50% write-off in the amount they are owed. |
Add in other sweeteners for Greece - a lower interest rate and more time to repay - and the total loss to lenders may be as much as 75%, depending on how you calculate it. | Add in other sweeteners for Greece - a lower interest rate and more time to repay - and the total loss to lenders may be as much as 75%, depending on how you calculate it. |
This "breakthrough" will be nothing more than a recognition of reality - financial markets have been valuing Greece's debts at a mere 20-25% of their notional worth for the last two months. | This "breakthrough" will be nothing more than a recognition of reality - financial markets have been valuing Greece's debts at a mere 20-25% of their notional worth for the last two months. |
Most of the banks who have lent Greece money have already officially recognised much of the losses in their accounts. | Most of the banks who have lent Greece money have already officially recognised much of the losses in their accounts. |
There will be grumbling about the European Central Bank's role. | There will be grumbling about the European Central Bank's role. |
It owns a lot of Greek debt, but has refused to participate in the collective debt write-off - much to the annoyance of private sector lenders, who therefore have to take a bigger share of the losses needed to reduce Greece's debts to a level that the country has any hope of being able to repay. | It owns a lot of Greek debt, but has refused to participate in the collective debt write-off - much to the annoyance of private sector lenders, who therefore have to take a bigger share of the losses needed to reduce Greece's debts to a level that the country has any hope of being able to repay. |
The final deal may well involve the ECB taking some losses as well, but with eurozone governments agreeing to shoulder them on the ECB's behalf. | The final deal may well involve the ECB taking some losses as well, but with eurozone governments agreeing to shoulder them on the ECB's behalf. |
There is also the small question of the Greek banks. They own a large chunk of the Greek government's debts, and will probably have to turn back to that very same government for a bailout, in the form of an injection of risk-absorbing capital, in order to cover their losses. | There is also the small question of the Greek banks. They own a large chunk of the Greek government's debts, and will probably have to turn back to that very same government for a bailout, in the form of an injection of risk-absorbing capital, in order to cover their losses. |
Which is to say that a large chunk of the debt being written off by Greece is simply money that it is picking from its own pocket. | Which is to say that a large chunk of the debt being written off by Greece is simply money that it is picking from its own pocket. |
No alternative | No alternative |
Of course, it's possible that a deal won't be reached. | Of course, it's possible that a deal won't be reached. |
But the consequences are so catastrophic for all involved, that this seems unlikely. | But the consequences are so catastrophic for all involved, that this seems unlikely. |
The Greek government has a big debt repayment falling due on 20 March. | The Greek government has a big debt repayment falling due on 20 March. |
Without a deal, the government does not get any more bailout money from the European Union and IMF. Without that money it cannot make the debt repayment. | Without a deal, the government does not get any more bailout money from the European Union and IMF. Without that money it cannot make the debt repayment. |
If it skips the debt repayment, the position of lenders will be even worse. Greece's debts are mostly governed by its own law - so in the worst case the government could simply pass a new law cancelling much of its own debts. | If it skips the debt repayment, the position of lenders will be even worse. Greece's debts are mostly governed by its own law - so in the worst case the government could simply pass a new law cancelling much of its own debts. |
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full | Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full |
An outright Greek debt default would also be bad news for the rest of the eurozone. | An outright Greek debt default would also be bad news for the rest of the eurozone. |
The biggest damage would be to the entire credibility of the bailout process. | The biggest damage would be to the entire credibility of the bailout process. |
If eurozone politicians fail to manage the Greek situation, what hope that they will deal with much bigger Italy? | If eurozone politicians fail to manage the Greek situation, what hope that they will deal with much bigger Italy? |
Markets would start asking difficult questions again, with Portugal looking like the next one to run out of money. | Markets would start asking difficult questions again, with Portugal looking like the next one to run out of money. |
A debt default would also be catastrophic for the Greeks themselves. It would cut off their one source of cash - rescue loans from the EU and IMF to the Greek government, and from the ECB to the Greek banks. | A debt default would also be catastrophic for the Greeks themselves. It would cut off their one source of cash - rescue loans from the EU and IMF to the Greek government, and from the ECB to the Greek banks. |
Without these, the government would be unable to pay for basic functions of the state. | Without these, the government would be unable to pay for basic functions of the state. |
Greece's position in this respect has improved - in the last six months of 2011 the government actually earned slightly more in tax revenues than it spent on everything except debt payments. But don't be fooled. | Greece's position in this respect has improved - in the last six months of 2011 the government actually earned slightly more in tax revenues than it spent on everything except debt payments. But don't be fooled. |
The government would have no money to rescue its banks. | The government would have no money to rescue its banks. |
And a government debt default - combined with a collapse of the country's banks - would push the country's economy even deeper into recession, meaning tax revenues would fall, while spending on unemployment benefits should rise - if the government had the money to pay for them. | And a government debt default - combined with a collapse of the country's banks - would push the country's economy even deeper into recession, meaning tax revenues would fall, while spending on unemployment benefits should rise - if the government had the money to pay for them. |
The real story | The real story |
So, given that failure is not an option, in all likelihood a last-minute deal will be stitched together in the time-honoured European fashion. | So, given that failure is not an option, in all likelihood a last-minute deal will be stitched together in the time-honoured European fashion. |
But here's the thing. It doesn't matter. | But here's the thing. It doesn't matter. |
The focus on the Greek government's ability to repay its debts completely misses the point. | The focus on the Greek government's ability to repay its debts completely misses the point. |
The real question is whether Greece has the political will to remain in the euro. | The real question is whether Greece has the political will to remain in the euro. |
Here are the four statistics that really matter: | Here are the four statistics that really matter: |
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What do these statistics tell us? | What do these statistics tell us? |
The first tells us that Greek workers cannot compete inside the euro without big wage cuts (or big wage rises in Germany). | The first tells us that Greek workers cannot compete inside the euro without big wage cuts (or big wage rises in Germany). |
Greek wages rose too quickly during the good years before 2008. Normally the Greek drachma would have compensated by losing value in the currency markets - but inside the euro there was no drachma. So Greek workers have priced themselves out of the market. | Greek wages rose too quickly during the good years before 2008. Normally the Greek drachma would have compensated by losing value in the currency markets - but inside the euro there was no drachma. So Greek workers have priced themselves out of the market. |
The second statistic is a symptom of that loss of competitiveness. | The second statistic is a symptom of that loss of competitiveness. |
It tells us that Greece is spending far more buying things from abroad than it earns from selling things to the rest of the world. | It tells us that Greece is spending far more buying things from abroad than it earns from selling things to the rest of the world. |
In effect, the Greek economy as a whole is spending 10% more than it earns - even now, after all the Greek government's spending cuts. | In effect, the Greek economy as a whole is spending 10% more than it earns - even now, after all the Greek government's spending cuts. |
The debt deal may help cut that figure down a bit - perhaps by one or two percentage points - because it will reduce the amount that the Greek government spends on interest payments to its foreign lenders. | |
But really it needs to be reduced all the way back down to zero - or even beyond zero into a positive surplus - if Greece is to earn the money needed to repay its debts. | |
In the meantime, the Greek economy as a whole must continue to fund its 10% overspend by attracting an equivalent amount in financial investments - mainly in the form of lending - from the rest of the world. | In the meantime, the Greek economy as a whole must continue to fund its 10% overspend by attracting an equivalent amount in financial investments - mainly in the form of lending - from the rest of the world. |
Money flight | Money flight |
But the rest of the world no longer wants to lend to Greece - which is why the EU and IMF have had to step in to rescue the government. And why the ECB has had to rescue the banks. | But the rest of the world no longer wants to lend to Greece - which is why the EU and IMF have had to step in to rescue the government. And why the ECB has had to rescue the banks. |
International lenders are not simply worried that the Greek government cannot repay its debts. | International lenders are not simply worried that the Greek government cannot repay its debts. |
They are worried that Greece will leave the euro. | They are worried that Greece will leave the euro. |
If that happens, then all Greeks - not just the government - will either default on their debts, or - if it is legally feasible - will convert their debts into new drachmas that are likely to lose over half their value against the euro. | If that happens, then all Greeks - not just the government - will either default on their debts, or - if it is legally feasible - will convert their debts into new drachmas that are likely to lose over half their value against the euro. |
And the fear of a euro exit is not just shared by international lenders. | And the fear of a euro exit is not just shared by international lenders. |
Our third statistic makes clear that Greece has seen a slow run on its banks, as companies - and increasingly ordinary Greeks - take their money out in cash, or move it to the safety of a bank account in Germany. | Our third statistic makes clear that Greece has seen a slow run on its banks, as companies - and increasingly ordinary Greeks - take their money out in cash, or move it to the safety of a bank account in Germany. |
So the problem is not just that money has stopped flowing into Greece. Now money is actually flowing out of the country. | So the problem is not just that money has stopped flowing into Greece. Now money is actually flowing out of the country. |
And that makes it even harder for the Greek banking system to fulfil its basic function of supporting the Greek economy. | And that makes it even harder for the Greek banking system to fulfil its basic function of supporting the Greek economy. |
Which brings us to the final statistic. | Which brings us to the final statistic. |
Greece is in a deep economic slump. The banks aren't lending. Companies aren't investing. | Greece is in a deep economic slump. The banks aren't lending. Companies aren't investing. |
Ordinary Greeks - out of work or scared of losing their jobs - have cut their spending. And of course the Greek government has been ordered to slash its spending. | Ordinary Greeks - out of work or scared of losing their jobs - have cut their spending. And of course the Greek government has been ordered to slash its spending. |
Yet Greece as a whole is still overspending - and therefore needs to borrow from abroad - to the tune of 10% of the value of everything the country produces. | Yet Greece as a whole is still overspending - and therefore needs to borrow from abroad - to the tune of 10% of the value of everything the country produces. |
Either the pain of spending cuts - by all Greeks, not just the government - continues for years into the future. | Either the pain of spending cuts - by all Greeks, not just the government - continues for years into the future. |
Or else Greece takes the nuclear option and leaves the euro - the quickest and surest way of regaining competitiveness and eliminating its current account deficit - but also an extremely painful one. | Or else Greece takes the nuclear option and leaves the euro - the quickest and surest way of regaining competitiveness and eliminating its current account deficit - but also an extremely painful one. |
Which brings us to one final statistic. | Which brings us to one final statistic. |
An opinion poll conducted in November found that over three-quarters of Greek voters still support membership of the eurozone. | An opinion poll conducted in November found that over three-quarters of Greek voters still support membership of the eurozone. |
One of those statistics will have to give. | One of those statistics will have to give. |