The Greek books are still being cooked

By Jeremy Warner 8:33PM GMT 08 Nov 2012

This week saw yet more austerity measures voted by the Greek parliament for yet another bail-out that won’t be repaid

With rioters on the streets outside, and proceedings laughably brought to a halt by striking maintenance staff, the parliament in Athens this week narrowly approved a further 13.5 billion Euros of austerity measures Photo: AP

While all eyes were focused on the US presidential race, Europe has been busy cooking up another fudge over Greece. Now in its sixth year of recession, with spiralling joblessness and an administrative system close to collapse, this is a country in a truly desperate state.

Despite their troubles, or perhaps because of them, the Greeks still cling to the euro as a last vestige of modernity and European solidarity. About the only thing they can agree on is that they don’t want to leave Europe’s monetary union, even though it can reasonably be seen as the root cause of so many of their woes. A currency that seems to offer only boom and bust in equal magnitude is bizarrely viewed as the one hope of resolving Greece’s myriad problems.

For the time being, Europe seems willing to indulge Greek fantasies. This marks a significant change from the situation that ruled only a few months ago, when it appeared that Europe’s policy elite were preparing to abandon the country to its fate.

Just recently, however, with the euro zone storm abating to some degree, there’s been renewed determination to keep the country in. Angela Merkel, now the euro zone's undisputed leader in chief, has spoken warmly of Greece’s continued participation, and she even seems to have German public opinion behind her.

Greeks are still widely stereotyped in Germany as corrupt, lazy spongers, but a recent opinion poll revealed a surprising degree of magnanimity: more Germans want Greece to stay the course than to be chucked out. Perhaps European solidarity still counts for something after all – until Germans come to feel the full horror of Greece’s pain in their own pockets, that is.

With rioters on the streets outside, and proceedings laughably brought to a halt by striking maintenance staff, the parliament in Athens this week narrowly approved a further 13.5 billion Euros of austerity measures. This in theory unlocks 31.5 billion Euros of new loans from the euro zone countries and the International Monetary Fund. It won’t be enough. Yet-to-be-published analysis by the “troika” of institutions responsible for monitoring the programme suggests that Greece will need at least another 20 billion Euros on top, together with a massive write-down of debts, to get the public finances back on to a sustainable footing.

Nor is there any guarantee that even this will do the trick. It is in the nature of the Greek crisis that just as policymakers think they’ve put the lid on the problem, it repeatedly comes leaping out again.

Each bailout is made conditional on austerity measures that, to the extent that they are met at all, only succeed in further shrinking the economy, thereby increasing the size of the debt burden even more. The bailouts have become entirely self-defeating. At some stage, creditors will have to reconcile themselves to the fact that they’ll never be repaid, and take the consequent haircut. This is the point at which the pretence of lending Greece the money to smooth its economic adjustment turns into the reality of straight cash handouts – a transfer union in all but name, and the very outcome Germany and other northern, creditor nations have been so desperate to avoid.

The last haircut was confined to private creditors. Yet the bulk of these have departed, leaving indebtedness mainly in the hands of official bodies – the European bailout funds, the European Central Bank and the IMF. If there is a haircut to be taken, it is these that will have to go to the barber. For the first time, the German taxpayer will see real money, which might otherwise have been spent on pensions, healthcare and education, disappear into the bottomless pit of Greek handouts.

Understandably, this is not something the German Chancellor, Angela Merkel, wants to see happen ahead of national elections next September. She’ll therefore do almost anything to avoid the moment of truth, even though the IMF has indicated that it won’t lend any more money unless the programme is accompanied by a big debt write-down. The troika has therefore reached an impasse – the IMF says no more money without haircuts; the Europeans say no more money if there are haircuts. As I say, some kind of a fudge will eventually be found that allows publication of the troika report next week and release of the next 31.5 billion Euros of bailout.

The European Central Bank is barred from taking write-downs, since to do so would be to stray into the forbidden territory of money-printing to finance government spending. So a concocted way round the problem is proposed where the ECB transfers its Greek bonds at cost price to member states, which then transfer any profits on maturity to Greece. In such a way, nobody takes a haircut even though the debt has been partially forgiven. Interest payments might also be waived for a while, and maturities extended, further pushing the problem out into the future. If you think this mere accounting sleight of hand, you’d be dead right.

In the meantime, the euro zone heads ever deeper into recession, with the forces of economic contraction beginning to lap even at the doors of mighty Germany. Official forecasters continue to expect the European economy to pick up a bit towards the middle of next year, but on the present policy trajectory, there’s little reason to suppose they are right. Not until the bad debt problem is properly dealt with will Europe be set on the path to sustainable recovery. Nearly three years into the euro zone crisis, lasting solutions seem as far away as ever.

The Greek books are still being cooked - Telegraph