Theodore Pelagidis, The nightmare is here

Brookings, April 17, 2015

Syriza will eliminate the primary budget surplus and cease or reverse the privatization efforts of the Samaras government, the cost of which for 2015 alone would be around 8 billion euros. Meanwhile, bond maturities in 2015 will reach almost 25 billion euros. Since most of the maturities are held by state entities, one should not discount the possibility of either a violent ‘Grexit’ from the euro or, conversely, a long transition to some kind of normality that will unfortunately kill any hope of an imminent ‘Grecovery.’

My January 5 blog post, Greece in 2015: Assessing the ‘Syriza’ Political Risk

Syriza’s behavior is unpredictable….What comes next might be something far worse than a nightmare

My January 28 blog post, Greece’s New Government: Empty Pockets and Empty Promises

theodore pelagidisWhat is the current situation of the Greek economy? GDP is about to contract again after an increase of 0.6 percent in 2014 fuelled by tourism and an increase of private consumption of around 1.5 percent. Employment, after an increase of 0.6 percent in 2014, seems to be falling again, and the primary budget surplus has evaporated in a three month period.

There is no doubt that the political risk has killed the (albeit anemic) 2014 recovery. It has also destroyed the troika program. However, polls show that people seem to be still relatively happy with a government that is said to play hard ball with the Europeans and the IMF—but the honeymoon is very close to being over. People are beginning to understand that the postponement of the drama—i.e, painful short-term reforms—will only make the end even worse. This is not even mentioning the possibility of an economic disaster such as a “Grexit”, meaning that the poor will first and foremost pay a heavy price. In any case, sooner or later, the Greeks will have to face the reality and, after calculating real costs and benefits, will possibly show in the polls a more cool-headed view about the future of the country. In the meantime, the pretending-to-be-cool government is serving IMF liabilities and Treasury bill redemptions by using cash from pension funds, counties, and public organizations, ironically making a future possible default much more painful and disastrous. As time passes by, it becomes evident that behind the government’s frozen smiles, the country is going nowhere. And the creditors have finally got it.

The two scenarios

So here follow two possible scenarios we may see in the next weeks:

1. “The deep dark before the dawn” scenario. I still believe this is the baseline scenario. The government, in a dramatic weekend either by the end of April or during May, being very close running out of money, meaning that they can’t pay back both IMF loans or refinance T-bills (May obligations: 746 million euros to the IMF and 2.8 billion euros in T-bills; June obligations: 1.5 billion euros to the IMF and 2 billion euros in T-bills), it has to urgently make a final decision. Tsipras then takes the initiative to announce to the public a painful yet indispensable agreement. No matter the details and efforts to mask the real thing, reforms will be fully implemented and a bill has to be passed by the parliament, or creditors will not pour the necessary money into the suffering economy, because the government’s erratic behavior has destroyed its credibility with the creditors. The agreement comes with a new European loan with a low interest rate. The “national populist” government embraces in substance a “neo-liberal populism,” which means a supposedly left/nationalistic rhetoric together with a policy of market deregulation and a huge wave of privatizations. One important detail: the government is fully incapable of preparing anything at all except for aggressively begging for money. The creditors will, in this case, have to provide in time the new conditionality rules with the detailed technicalities included. I still believe that this is the most possible scenario; I give it a 75 percent chance of occurring. But make no mistake, this is only one episode of the drama. Sooner or later the government will collapse—not because of the austerity, but from the incompetence, the inexperience, and the lack of diligent, hard-working people (rather than media personas). And because of this vacuum, the government can not serve its clientele voter that is hungry for money, positions, exchange of favors, and of course jobs. By destroying the weak recovery, the government has undermined its future.

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