The Greek Bond Miracle: The fake clean exit, the Grexit, and a dream that never was

Do you believe in Santa Claus? If so it wouldn’t sound strange to you that just around Christmas it was first announced that Greece’s economic supervision by the “troika” (European Union, European Central Bank, International Monetary Fund) was to end in August 2018.

That was when the Greek minister of finance Euclid Tsakalotos, educated in exclusive UK boarding schools and at Oxford, and described as a “hardcore Marxist,” the person who had been most recent “negotiator” in the bankrupt country’s so called “bailout” or “memorandum” that has decimated the economy, visited New York City to chair a conference on investing in Greece. During this conference, he took the opportunity to ring the closing bell at the New York Stock Exchange.

This visit coincided with a run in Greek government bonds, with the bankrupt country’s debt rising to investment grade levels, resulting in the triumphant boasting from government as it asserted its expectation of raising new funds without the restrictions imposed under the “memorandum.” To the unfamiliar, this would certainly be worthy of a miracle. It could be called “The Miracle on Bond Street,” paraphrasing the other famous Christmas story, the Miracle on 34^th Street, or something like that. But why is that?

Greece has been barred from any access to the capital markets, other than short term T-bills, since 2010 when it entered into an economic restructuring program (“bailout”) that was supported by the IMF, the ECB and the EU. Enough has been said as to what led to the crisis, who was really “bailed out” and whether the program was designed and implemented correctly. But this is another discussion. As part of this program however, debt held by private investors (the ones that haven’t uploaded it during the first years of the “bailout,” i.e. probably the ones that fueled it) was subject to a generous haircut of 53 percent in 2012. Even so though, the country is still bankrupt with debt standing at exorbitant levels, especially as this debt is mainly held by foreign investors, governed by foreign laws and denominated in a currency not controlled by the country, i.e. without the ability to depreciate. The IMF has already characterized the debt as unsustainable, or at least implied so and repeatedly threatened to disengage in the absence of any debt relief that the European public don’t seem eager to grant.

But in any case, after so much drama Greece is now nearing the end of the third part of this “bailout” program and supposedly it will exit and have once again access to the capital markets, no matter how improbable that seems.

The credit rating

Who would imagine? Greece’s government debt stands at close to 180 percent of its GDP and its credit rating was at B- at around Christmas (S&P increased it thereafter to B) but it is still below investment grade. The debt level is much higher than before the crisis and the credit rating, as would be expected by financiers, is much lower too.

However, the 4 percent yield as of December 2017, means that it has decreased to before the crisis levels even if credit rating is also lower! Just before the onset of the Greek crisis in 2009, the Greek yield was around 5 percent, with the Euribor at a bit over 1 percent, while with the Euribor slightly positive the yield at 4 percent it was almost at same levels although the economy is in worse shape! It had since increased a bit, to around 4.4 percent by February, but still in the same low range.

The yields

The yield on Greek bonds has mostly fluctuated between 7-10 percent during the crisis (with some spikes in times of uncertainty) but has since fallen considerably. It is now below countries that are much larger, that are under no such financial distress or fiscal supervision, have much lower leverage and higher growth prospects, such as Mexico, India, or Brazil, for instance. Perhaps that’s the key. These countries are (at least nominally) independent. Greece is part of the EU, which has extended a lot of credit to the country. Of Greece’s around €330 billion debt, 75 percent is owed to the IMF, the ECB, and to EU member states. As a result, that probably means there is some safeguard, or at the very least that’s what is commonly assumed. Then again, that was the assumption before Greece’s bankruptcy. Supposedly the other EU countries have now guaranteed this debt; a feat that is not to be envied.

If that’s so, is then the Greek debt a good buy? It is probably the highest interest-bearing debt in the EU and perhaps in the entire western world. Germany’s yield is barely positive at 0.3 percent, which in turn along with other EU countries have lent to Greece at around 1 percent. Those countries are making money on the difference. For those countries that raise funds at higher rates or who could do something better with these funds, I am truly sorry for them.

On the other hand, with this 4 percent, private investors would be making around 300bp or so purely on political risk? And that’s what you have to be familiar with before buying. Something like Greeks running rebellious again, as in 2015, and wanting some kind of renegotiation or an all-out, the dreadful “Grexit” which we will revisit further down.

The repay-ability (or serviceability)

So if leverage and the credit rating isn’t alluding to the yield, then what is? Well, it might be the ability or propensity to pay. It’s what’s called “serviceability” by the IMF, on the basis of the Gross Financing Needs (GFN) model. It’s like when you complain that you can’t make a payment and the creditor responds: “Okay, how much do you have then?…” It is expected that GFN shouldn’t exceed 15 percent of GDP, but it is projected to get out of control after 2030. Even the current levels of 20 percent can be excessive. Can the Greek economy continue paying as such? Probably not, or at least not without completely devastating the country.

Of course, some may be saying that it is possible or may be indifferent to the latter possibility. There has been enough ink spent by economists to point out the unlikelihood of an economy growing at 2-3 percent annually with 3.5% primary surplus and in the absence of investment. This 2-3 percent growth is not happening at this time. It can’t happen only by investing on low value-added tourist activity and subdued consumption, even if some are trying to distract and delude with the usual stories of corruption and bureaucracy.

Even if that was the reason, the troika should have tackled that after so many years and so many useless reforms. But all of these reforms have simply led to lower productivity even if wages were reduced. That’s due to the low value-added output that was further decreased due to the crisis. It’s like tackling the symptoms rather than the causes. Who knows, maybe that’s the purpose.

In the end it comes down to money. Investment in Greece has plummeted during the crisis. PriceWaterhouseCooper has estimated that as much as €100 billion is missing in investment. And the EU is not really investing now. Even historically, the EU investment programs have only run at 1-3 percent of GDP (€70 billion in EU programs between 1985-2014, with some leverage from the EBRD/EIB, which doesn’t come for free as there is interest; note that even non-EU countries receive those funds). Investment was directed to public works with no such long-lasting benefit for the economy (the effect on agricultural subsidies is debated too…). Many public works projects were undertaken by nouveau-rich Greek elites that also controlled the major media outlets. Hence there was some positive feedback along with a sense of well-being and an imported lifestyle based on leverage. The public is not even using newly-built toll highways, as tolls as well as automobile usage are quite expensive, therefore making it questionable whether investment will be recouped. And just to cap all of that, the European Court of Auditors announced in March 2018 that irregularities in the financing of these construction works (highways) have cost an additional €1.2 billion, or 17 percent of their budget!

One of these highways, the E65 between Domokos and Trikala, is actually the Greek version of a “bridge to nowhere.” It is a toll highway in the middle of nowhere, not connected to another highway, a major city, a port or an airport (that is with all respect for people in this part of Greece; nowhere just refers to the limited usage of and traffic on this road). Around €1 billion has been spent for this project and around 70 percent more is needed to finish it off (i.e. connections to other major highways). Nobody knows when this will happen. Somebody must be thinking that Greeks are stupid or are laughing at them, not with them. It’s not funny though, it’s outrageous.

By comparison, with €1.2 billion, 14 Greek high-traffic tourist airports were transferred to a consortium of Fraport and a Greek business group. They will be subsidized with €400 million of EU funds (by the way, isn’t this an a private sector subsidy?). The major Greek ports were sold for even less than that amount. Greece still doesn’t have even medium-speed trains (by European standards); “modernization” has been ongoing for the last 20 years or something. One of the most expensive and useful highways, Egnatia, is up for sale and probably will fetch much less than the aforementioned amount. If Greece would have been spending this money to put it where the mouth is, i.e. in sectors generating income or high value-added good jobs such as in a Greek airline company or a factory, it would have been deemed by the EU to be an unfair subsidy, a waste of money, inefficiency, corruption or anything else.

This highway to nowhere should stay the way it is as a testament to the inefficient involvement of the EU and associated interests in Greece. Even the highways that lead somewhere can pretty much facilitate just a protectorate type of economy centered around transportation and logistics that, in the absence of local production, serve as conduit for goods and people movements between Asia and Northern Europe.

Furthermore, in the last 40 years and especially after joining EU and the Eurozone with its high costs and loss of tariff protection, deindustrialization precipitated, transforming Greece into a country for the consumption of imported goods and services; some of the more discernible features of colonialism or parasitism. Greek business interests may have welcomed that; it’s easier and less risky to import than to produce. Consumption is supported by public debt (which has run its course) and low productivity/low salary services in tourism (also coming to saturation as the country is running out of waiters while many of the educated youth have to leave).

If anybody considers any protectionism that could have supported local production as “backward” or a pariah concept in a world of supposed “free trade,” then they should refer to the latest “anti-dumping” measures towards China by the EU and protection of strategic sectors or local production taken by the U.S. and China. In the absence of “Grexit” or large-scale investment (much larger than the most of the €1-2 billion discussed in most of the cases or in privatizations), the EU should probably be providing Greece with a five year holiday from EU regulations and ability to raise import tariffs so that it can develop home-grown products and technology. Let’s call these the “anti-parasite” measures.

Even if somebody can go as far as very inventive mathematics to prove debt sustainability at the so ferociously debated 3.5 percent primary surplus level, some recent developments will discredit the argument and point to other machinations. Just in November 2017, the Greek government, obviously in agreement with the troika, proceeded with exchanging the bonds held by private investors (those that were subject to the 2012 PSI haircut) with new bonds maturing in 2023, 2028, 2033, 2037, and 2042 (5, 10, 15, 17, and 20 year maturities). In total, €25 billion out of €30 billion have been exchanged. The coupon on these bonds is 3.5 percent, 3.75 percent, 3.9 percent, 4.0 percent, and 4.2 percent.

The explanation given is that the Treasury wants to increase liquidity by appealing to large foreign portfolios and to construct a normal looking upward sloping yield curve. So it seems that large investors want to buy Greek debt and not the small ones. Aren’t these some shades over the efficient market hypothesis? And, by the way, have you seen the Greek yield curve? Based on the December 2017 data, yields gyrated around 3 percent throughout all maturities.

This doesn’t look like a yield curve. It looks more like a dead person’s cardiograph (or almost dead). And that’s what the Greek economy is: in serious trouble, in some sort of intensive care with “mechanical” support (if you have different data please let me know). However, if the EU and Treasury are trying to fabricate normality, this is a very expensive shenanigan. These coupons are well above the 2 percent of the original bonds. Who is going to pay that? The Greek people? And if that’s so, how?

In any case, taking the original debt repayment schedule and updating it by the new swapped bonds we get some spikes of irregularity with very high payments in 2023, 2028, 2033, 2037 and 2042. These payments are interrupting an already unbearable array of steady high payments that the country is obligated to meet between 2023-2040, which would require a 3.5 percent primary surplus. If Greece is to meet these payments, for example in 2023, its primary surplus should be over 5 percent or the economy has to grow at 8 percent annually, which is science fiction in the absence of any magic plan (or any plan to be honest, outside of gimmicks for systemic media commentators often sponsoring their own favorite pet project or investor).

So these obligations cannot be met. What is therefore going to happen? The recent agreement between Greece and the troika purportedly provides “debt relief” via a ten-year extension on the repayment of “bailout” loans and the deferring of interest payments and amortizations for an additional decade. But will this be enough? And what did the EU, ESM, and credit rating agencies know about these agreements, months in advance? At least the credit rating agencies, should have been shouting foul over the repay-ability of these issues. But they haven’t, they keep silent and supposedly they have a positive outlook on the Greek debt. How nice. Seems that we’ve been left outside of all these talks!

Inventing the “success story”

So it comes down to EU being satisfied and calling it quits with the Greek mess via its plan to absolve itself of this crisis. Which pretty much puts to rest the discussion that the 2015 unrest harmed Greece (an additional €100 billion burden according to those opposing the referendum, then subsequently raised to €200 billion. Who knows…) or delaying Greece’s salvation. It was simply up to the dominant Eurocrats and Europowers to decide that enough is enough. But they just couldn’t put up with some rebels back then and Varoufakis played the useful villain. Economists and academics on both sides of the argument embarked on the debate and eventually it sounded more like arguing about their own ego or allegiances. As much as it was about penalizing in the first place and keeping troops checked, the odds are changed now and it is about playing it nice. It is about creating success, and the time for using shiny brochures, deep thought catch phrases and festivities for doing so has passed.

The idea of the EU is falling apart; not a bad idea but still horribly implemented and impossible to change within a reasonable lifetime or probably ever. Sometimes you just hear it from where you wouldn’t expect. In one interview in 2016, a lower level Dutch diplomat in Athens said that a success in the Greek program is needed to rally against Eurosceptics in its own country and probably elsewhere too. Since then, you find Eurosceptics all over and things are rather going their way. Eurosceptics, for the unfamiliar, are by default the “bad guys” or the “populists,” while the pro-European (or pro-EU bureaucrats) are the good guys, the ones that know better, that hold the higher moral ground and who have the historic responsibility to enlighten the “deluded” or push them to the side.

So if EU needs some successes, in the absence of one it just has to create one. It’ll cost little compared to EU’s combined wealth (Greek debt is about 2 percent of the EU’s GDP…). Right now the cost seems like a couple of billion in the bond market. If one needs to move the Athens Stock Exchange too (of little importance as Greeks do not invest much these days) it wouldn’t be difficult either, since the daily volume of around €40 million is close to lunch money for some big funds.

Some handouts to the poor and unemployed were distributed by SYRIZA too. About a couple billion euros of one-off helicopter money was handed out before Christmas 2017, allocated as €300-900 per poor household and €400 per unemployed youth. Apart from the feel good effect, this would also boost GDP through an immediate consumption hike; another gimmick in other words. This may do the trick for now. But is it a success scenario?

During the euro honeymoon period in the 2000’s, when the EU periphery were promised convergence with the EU average, the countries of the periphery attempted to get there with leverage and consumption in the absence of the high value-added production of the north. This happened through public sector or private sector bonanzas, or both. At least that’s how I understand it. Then the trick ran into a dead end. Debt got out of hand. Countries liked the idea of equality but nobody was interested in sharing capital formation or transfer of know-how.

You may be wondering why lenders funded this rally and why they were not also penalized. It seems that there are only irresponsible borrowers in this world and no irresponsible lenders and that losses only amass to borrowers. Although debt is priced according to different levels of risk, it is ultimately risk-free! This, of course, necessitates a long discussion. In any case, seeing the dead end and potential domino effect (lenders are always good in exasperating those fears) the IMF and troika had to step in (others claim that, the IMF, at least, was in fact invited in by some Greek politicians).

The troika ran a program aiming at fiscal adjustments; you know the usual suspects: salary cuts, pension cuts etc. as funds had to be found to honor the debt. Portuguese debt stand now at 130 percent of GDP but the program was officially declared concluded. The IMF called it the “unfinished business.” But there’s no room for debate or doubt in the EU now. In actuality, the Portuguese finance minister, Mario Centeno, the person credited with the “success story” of his country is the one now running the Eurogroup, providing a more friendly facade after the departure of Schaeuble’s and Dijsselbloem’s grim figures. Who knows, maybe Centeno will be even rewarded with a position at Goldman Sachs, just as the Portuguese former EU president, Jose Barroso. In any case the IMF has been silenced, it’s been repaid almost in full by Portugal and has departed, just as it has repeatedly claimed it will be doing in Greece even if in the end it has thus far remained.

The Portuguese and Greek “success stories” are likely similar in having created a sort of debt-colonies or debt-zombies with exorbitant levels of debt, albeit served at lower interest rates than outside the EU’s safety net. This probably echoes the argument of ESADE’s Pablo Triana that Greece owes gratitude to the EU for these low interest rates, as they could have been higher based on its debt’s credit quality (wondering what he thinks now of rational “markets”…). This individual should be checked for sanity or impartiality or both. The argument resembles that of prisoners being electrocuted and the guards requesting gratitude for not charging for the cost of the electricity necessitated to “reeducate” them. Still, the argument has been shared by some EU ministers such as Belgium’s Johan Van Overtveldt. I’m just wondering who came up with it first…

Ultimately though, the real level of success can be judged outside hard numbers by people on the street: the 25 percent unemployment (though there has been some reduction engineered through part-time contracts and widespread underemployment as of late), the many that left the country, the rise in poverty, the mountain of non-performing loans, the shuttered store fronts, the bankruptcies, the suicides, the homelessness, and much more.

It is estimated by the IMF that Greece will need 20 years to once again attain pre-crisis levels (probably downsized as well). Portugal’s respective estimated period is half of that. Just to be fair though, the Portuguese unemployment rate has already fallen at almost the pre-crisis levels at around 9 percent. I don’t know how this has been achieved; i.e. through what type of jobs/activity, and of course I don’t know if it’s sustainable without EU support. Any input from locals is welcome.

And indeed, in the beginning of 2018 the unemployment rate in Greece was down to around 20 percent and it has been claimed by Greek government officials that it will fall to below 15 percent by 2019, mirroring Portugal’s quick employment rebound. As much as this may sound unrealistic, it can certainly be engineered (at least in the absence of any credible plan to spur economic development). There is already a government plan in place subsiding new hires: it offers €360 towards salaries staring from the €586 minimum. It can very well be called the “hire one get the second one for free” program. With €2-3 billion per year this could produce 300,000 jobs. There is also extensive hiring in municipalities and other public sector positions.

And even so, jobs are not good: 33 percent of positions (either part-time or full-time) receive below €600 per month, which is quite challenging to survive with. In addition, almost half of 2017 new hires were part-time. No wonder that candidates still prefer the public sector than the private and a testament of the type of positions that the private sector generally offers, as discussed above low paid, low value added in general. For 8,166 positions offered in the municipalities at the beginning of 2018, some of them consisting of unskilled manual work, applications exceeded 30,000.

But in any case, if Greece or Portugal are allowed or supported to operate as a Brussels debt colony with a 130 percent debt-GDP ratio at a 2 percent interest rate (as compared to the 70 percent debt-GDP ration required as per Maastricht criteria and, let’s say, a 4 percent rate) then why did Greece have to go through all this trouble? Greece’s debt-GDP ratio was at “only” 130 percent just before the start of the crisis, but the country needed supervision then and it doesn’t need now at 180 percent? If a 130 percent debt level was sustainable, then was the “bailout” program simply a good excuse for the political elite in Greece and the EU to avoid the political cost of “restructuring” the economy? Seven years later, 500,000 educated youth that probably have high work expectations have left the country, while the newly downsized economy can be more easily managed through consumption/service sector handouts, i.e. “business as usual.”

Some old “friends” and some last things to take care of before the troika goes

One can therefore say that in the absence of hard data, at least of the variety that financial analysts use, there’s nothing that justifies this yield on Greek bonds. But if the yields fall (or bond prices increase) that means that somebody is buying. But who?

A few months ago, on December 18, John Cryan, CEO of Deutsche Bank visite Greece’s prime minister Alexis Tsipras in Athens. Tsipras twetted the following about the meeting: “Confidence building messages in our economy are multiplying. Shared Estimates: Reforms are working, Growth accelerates & projected program end in the first half of 2018.” Epic!

Deutsche Bank — which recently failed a U.S. Treasury stress test — has been among the coordinators for the bond swap mentioned above, along with BNP Paribas, Citigroup Global Markets Limited, Goldman Sachs, HSBC Bank plc, and Merrill Lynch International. Any familiar names here? Some of them were holding Greek debt back in 2010 when the crisis erupted. German and French banks held almost half of it according to BIS and Reuters (much of the French exposure though came through ownership of local bank subsidiaries in Greece). In the third quarter of 2010, German banks had loans to Greece to the tune of €19.3 billion on their books. In March 2011, Deutsche Bank’s group-wide engagements in Greece had dropped to €1.6 billion (source: Ramifications of debt restructuring on the euro area – The example of Germany’s exposure to Greece, EU Parliament, Directorate General For Internal Policies, June 2011).

If you have seen the movie Margin Call, this is the typically the time when the big guys wake up and realize that the music has stopped and they have to upload. Then they are wondering whether they could upload to their business partners just to save their skin, and if so how could they face them one day. Well, it seems they can… Who could be buying? If anybody knows, please let us know too. Or could it be that the fact these bonds were aggregated in large blocks that can be traded anonymously in darkpools have something to with that? If so, one can just follow the money, who could benefit from these sand make assumptions. There is already reporting about funds that have moved from Portuguese debt to the Greek one as the yields there have fallen. Let’s find out who are these funds and what type of information they have.

These banks, the old “buddies,” who are probably very familiar with the Greek troubles from a long time ago, coordinated distribution of the newly-issued bonds to large international funds, representing as many as 60 percent of buyers. Greece’s banks: Alpha Bank, Eurobank, the National Bank of Greece, and Piraeus Bank were co-dealer managers regarding the domestic buyers who, by the way, are mainly Greek Banks (if that makes sense!). The increased coupon, of course, is a boost for these banks. And they probably got the advisory fee from the intermediation as well. Not bad isn’t it, for moving paper from one pocket to the other.

The non-performing loans (NPLs) and foreclosures

Following the conclusion of the swap, Tsipras publicly asked these banks to proceed quickly with NPL auctioning, supposedly a “bailout” prerequisite to clean up balance sheets and raise funds for the economy. Rumors abound that otherwise the banks would have to be recapitalized or bailed in (i.e. a haircut on deposits, that’s the story that’s been pushed informally in Greece to rally the troops). The truth is, however, that these banks have some very important international shareholders that were dealt a bad hand with the previous recapitalizations. Supposedly the ones pressing for these recapitalizations and the NPL clean up are the ECB or the IMF or whoever. But Italy has also opposed being pressed over NPLs or recapitalizations; no such luck in Greece, however. 

There are between €80-110 billion of non-performing loans which actually account for the majority of the bank loans. It has been reported that they have to be reduced by €40 billion (in pre-crisis values) as per ECB requests. This could involve foreclosures/auctions for as many as 130,000 properties. To prevent social hardship there’s certain legal protections against auctioning residences of first-time buyers (primary residences as per the Greek terminology, as they may cover not only mortgage but also collateral assets) for real estate values up to €180,000 for single individuals to €280,000 for families. This doesn’t cover property used as collateral for commercial lending; this should be quite substantial, considering the extensive small business sector in Greece as well as the devastation that has been caused from the recession and the “bailout” program. Even these restrictions, however, will go away in 2019.

In the meantime, from the beginning of 2018 these assets can be sold to vulture funds; hence you hear all these stories about funds coming back to Greece. The values of such properties are most probably much lower now than before the crisis and will be sold at a fraction if auctioned as per the global practice (probably much less than even 50 percent; consumer loans that are at the low end of NPLs are sold for 3 cents on the dollar, even business loans have reportedly been sold for less than 10 percent). As at the start of 2018, as electronic auctions kicked off, it was made clear that many of listed auctions included properties even below €50,000 in value and according to activist groups, primary residences as well.

Trying to understand what’s the benefit right now of such auctions in raising meaningful funds, outside the opportunity for vultures, of course? These properties could have been kept in a “bad bank” (same as what happens with the Greek debt: it is frozen out somewhere where it will be repaid over the next 40 years). There’s such discussion ongoing at the EBA and the Commission staff in fact, i.e. for the establishment of a Pan-European Bad Bank (AMC) for NPLs, but no such decision seems close for now. Most importantly, the proceeds from these auctions will flow directly into the banks and their private investors.

On the other hand the state, i.e. the taxpayers that have poured more than €40 billion in the banks’ recapitalizations, are facing at least €25 billion of losses from the 2013 recapitalization (and after the state gave away control to the banks in 2015). This is not what happened in the U.S., where the Treasury poured in $475 billion with the TARP and was repaid in full. Indeed, it even received profit from the repayment on funds provided to Freddie Mac, Fannie Mae and AIG. It received these funds in priority over private investors and was acquitted of any wrongdoing in doing so in the U.S. courts.

If there are any strategic defaults or mismanagement in these NPLs, they should be dealt with somehow in court or otherwise (just to disavow moral hazard concerns). We refer here for example to cases such as those involving Piraeus Bank, that was found lately to have bypassed regulations in granting and transferring loans to insiders. If any borrower keeps money in offshore accounts and strategically defaults, why not try access their offshore accounts directly? It can’t be that all these people are in strategic default (estimated at around 300,000) and even this depends on the definition: if putting food on the table or educating your kids compared to paying the loan is strategic default then we could be doing something wrong. Foreclosures at the bottom of the market is exactly what U.S. tried to limit to keep the real estate market for plummeting. Eventually, if the economy grows these property prices will recover over the next years or more and the loans will be repaid too. And finally, if incomes and real estate prices are down by 30 percent to, say, drachma levels while loans remain stable at euro levels, then what would you call somebody struggling to meet the payments and giving up, especially if they can rent the same house with less money?

Greece’s prime minister, trying to play down fears and maintain his “socially sensitive” face in alignment with his supposed past or present political orientation, has said that banks should be focusing on the big lenders who are large affluent borrowers attempting strategic default and not on the small retail borrower. There shouldn’t be that many of these affluent borrowers, shouldn’t there? It would be suspicious if they haven’t been dealt with already. Then, even under good intentions, it might be difficult to salvage large corporate loans; whole market sectors might have collapsed and even if not, banks may not have the skills or management to run them. But if Tsipras wanted the banks to do something, couldn’t he have obliged them to do so before offering these new bond issues, or better yet, if the state haven’t given up control at the 2015 recapitalization?

Some more privatizations and reforms…

Apart from the NPLs, there are also some other matters before we finish up with the “bailout,” such as some (more) privatizations. Pretty much anything that could be sold is already gone. There are still a couple more assets, but if anything, future transfers of public companies will primarily serve in sweeping debt under the carpet (i.e. removing it from the state balance sheet). Privatizations so far have fetched less than €6 billion and probably won’t exceed €10 billion, a far cry from the initially touted €50 billion figure and abysmally low compared to the Greek debt. This is to be expected of fire sales, as many have cautioned long before. So if there is any use (to the economy and society) of privatizations, it is to take away some power from those that have bankrupted the country. But will those replacing them turn some benefit to the people in monetary terms or in terms of efficiency?

Aside from privatizations, there are still some other potential reforms (such as deregulating sectors or restricting strikes) but after their colossal failure in reviving the economy, they shouldn’t be taken seriously, except for those that stand to gain and lose from them with the redistribution of a smaller pie…

The dreadful “Grexit,” but for whom?

If that sounds bad, why isn’t Greece walking away with a “Grexit” as some might think and as some have even some proposed in return for a debt write-off? “Grexit” — just the word creates fear and loathing… let alone the various “TINA” (“There Is No Alternative”) preachers. The question of who is afraid of it and why has been asked and answered so many times and in multiple ways, reflecting the motivations of the speaker. In the end it it is reminiscent of another play, Who is Afraid of Virginia Woolf, one of a failed wedding, no matter what are the reasons for that, but still a failed one.

Greek public opinion already defied these fears by voting against the “bailout remedy” and thereby flirting with “Grexit” back in the July 2015 referendum, although interpretations of this action differ. However, the mistake of those supporting the euro (probably out of arrogance or a disconnect with reality) was that they clearly connected the “yes” vote with the euro and the “no” vote with “Grexit” in an attempt to create fear. But the public didn’t budge.

Since then polls have shown that most of Greeks believe that joining the euro was a mistake but seem rather hesitant or ambivalent about leaving. Perhaps they are just terrorized with all the horror stories and intimidation regarding “Grexit.”

Parting ways, however, bears emotional aspects. Many in the Greek public as well as much of the establishment are emotionally attached to the west, the latter maybe through business ties too, but this is one thing and economic realities and policies that can lead to recovery is another. However, based on polls, even if Greeks have very low trust in the EU and Greek politicians, they have slightly higher confidence in the euro (the latter has waned considerably though). Maybe the public knows better with regard to economic recovery policies, or they simply don’t trust Greek politicians to come up with some currency that will be reliable. However, this doesn’t matter much if one can’t get hold of this currency, so it comes down to priorities among the various social groups.

Then come the economic factors. “Grexit” could cost a lot, probably in a short term devaluation and a brief GDP slip, but the Greek economy has already seen most of the GDP decrease and the so-called internal deprecation of wages and prices is in full swing with no rebound in sight. The situation now is much different to that seven years ago. It will also cost a lot to the EU, some say more than €1 trillion, but probably they have factored effects in already at this point. In any case if they cared they could act differently, and regardless this is not a Greek problem anyway.

The (EU) dream that never was…

A “Grexit,” however, would create an economic and policy void. It will call for the country to redevelop its production and economy away from a parasitic one. This may be difficult to accomplish quickly. However, if it is done, and it has to be done, Greek manufacturing production at close to 8 percent is much below any healthy level and the EU average (15 percent and projected to increase to 20 percent by 2020). This process may be damaging for the existing power distribution within the economy. It would open up the Pandora’s box for the establishment which in Greece covers mainly new money active in low sophistication or steady cash flow sectors (there’s no private equity or venture capital in Greece), as well as the nepotistic political elite. These elements are used to operating on imports and services and receive public funding as is. For that, it has been said that although there was room to avoid the troika program, politicians didn’t try to do so as they preferred to avoid the political cost of implementing unpopular measures, including potentially being pushed to the side.

Under troika supervision, the political establishment remained relevant, serving as local enforcers. Nevertheless, one of the established duopoly parties didn’t avoid dissolution in this process and a replacement had to be created almost from scratch in a painful way. This is the party enjoying the EU’s trust now and the one carrying out obediently and effectively most of the painful decisions.

In turn, the EU made a lot of mistakes in implementing the program, or had other priorities such as not proceeding with a debt haircut at the early stages of the crisis when it would have been more effective. Instead, it just threw good money after bad. It seems they simply didn’t care or didn’t have the capacity to get involved or had other priorities.

Obviously, a head on confrontation and a “Grexit” would have led to bank nationalizatin,n and with that, nationalizing the loans to the Greek elites. It would have caused losses to the ECB and other international institutions. It would probably have caused distress to those Greek businesses holding euro-denominated loans. Who knows how their offshore accounts would have been affected as well (much of it in domiciles controlled by the EU directly — i.e. Luxembourg — or indirectly, such as the Caribbean), not to mention future remittances.

There are more than €100 billion held by Greeks in offshore accounts as per the Paradise Papers. Not all of it is off course simply due to tax-evasion. Some must be from illegal activities as in every country. Some might be legal and alrea

dy taxed (like the shipping income or the funds that fled when the crisis started). However, if we consider as a normal level of offshore wealth the EU average of 13 percent of GDP, then that means that there is around €80 billion of irregularity in Greece that could be investigated. Imagine if this capital was invested back in the country, or had never left. It represents around 40 percent of current GDP and pretty much comprises the missing investment as per the PriceWaterhouseCooper research.

Although the lengthy discussion on tax-evasion and corruption in Greece and although the modernized and intensified tax collection mechanism, offshore wealth has not really been tackled. Troika seems to have given up on those, let alone Greek authorities. How come? Bet that a Grexit would have happened the moment that EU attempted to tamper with these offshore accounts or taxing them to pay back debt (offshore funds amount to as much as 30% or more of Greece’s debt…). Bet that in this case the Greek establishment would have been beating the drums of rebellion and national pride and preaching the quest for independence! Let alone the reactions from bankers in these offshore destinations (or their ultimate parents within the EU…). The Euro probably offers to all o

Despite the lengthy discussion on tax evasion and corruption in Greece and despite the modernized and intensified tax collection mechanism, offshore wealth has not really been tackled. The troika seems to have given up on this, let alone the Greek authorities. How come?You can bet that “Grexit” would have occurred the moment that EU attempted to tamper with these offshore accounts or moved to tax them in order to recoup some debt (offshore funds amount to as much as 30 percent or more of Greece’s debt). You can bet that in this case the Greek establishment would have been beating the drums of rebellion and “national pride” and preaching the quest for independence! Not to mention the reactions from bankers in these offshore havens (or their ultimate parents within the EU). The euro probably offers to all of them some level of safety in terms of movement of funds, so “Grexit” is viewed as a threat. Furthermore, the “bailout” program provided leverage and coverage for imposing those various “reforms” that often seem irrelevant and, judging by the results, certainly useless for the economy. How this could have happened through normal parliamentary procedures?

This is nothing new. A review of the writings of Paul Porter, the Chief of the American Economic Mission to Greece for its redevelopment after WWII may sound like deja-vu:

But eventually it seems that all this happened as the EU (the Brussels non-elected administration) and the EU’s superpowers didn’t care much for Greece, in any way and at any time. Each EU member state seems to have its own agenda. This is not the U.S. The EU is more fractured and of course there are no such mechanisms in place. Otherwise, the EU would have stepped in to remedy these troubles long before, not turning the blind eye on Greek — and other — statistics (at the time of joining the euro) and allowing the pilling up of debt. But then again, this debt was fueling their own exports or mischief (referring to bribing scandals such as the Siemens case). And even if they did intervene, they couldn’t have replaced the existing establishment. It would have been too much work to step in, perhaps even impossible or illegal. So the Greek elites acted for their own interests and to save their own skin, and indeed they mostly did.

The above shouldn’t be interpreted as being anti-establishment or anti-elite; some sort of establishment is inevitable to exist everywhere. It’s just that the current one, the one of the last forty years more or less, has been proven incapable of serving Greece or itself in the wake of changing global economics, technological progress and rise of the educational level in Greece. Instead, this establishment has just stayed the way it was; an anachronism. Perhaps that’s the destiny of Greece: five bankruptcies in the last 200 years of independence (1827, 1843, 1893, 1932, 2012 plus the economic devastation of World War II). You may draw your own conclusions and if somebody talks about institutions (as per Acemoglu) then I’d talk about those controlling the institutions (as per Plato).

The reason for failing to follow western norms (which shouldn’t be taken as an imperative anyway), based on my own understanding and binge reading (I’m not an expert) is that there is no true bourgeois or middle class in Greece as it is known in the west. And by that, we are referring to the class that instigated the industrial revolution in the west. This was the class that emerged in Europe, often violently, to claim the space between the aristocrats, the landed capitalists, and the poor farmers or workers; the class of socially mobile capital, the class of enlightenment and democracy.

In Greece, during modern times at least, there were for the most part not so distinctly formed classes as elsewhere, in my estimation. There is no aristocracy and there are no large estates in Greece, and Greek business were smaller or global (shipowners and diaspora). What is considered middle class or bourgeois (“astiki taksi”) historically mainly included those attached to the government and central administration in Athens and some other major cities. They attained this position either through connections and being part of a political party, or  via a business that to a large extent benefited by preferential access to this central administration. It represents something similar to the upper urban middle class or even aristocracy elsewhere.

For all this the Greek bourgeois is mainly oriented towards power rather than capital. Other reasons can be sought in culture and social norms as well. Indeed, in the first years of the Greek state parties were organized around allegiances rather than classes or ideologies (i.e. around professions, or allegiance to a specific foreign country). One could very well suggest that this practice lives on. Especially after the recent blurring of ideologies, the political parties seem to simply cater for their clientele in certain sectors, such as small business, professionals, public servants, the army, etc.

In any case, returning to our argument: as there are no such bourgeois or industrial capitalists or associated needs, institutions and mechanisms that allow for capital formation and accumulation are also imperfect or in any case don’t function in the same way as in the west. The same explanation may hold in other countries outside the west. Probably that’s the reason that the nouveau rich in such cases prefer to send their wealth out of the country. When some industrialists or aspiring middle class manage to amass capital and know-how to establish a stand-alone power center, it seems as though steps were taken to deescalate the emerging threat.

Epilogue

Greece is however now back at square one, with a devastated economy and much less room and tools to grow and while the same inefficient establishment is running the show. Nice! On the other hand, taking into consideration all limitations, maybe that’s an honest and efficient solution for the EU. Can you hand somebody a maxed-out credit card and let them understand how to manage themselves on their own? This will turn the spotlight to the Greek establishment that won’t be able to hide behind the troika. But will Greece react or stay a zombie economy, wandering aimlessly, muddling through with anemic growth, without purpose or destination? What kind of life will that be? Something like the tragic hero in Jack Nicholson’s One Flew Over the Cuckoo’s Nest. A lobotomized subversive, but on the other hand, surely a success over the unruly patient for the facility’s cleansed, apathetic or twisted management.

Greek people show some level of resignation; the participation in elections is at historic lows and so is optimism and trust for the system. Will it stay that way? In any case it doesn’t seem that the country’s troubles are over. Let’s say, borrowing the term from elsewhere, it is a “frozen conflict.” And there are of course still those who fanaticize over party lines and the party clientele in both aisles and who look forward to power sharing and benefits. Depending on who you talk to, you may even find some that say things are getting better! Some have survived, some are close to power brokers, and some find good opportunity in trading devastation and in the redistribution of the smaller pie. They just talk to themselves and receive feedback from their own echo chamber. I hope I’m proven wrong. It’s still a good market as was once said for the MBS desks just after the 2008 crisis; it’s just that it is good for less people, the same as the globalization of the few, those that can produce anywhere, sell anywhere and get taxed nowhere other than in tax havens…

That’s not the deal that Greek people embarked on however, or the people of any other EU member state. That w not the dream they had in mind. But dreaming is just out of question for now. It’s time to wake up and find a solution while niceties and philosophies can run in smoke filled rooms after dark. However it won’t happen that fast. Tsipras continued to tout the “success story” despite serious doubts and challenges.

Poor Greece… The whole picture doesn’t look good, at least if the opinion of the many is considered. But trying to sound positive, or in the spirit of holidays when this story first appeared, let’s just believe that Santa Claus really exists, the Greek bailout is a success story and we’re really coming to a clean exit. The next couple of years will be interesting though. The Greek government has some slack in 2018 as there are no big payments coming up. The problems appear in 2019, with a large payment that looks even more daunting considering the sluggish growth. But 2019 is a year of elections, if not earlier. That’s always an opportunity for verbal rhetoric, and after that, more trouble, whilst kicking the can down the road. But at least for now the ball is in Greece’s court and with its administration, whoever that is. Drawing for how the 2015 referendum was turned around it is now evident that is not only the public that decides. So it’ll be interesting and critical how this establishment will react as there’s little room for maneuvering and small margin for error. Let’s wait and see.

P.S. The article was originally drafted in January 2017 and was lightly revised for subsequent development in spring 2018.