As my readers would know I have been discussing Europe’s financial issues for quite some time. I have stated many times that Greece’s issues are far bigger than just internal fiscal policy, and that I consider Greece’s default an inevitability due to its macro-economic position within the European marketplace.
Overnight PIMCO added their voice to the “inevitable” argument.
The head of PIMCO, the world’s biggest bond fund, predicted that Greece and other European economies would default on their debts to resolve their problems as the euro area deals with its debt crisis.
Greece’s government won a vote of confidence late on Tuesday, a crucial step toward securing further short-term and longer-term financial aid from the European Union and the IMF as the country tries to avoid the euro zone’s first sovereign debt default.
“For the next three years, we’re going to see different economies work out different problems. For European economies, especially Greece, it would be through default,” Mohamed El-Erian, chief executive of PIMCO, told reporters in Taipei on Wednesday via a video conference.
He didn’t identify which economies other than Greece he was referring to.
El-Erian has suggested in the past that Greece would default and that Europe risks wasting money for nothing by pumping billions of dollars into the ailing economy.
Obviously it is possible that PIMCO has a “position” on Greece that has led to this announcement, but they are certainly not the only voice in the crowd. From the UK Gaurdian today.
Seen from Brussels, Berlin or Frankfurt, the crisis playing out in Athens this month looks almost simple, and linear in its direction. The Greek prime minister, George Papandreou, wins a confidence vote, as he did on Tuesday night. The government gets MPs to approve its package of austerity measures, set for a vote next week. Then comes the next slug of cash from the IMF and the eurozone, plus the agreement of another massive loan, worth tens of billions of euros. This isn’t easy, European policymakers admit: it requires adept political management, courage, and the ability to stay the course. But the alternatives don’t bear thinking about: the first-ever default by a sovereign member of the European single currency, the possible toppling of the Greek banking system and other institutions around the world in a repeat of the panic that followed the collapse of Lehman Brothers in 2008 – and an existential threat to the entire European project.
Right on the risks, but wrong on the policy prescription. After a month of mass demonstrations in Greece, and the near-dissolution of the government last week, this takes too little account of reality, either domestic and political or international and economic. Not only has Mr Papandreou to get parliamentary approval for €28bn of spending cuts, tax increases and privatisations, he must begin implementing this draconian programme by 3 July, in time for the next extraordinary meeting of eurozone ministers. Even in ordinary times this would be regarded as ambitious, but to do so amid the worst recession the country has seen in four decades would require a miracle of collective discipline. The new finance minister, Evangelos Venizelos, has already tried to change the plan to answer a key grievance of protesters, by dropping an increase in fuel tax and a property tax, and trying to increase Greece’s notoriously leaky tax take by targeting the self-employed.
Greece’s main opposition leader, Antonis Samaras, for one, is no longer buying it. His economic logic is impeccable: the imposed cuts are squeezing demand at a time when the economy is in deep recession. Indeed, it is already happening: 50,000 businesses went bankrupt last year and the economy is in its third straight year of recession. The fact that the main conservative opposition points this out, however, is a big new twist.
Economically, socially and now politically, the status quo is unsustainable. Instead of postponing the inevitable Greek default, it would be far smarter to prepare for it.
I completely agree. I have stated previously that the austerity measures enforced by the IMF and the EU are not working because they are killing off industrial output when increasing productive competitiveness is the only real solution available to Greece if it chooses to stays in the Euro. Quite simply under these conditions Greece will eventually default on debts, noting that IMF loans ARE more new debts. What the Greek parliament should be doing is determining the best strategy for Greece and its people.
What I find odd about this current situation is that the Greek parliament seems to be hellbent on following the path prescribed by the IMF even though it is very obvious it is having a detrimental effect on their fiscal position and economic well-being. As El-erian stated.
“Nothing has been done to enhance growth,” …. “No single (Greek) indicator has shown strength”
Yet the Greek government seems to be fighting for its life in the belief that the current plan will somehow lead to their economic salvation. I wonder if members of the Greek parliament have ever sought advice from the Argentines, given they were the most recent country to have a comparably sized default. If they did I suspect they would be receiving some fairly different advice about what strategy to take to enhance their economic future.
Argentina said on Saturday it was better off free from the shackles of the International Monetary Fund, which it blames for contributing to its $100 billion debt default nearly a decade ago.
In a statement to the IMF’s steering committee, Argentina said “we can proudly celebrate that we have cemented our economic independence as never before in our recent history.”
The South American country has a fraught relationship with the IMF, stemming from what it sees as the Fund’s mismanagement of its 2001-2002 debt crisis.
Argentina is now trying to restructure more than $6 billion in defaulted debt with creditor nations, and the IMF said on Thursday it hoped to schedule a long-delayed economic review.
Argentina said it had learned “harsh lessons” from its earlier crisis and its economy was faring better because it was not obliged to follow IMF guidance.
The IMF conducts general Article IV reviews with all of its 186 member countries as part of its monitoring of the global economy, but loan programmes come with strict conditions attached.
“If we had followed the recommendations traditionally made by (the IMF) — which have favored opening our economies, foreign indebtedness, financial liberalization and ‘unbeatable’ market-oriented reforms — the outcome would have been totally different and today we would have been embroiled in a fresh economic, social and political crisis,” the statement said.
I hope for the sake of the Greek populace someone in the Greek parliament is doing some homework on recent economic history and sought advice from independent council on developing an economic strategy for Greece’s future.