Greece: Just when you thought it was safe to go back into the Aegean

published 9 February 2017

170209-greece-b — Greek PM Alexis Tsipras: not likely to dump the euro

In the Greek myth, King Sisyphus is forced to push a boulder uphill for eternity, largely as a punishment for being too clever by half for Zeus' liking.

We now have bulldozers to do that sort of thing. So in the modern re-telling of the tale, our white-collar Sisyphus would be a journalist, assigned by his editor to cover the Greek debt crisis.He would write endless stories about the Greek government, the eurozone authorities and the IMF.

And every time he thought the story was finally going to come to a resolution satisfying or otherwise a brand new fudge would be found, and he'd be back to square one again.

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Will we get to see the end of the story this time around? I'm not betting on it...

Acropolis Now, the sequel to the sequel to the sequel

As you might have guessed from the heavy-handed analogy, Greece is back in the headlines. What's the problem this time? Same problem as every time. Greece has too much debt and no hope of ever paying it off, so we have to have regular arguments about how to pretend that's not the case.

Here's where we are now: the International Monetary Fund (IMF) and the eurozone authorities have been reviewing progress on Greece's latest bailout package. The August 2015 deal saw Greece promised €86bn in exchange for hitting tough fiscal targets.

In its latest review, the IMF says that Greece can't hit the targets, which it thinks are too tough in any case. "Greece cannot grow out of its debt problem. Greece requires substantial debt relief from its European partners to restore debt sustainability."

Although Greek economic growth and budget figures have beaten expectations in the last year, the IMF doesn't think that's sustainable. The IMF would rather see Greece widen its tax base (ie bring lower earners into the tax system) and reform its pension schemes. In other words, the IMF reckons Greece needs structural reforms, rather than trying to stagger on with its current system.

Europe (including Greece), on the other hand, would rather stick with the optimistic view. Because that way they don't have to return to the sticky question of even more debt relief.

So Europe wants to stick with the plan. The IMF wants to make it more realistic. Unless they can agree on an approach, and Greece can prove that it can cut harder and faster, then Greece doesn't get the next batch of bailout funds.

As a result of the impasse, the yield on Greek bonds has started to climb again. Five-year debt (due to be repaid in 2019) nearly hit 10% the other day.

Now, this is not an "on the brink" situation yet. Greece won't run out of money until July or so.

But everyone would rather get it sorted by the end of this month. Because after that, there's the Dutch elections in March, the all-important French elections in April and May, and the increasingly wobbly-looking German elections in September.

The last thing any European politician wants right now is for Greece to become a domestic political issue while they're all trying to fend off challenges from anti-euro populist candidates.

Greece's problem is the euro

Before we get on to what happens next, let's be very clear here. Greece's key problem is the single currency. This really is not an ideological stance. It's simple observable fact (inasmuch as anything in economics is observable).

Matthew C Klein on FT Alphaville (impressively, given the FT's broadly europhile take on things) compares Greece's situation to those of "emerging market basket cases" from history.

Klein doesn't mean that in a derogatory manner, I add. He's just making the point that Greece is hardly the only country in the world with weak institutions and a sluggish economy it's not unique in being a less-than-efficient nation.

He takes a look at previous financial crises in Argentina, Brazil, Indonesia, Thailand and Turkey. Like Greece when it joined the euro in the halcyon days pre-2008, all of these countries have had periods when they saw huge foreign investment.

Like Greece, this influx of money ended up fuelling domestic consumer spending booms even as the labour force became less and less competitive, due to an overvalued exchange rate.

And like Greece, once the hot money rushed out, everyone was in trouble. Monetary conditions tightened, asset prices tumbled, and consumer purchasing power collapsed.

Unlike Greece however, "Argentina, Brazil, Indonesia, Thailand and Turkey all performed far better in the aftermath of their crises than Greece."

Why did all of these other countries manage to get out of jail a lot faster than Greece? "Policymakers responded in lots of ways, but all let their currencies float so that the burden of adjustment would be split between foreigners and net importers rather than imposed squarely on the local population."

In other words, it's the euro. The euro is the problem. And this makes perfect sense.

When you have your own currency, you can stiff your creditors. That's how it works. You can call it the inflation tax. Savers get it in the neck. Same goes for foreign creditors who were naive enough to lend to you in your own currency. It's debt relief by the back door.

But a flexible currency also encourages economic restructuring. Consumers can't afford to buy as much. But exporters get a lift. So your country buys less and sells more.

If you don't have the ability to manage your own currency, you can't do any of this. You're left with your creditors telling you how you should be running your economy. And they might have some good points as well. But it doesn't make it any easier to swallow.

What happens next

That all being said, is anything likely to change? The Greeks haven't dumped the euro yet, and given that things are going from awful to merely bad, they aren't likely to dump it now.

So you'd expect the IMF and the European authorities to somehow hammer this out rather than deliberately courting a crisis.

The only potential spanner I can see in the works is if they don't get something sorted out by the end of the month. You then get into election season. You then have to wonder if it could become a big political issue again, particularly in Germany.

There are a few politicians who would likely see "Grexit" as no great loss maybe even a vote winner and the truth is, there's probably less cost to it these days, now that markets have broadly decided that Greece doesn't matter and that the European Central Bank has got the go-ahead to print as much as it takes if necessary.

So don't worry yet. But if it's still rumbling along in three weeks time, we might need to look at it again.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.