Greece secures 130bn bailout. So what's next

Despite the menacing rhetoric and the continuous threats by EU officials during the past weeks, reason prevailed.  And it was pure reason. 

Many EU economists made headlines these last days, arguing that the Eurozone was now “Ring-fenced” against a potential Greek default and  maybe it was a good time to let Greece go.

I repeat. There  can be NO ring-fence in a sovereign default. Especially when the sovereign is a Eurozone member. In this case, default leads to fear of contagion and panic. These are market FEELINGS and CANNOT be “Ring-Fenced”.  

Politicians may feel “Ring-Fenced”. In reality they are out in the open. The ECB, the IMF and even the IIF knew this. These institutions were in no position to  ignore reality and did what they had to do to avert a sequel of Lehmanesque proportions in the sovereign space. Despite the theatrics of EU politicians. 

The market should expect the theatrics to continue.  After all politicians are interested in “positive media coverage”. The rest of the world is interested in actual results.

So where do we stand now?  Greece got the 2^nd bailout package of EUR130bn. The interest rates of the 1^st package where reduced to Euribor + 150 bps, effectively much lower than the rate at which the average Greek depositor “lends” his bank through deposits. The rate for the 1^st bailout package is below the current financing rate of many of the countries that actually provided the funding. Hence the ECB decided to “swap” its holdings of GGB and give its “profits” to the European central banks. To smoothen the effect.

For the first time the ECB stretches its mandate (creatively) to support the coherence and future of the Eurozone. This should be credited to Monti.  Is this a game changer? YES. Should It be downplayed? NO.

Greece has taken a step back from facing the abyss. The abyss is there and the IMF debt sustainability report is there to remind it. If there is a person that believes that the sustainability report was accidentally “leaked” he or she is dead wrong.

The EU continues to play the old carrot and the stick trick. Greece gets the bail-out, a sustainability report is “leaked” to put things into perspective. What did the report say? That if the measures fail, debt becomes unsustainable. No shit Sherlock. However, it seems to be making all the news today as if Moses came down from the mountain speaking  of the Unheard Truth. Go figure.

The target of a debt/ GDP around 120%  is now in place. Is this achievable?  Maybe yes, maybe no.  Some say that a debt / GDP of 120% is not sustainable. I say it depends. If you run a primary surplus of 5% and the holders of the debt are mainly non-private institutions (ECB/IMF) then it is. 

If you run deficits, then its not.  Has Greece ever run on a primary surplus in the past decade? Yes. Can we do it again? We can try our best. Better to try than to say the easy “it’s impossible”.  And jump into the abyss.

No-one can be certain of how the world will look like in 2020. However, we can be sure of one thing. If the STRUCTURE of the Greek economy remains as it is there is NO way that any of the targets will be achieved. And the abyss looms. The problem in Greece's economy is not numbers. It’s the structure. Painful but it has to change.

People argue that the bail-out terms are hitting growth. Are they? Yes they are. When you plan the reduction of the public sector it means higher unemployment. And 70% of Greece’s GDP is consumption. So a 5% rise in unemployment will lead to a (back of the envelope calculation) 3.5% decrease in GDP. Who’s to blame? I say the Greek politicians of the past many years.

 If during the 1^st bailout package they had effectively reduced the bloated public sector by 80-100k of employees from non-existing state companies  they would have saved the butts of  150k public sector layoffs coming and probably wouldn’t  have taxed the hell out of businesses and individuals – the result of which was another 500k unemployed from the private sector. Is it fair for the people to suffer that much? Hell NO. So Greece must find a way out.

So, what can we do now. Well now we are in a tough spot. But Greece can still make it. 

People argue that the bailout money  is going to go into an escrow account – ie it will be paying only interest expenses hence nothing will come to Greece. Well that’s the glass half empty. Cause if you look at it the other way around, it means that the State budget will be free from earmarking revenues for interest payments – these will be paid by the escrow. So the money saved , and its quite a lot of it, can make a difference. WILL it  make a difference? NO IF the structure of managing this money remains the same.  That's the purpose of the bail out deal. Dont worry about interest payments. Put your house in order. Do people like it ? No. Should it be done? YES. And we should have done it by ourselves YEARS ago. But we were too "happy" to ruin our lifestyle.

Greece has to do an internal revolution to make it. A revolution against its post-1974 past.  To spur investment and enterpreneurship.  Greece CAN do a lot. And at no cost. If you cut the red tape, bring uniformity to corporate rules and practices and provide an efficient and STABLE  tax regime then the country has a chance.  My view? On top of this, a "Marshall" plan should be on the cards. This would be another game changer.

BUT  Greece  needs to REBRAND itself. And the flight of human capital HAS to stop NOW ! This is the major risk that Greece faces. Drainage of young talent. 

But where can we excel? Do we have to become India in terms of wages to be competitive? NO. HELL NO!

This is no nuclear physics, people. Being competitive means offering a better price OR a better quality (or both).  DRACHMA advocates say that it will increase competitiveness. They forget to tell us that these competitive gains will be eaten up by INFLATION!

We CAN compete on quality. We CAN offer BETTER quality.  REAL agriculture of value added products (instead of subsidized low return crops). Premium Tourism. Renewables. Shipping. Technology.   

My personal vision?  On the next poll, when the question “What would you like to do professionally after graduating” pops up,  the answer will no longer  be “a public servant” as it has been  for years,  but rather  “I want to invent the next Twitter”. But is this possible? 

Of course. As long as we WANT it and as long as we don’t brand any potential investor/ enterpreneur as a “Dragon capitalist who came to drink the blood of the poor proletariat”. This was catchy 100 years ago. Not anymore.   But both, politicians and electorate alike must FINALLY understand that the “old” economic model – if there was ever such a thing- is dead.  

All Greeks should  collectively commit to save the future of their country by placing the common “good” ahead of party politics and ideologies of the past century.  Under which banner?  Well there is no credible party banner. I agree. Let’s do it under the Greek banner for once.

If not, then we will be back staring at the abyss, wondering if there is  a “drachma” safety net at the bottom, as all the doom & gloom theorists believe. I am not ready to take that leap of faith into the abyss. Maybe you are…