Greece: Disagreement Everywhere, Rift in the Troika

Austerity measures are taking their daily toll on Greece. Suicides and attempted suicides have jumped by 22.5% since 2009. The unemployment rate rose to 18.2%. RTL, the largest radio network in Europe, lost 50% of its advertising revenues in Greece since the start of the crisis—and decided to leave. And now pharmacies are having difficulties obtaining medications.

The pharmacy problem is an unintended consequence of the austerity measures that the bailout Troika (EU, IMF, and ECB) is imposing on Greece. To cut its healthcare budget, the government has reduced the prices that the industry can charge state-owned insurers. So wholesalers are selling their limited supply outside Greece. And state-owned insurers, whose budgets are squeezed as well, delay payments to pharmacies, which then can’t pay their wholesalers for the medications they do get. Thus, wholesalers are even less likely to sell to pharmacies—and the system breaks down. A microcosm of the current state of the Greek economy.

Yet more cuts are coming. To impose them, Prime Minister Lucas Papademos even threatened private sector unions (and everyone else) with the nuclear option—disorderly default.

But now the Troika itself is in disarray. It surfaced today at an IMF press briefing in Washington: the IMF no longer supports austerity as a guiding principle. Athens News quoted a senior IMF source, who was speaking on condition of anonymity. Frustration was practically palpable:

Horizontal austerity measures are constantly being adopted that are leading nowhere, whilst further wage and pension cuts are unjustified because the only way to improve competitiveness is through growth-creating market liberalization, the opening of closed professions, and productive investments.

The three Troika inspectors—Poul Thomsen from the IMF, Mathias Morse from the EU, and Klaus Mazouch from the ECB—are supposed to head to Greece next week to inspect its books; the budget deficit is once again higher than the revised limit that Greece had vowed to abide by. And they’re supposed to negotiate additional “structural reforms.” But there probably won’t be three inspectors, according to senior IMF sources. Missing: Poul Thomsen. The IMF has had enough.

Already, according to more leaks, IMF Managing Director Christine Lagarde had warned German Chancellor Angela Merkel and French President Nicolas Sarkozy that the fiscal and economic situation in Greece had deteriorated. Hence, the “voluntary” haircut on Greek bonds held by private sector investors should be increased to more than 50% to maintain the goal of bringing Greece’s debt load down to 120% of GDP. And the second €130 billion bailout package, agreed upon on October 26, should be enlarged by “tens of billions of euros.”

The German reaction was immediate. “There has to be a line somewhere,” said Michael Fuchs, deputy leader of Merkel’s party, the CDU. “This cannot be a bottomless barrel.” Even if Merkel were amenable to committing more taxpayer money to bail out Greece, she’d face a wall of opposition in her own party. And he wasn’t brimming with optimism: “I don’t think that Greece, in its current condition, can be saved,” he said.

Lagarde’s demand for a larger haircut smacked into an onslaught of leaks from the bond-swap negotiations between the government and private sector bond holders. First, there were rumors that the banks had largely agreed on a deal. Then there were rumors that hedge funds that had acquired some of these bonds at a discount were refusing to go along with anything. They were betting that they could profit from a default because it would trigger CDS payouts. And if the majority agreed to the haircut, they would also profit because Greece would eventually redeem the bonds.

Now, there are rumors that the government wants to compel these hedge funds to join the bailout majority. Tool: retroactive “collective-action clauses”—if a majority of bondholders agrees to the deal, the recalcitrant minority could be forced to go along.

“Frankly, a disaster,” is how David Riley, head of global sovereign ratings at Fitch, described the negotiations.

Mid March, Greece will either default or receive the next bailout tranche. Its economy is in shambles, its society in turmoil, and its finances ruined. There are no easy solutions. Every move is painful. And someone has to pay. It may be too difficult to keep Greece in the Eurozone, but allowing it to exit would be even more difficult, at least in the short term. And not only for Greece. It would be a shock to the Eurozone economy, which is already fragile. Even Germany, economic superstar with unemployment at a 20-year low and exports at an all-time high, has smacked into a wall.

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