Greece and Creditors at Loggerheads Again; Troika Wants More Foreclosures

European creditors want to extract more blood from a stone, in this case Greece.

Greece and its lenders are again at odds over the latest “bailout” funds, which is €2 billion that was scheduled to be approved for release by the famed Eurobgroup (remember them? That’s all the Eurozone finance ministers) on Monday.

But a precondition for getting more dough was that Greece show enough “progress,” as in either have implemented or have committed to a sufficiently large number of “reforms”. “Reform” is Eurocrat-speak for austerian blood-letting. The creditors see Greece as coming up short.

As we’ve pointed out repeatedly in our coverage of Greece, the lenders are hell-bent on seeing Greece remake its economy in ways that are guaranteed to make their loans fail, or perhaps more accurately, produce even greater losses than if they allowed for more investment and spending, rather than insist on punitively high budget surpluses and other destructive measures.

Why this fixation on implementing failed policies? The reasons vary by actor, but they include: delusion (as in they believe austerity “works” as in makes economies better), political necessity/survival (governments that implemented austerity programs at high costs to their citizens can’t be seen to be letting the greatest profligate, Greece, get off easy), a fixation with morality (Greece must suffer pour decourager les autres).

But irrespective of the proximate causes of what looks like an exercise in sadism dressed up as economic orthodoxy, the creditors appear united, or at least united enough, to cram yet another set of punitive reforms on the already prostrated Greeks.

Here are the big issues where the two sides remain far apart:

Foreclosures. As part of the banking system bailout, the Troika wants more writeoffs of bad loans. They insist on a related measure, of lowering the value of homes that are subject to foreclosure from €200,000 to €120,000

Increasing tax collections

Increasing the VAT on private schools to 23%. I’m a bit mystified by Syriza fighting this measure if “private schools” are academies for the wealthy. But if the Greek Orthodox Church operates primary and secondary schools, as the Catholic Church does in the US, it could affect a much larger number of students at much lower levels of family income. Input from informed readers appreciated. Mind you, Syriza is proposing to find the funds to cover up this income loss elsewhere, but apparently have yet to satisfy the lenders on this point.

As anyone who remembers the US foreclosure crisis will attest, almost without exception foreclosing on homes leads to higher losses than keeping the homeowner in place. There’s no reason to think the results will be any different in Greece. First, foreclosed properties cost money to secure and maintain and often deteriorate rapidly. In Greece, unlike the US, you have much greater risk of civil disobedience with foreclosures, in the form of squatting or vandalism (and we had plenty here that was purely economic, such as stripping homes of copper and appliances). Second, who will buy these properties? Foreigners are at risk of being threatened physically. And the idea of buying properties and turning them into rentals for the displaced homeowners hasn’t worked out for investors in the US, where we’ve had a so-so economic recovery and a strong bounce in house prices in the weakest markets. The outcomes would clearly be worse in Greece. And that’s before you get to the offset of higher social costs from more homelessness.

Similarly, it might have occurred to the creditors that the threat of a bank holiday, which then took place, led many citizens to pull as much as possible out of their bank accounts. So Greece, which already had a large black market economy, has if anything more cash in circulation to facilitate even more domestic tax evasion. One can argue that the taxable economy is in a death spiral. The more the creditors insist on higher VAT, the greater the incentive to deal in cash to avoid the VAT, which means lower VAT receipts than projected, which leads the creditors to call for higher tax rates. Greece already has a huge problem with tax avoidance; the current program for dealing with it reads like a prescription to make matters worse. Even tourists are wising up. A contact recently vacationed in Greece and took tons of cash, and got substantial price breaks and much happier vendors/service providers as a result.

Needless to say, Greeks are not putting their cash back in banks. From the Telegraph:

Screen shot 2015-11-09 at 2.38.55 AM

Tsipras is again trying to resolve the impasse at the “political” level, meaning going to Merkel Hollande, and Juncker. This has a Groundhog day feel. Before the end of June rupture that led the ECB to force a bank holiday to show Greece who was in charge, Tsipras repeatedly ran to Merkel and Hollande seeking a break from what the Troika was telling him. All that appeared to result was the two sides talking past each other. Merkel kept telling Tsipras that he had to work with the IMF, and Tsipras, by virtue of the fact that he was getting the attention of Merkel, appeared to convince himself that he could win her over despite the lack of any real movement on the creditor side. And as Greece kept making commitments and then reneging on them, which lead Greece’s counterparties to lose trust and get angry, the frustration level rose and the lack of progress gave the creditor an excuse to get rough with Greece to bring it to heel.

Unfortunately, as before, the creditors still hold the whip hand. They shuttered the banks before, which inflicted so much damage so quickly that Greece capitulated. Greek officials may have convinced themselves that the lenders would not dare be so brutal with Greece again, so soon. But if that is what they think, they have drawn the wrong lesson. Despite condemnation from some US observers and what passes for the left in Europe, the creditors did not seem embarrassed by the uproar. If the bad headlines associated with steamrolling an elected government and worsening a humanitarian crisis didn’t give the officialdom pause last time, there’s no reason to think that the spectacle of throwing homeowners on the street will bother them either. The German press no doubt will be full of stories about how many lived in these properties paying no rent for years. And the refugee crisis is a vastly bigger existential threat to the Eurozone. Indeed, perversely, leaders like Hollande and Merkel might find that uniting the Eurozone ex Greece against Greece is a very useful solidarity-building exercise.

There are some major wild cards. Merkel’s sponsorship of an effort for Germany and other countries to take more refugees in puts her at odds with popular opinion on the most heated topic in Germany. As other commentators pointed out, Maggie Thatcher’s fall was remarkably swift, and a Merkel ouster could be as well. But given that Merkel apparently likes Tsipras personally despite regularly disciplining him, and has often acted to moderate the policies of the powerful finance minister Wolfgang Schauble. If Merkel goes, Schauble would almost certainly become even more influential on the topic of Greece, which would not be a positive outcome. The anti-Eurozone Front National is looking even stronger by the day, with the migrant crisis playing right into its racism and xenophobia. Yet the Greek public has remained for the most part committed to staying in the Eurozone. And as we’ve pointed out, the operational issues of setting up a new currency are vastly more daunting and time consuming than economists and the punditocracy begins to understand.

So Greece is caught between a Scylla and a Charybdis. But unlike the myth, there’s no evidence that a path exists to navigate between them.

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19 comments

  1. Disturbed Voter

    Creating failed states, systematically, is what the West does. But we are not supposed to do this to our allies.

        1. Disturbed Voter

          Agreed. The attempt by Left and Right to depersonalize class struggle is a red herring. Groups and nations do nothing … these are empty categories. Individual perps do things, whether citizens or elites. Pay attention to where the money is coming from, and where it is going. Ideology is just a distraction from the money.

  2. AWB

    Western social democracy is doomed, to be replaced by liberal fsscism. As Greece goes, so do we all. As Europe falls to the foreign invaders, so do we all. These invaders don’t work, but they vote.

  3. hemeantwell

    The resonance between this article and Grandin’s on Kissinger is very strong. Backs can be broken by bombers or credit controls. It’s clear that Kissinger experienced a prolonged omnipotent/sadistic high as he managed the Cambodia bombing campaign. If Schauble has a psychoanalyst, his/her session notes must be ghastly.

  4. ambrit

    Is there any evidence that some part of the Greek nomenklatura learned the lessons of the previous debacle and is working on the reintroduction of a sovereign currency ‘on the sly?’ (Does any government ‘use its’ time wisely?’)

  5. readerOfTeaLeaves

    mostly a drive by, but I hope this whole topic moves into a larger conversation about the lunacy of enabling too damn many people to create too damn much debt, and in ways that were far, far too elaborate and complex.
    Adair Turner seems to be at the forefront of diagnosing this insanity.

    Anyone interested can start here: http://ineteconomics.org/ideas-papers/interviews-talks/what-really-caused-the-crisis-and-what-to-do-about-it

    ‘Reading Turner’s book’ is on my Xmas list of gifts to myself.

  6. susan the other

    Greece needs credit but the old concept of “credit” in a global-warming-overpopulated world isn’t viable. Schaeuble thinks generous terms will eventually turn things around; Sweden thinks NIRP will stop the bleeding – the problem is that generous terms and NIRP also kill the patient – just slower. There is no cure to this mess. Except to find a new standard of credit. Just the thought leaves everyone stupefied. I hate to say it, but the only functioning entity on the planet us the US military and that’s because money is no object. That is the only reason we’re able to pursue our goals. So, financially, that is instructive, no?

  7. pasxalis

    Private schools in Greece include:
    – Foreign Language schools,
    – Frontistiria, which offer remedial classes and preparation classes for the university entry exams.

    Those are used by the large majority of the students – almost all of them during the last year of school, afaik.

    Back in 2008, when I last checked, foreign language courses were about €700-800 a year, and a full preparation course (exam preparation on 6 subjects) was around €3500. I suspect they might be slightly cheaper now.

    The law would also include private kindergartens, which are quite popular, but I know next to nothing about them.

  8. George Phillies

    Of course, the Greek government may have realized that they should have taken precautions with respect to being ready to print currency. There are probably printers outside Greece who could handle producing fast an adequate supply of Greek Euros or whatever, especially if you let them add the small tag “made in China”.

    1. Synoia

      Oh Christ. Another one ignorant of the IT needs for a sovereign currency.

      The only alternative I can see is to pick up another country’s, a non Euro one, banking systems.

      Probably the UK’s. I doubt they would cooperate. At least it would be documented in English.

  9. JTMcPhee

    At some point someone in whatever we might want to call ” government ” was making some small effort to do some revenue collecting:

    “Greek government uses Google Maps to find tax cheats”

    http://fortune.com/2010/08/02/greek-government-uses-google-maps-to-find-tax-cheats/

    Too bad digital moolah and safe deposit boxes and other such “store of value” aren’t as transparently visible… Not to mention suitcases full of German corporate money dropped on the couches of Greek officials who might even tangentially be connected to “trade” in stuff like U-boats and such.

    …time to just yield to the Presbyterian catechism of my youth, its God’s Will, the Elect numbers just 144,000, and you know who they are and hence who goes to Heaven because they have all the money…

  10. different clue

    Well then, Greece should simply raise the numbers of refugees it sends into Europe. It should send as many thousands as possible every day for years to come in order to make Europe well and truly PAY for the money Europe extracts through more foreclosures.

    Greece can still make Europe’s victory Pyrrhic, toxic, and radioactive if Greece has the will to do so.

  11. S.A. Zimble

    Dear Yves,
    You asked about clarification on the private school tax and the reasons Syriza are against this. The tax was originally to target what are called “frontisteria” , which are the large number of private after school tutoring businesses. A large percent of greek students need (are forced?) to use and pay for these private tutors in order to pass exams in high school and also to prepare for the extremely difficult university entrance exams. It is an indication of the failure of the full scope of the state education system in Greece, and now there is a strong redundant institution/business that has grown up around this failure. It is not simple to dismantle as many people make a living providing this service. This could explain Syriza’s defence of this institution: to save people’s jobs.
    Separate from the frontistiria, are the actual “private primary and secondary schools” are just collateral damage as far as I can see. There is some analysis that has postulated that if a large number of student leave the private schools to go back to the public schools that the system could not manage this and it would infact cost the state more to absorb the additional students, then the actual tax revenue created from the private secondary schools.
    I hope this is helpful.

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