ATHENS, Greece — Riot police officers run through fire as anti-austerity protesters throw petrol bombs, during clashes in Athens, Wednesday. Greece has a tentative rescue deal, but relief that it is not falling out of the euro is unlikely to last long: its economy has taken a huge hit. Months of political brinkmanship, uncertainty and bank closures have hurt companies and brought everyday business to a standstill. (PHOTO: AP)

Last Friday’s Jamaica Observer article entitled Greece vs Jamaica, a perspective from four years ago, quoted from a four-year old Guardian article by US economist Martin Weisbrot, co-director of the influential Centre for Economic and Policy Research in Washington. The article, written in July 2011 before both Greece’s debt default and Jamaica going definitively “off track” with its IMF programme, argued that “Jamaica’s crippling debt crisis should serve as a warning to Greece.”

Weisbrot argued that Jamaica’s debt, one of the highest in the world at 123 per cent of GDP, may look better than Greece at 166 per cent of GDP (both are a little above 10% of GDP higher today). But he observed “The more important number is the interest burden of the debt: for Jamaica it has averaged 13 per cent of GDP over the last five years. This is twice the burden of Greece (6.7 per cent of GDP), which is in turn the highest in the eurozone.”

Weisbrot’s key argument was that the Jamaican debt restructuring of 2010 was not a model, but a warning for Greece.

“It’s hard to imagine a worse disaster for Greece. It is worth a closer look at what has been done to Jamaica, not only as a warning to Greece, but to shed some light on the damage that can be done when ‘the international community’ is willing to sacrifice a country for the sake of creditors’ interests.”

While noting that the Jamaica debt exchange “extended the average maturity of the debt and lowered interest rates enough to reduce the Government’s interest burden by about 3.0 per cent of GDP annually over the next three years,” he argued “This would be quite substantial if Jamaica had a debt burden the size of Greece or Ireland, but unfortunately it still leaves the country with unbearable interest payments. There was no reduction in the principal, and Jamaica will have to refinance some 46 per cent of its debt within the next one to five years — which could prove disastrous if there are unfavourable market conditions.”

His argument that Jamaica needed greater debt relief in 2010 is not new. The starting point for our analysis is to note that Jamaica’s interest burden today is sharply lower, at a still high 7.5 per cent of GDP (and admittedly after a second restructuring of the debt suggesting the first one was indeed insufficiently deep), while Greece’s interest costs have fallen to only 3 per cent of GDP due to concessionary European financing.

However, even Greece meeting their recently negotiated reduced primary surplus target of 3.5 per cent of GDP by 2018 (1.0 per cent in 2015, 2.0 per cent in 2016, 3.0 per cent in 2017) is now regarded as unattainable by leading international economists, and probably rightly so.

It is a complex issue to evaluate the debt crises of Greece and Jamaica since 2009 to date.

Blackmail backfires

 

In a little under six months since his election as Prime Minister of Greece, Alexis Tsipras has presided over the renewed collapse of the Greek economy. Tsipras’s attempt to essentially “blackmail” his European creditors into writing off some of Greece’s debt, culminating in his vote “no” referendum, appears to have backfired spectacularly.

In what one Greek professor described as “the education of Alexis Tsipras”, faced with a binary choice of having to sign up to a significantly “worse” agreement than what was on offer before the referendum, or a prompt “Euro” exit, or “Grexit”, and realising that that was not what he had been voted in to achieve (Greeks don’t want to leave the Euro unsurprisingly) he finally caved.

Unsurprisingly, the Europeans appear to have returned the favour with interest.

The account of the recent negotiations in Monday’s Financial Times is riveting. “They crucified Tsipras in there,” a senior Eurozone official who had attended the summit remarked. “Crucified.”

At around 6am on Monday, as dawn was breaking over Brussels, Alexis Tsipras and Angela Merkel, the German chancellor, had decided after 14 hours of talks over a new programme that Grexit was the only realistic option. As the two leaders made for the door, Donald Tusk, the president of the European Council, said, “Sorry, but there is no way you are leaving this room”. The issue was whether the proceeds of a “privatisation fund”, into which the country has to place 50 billion euros of assets, should be devoted to the repayment of debt (Merkel’s position), or reinvested in Greece (Tsipras).

Although this was ultimately decided (as one of his very few small victories) in Tsipras’s favour as a matter of “sovereigity”, the decision is similar to what courts do to bankrupt companies ruled no longer competent to manage their own recovery. Furthermore, the European creditors demand that Greece’s parliament must within three days legislate “prior actions” before they get any money (which they have now done) shows just how much Greece’s economic sovereignty has been suspended, a clear warning for Jamaica if ever we needed one.

The key question is that of “country ownership”, something Jamaica knows so well. In a recent article, prominent Financial Times columnist, Wolfgang Münchau, asked: “Do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?”

Former IMF chief economist, and the author of the internationally acclaimed treatise on debt, This Time is Different, Ken Rogoff, noted on CNN’s Global Public Square (GPS) hosted last Sunday by Fareed Zakaria, most of the “austerity” Greece has faced has been due to the reduction of this primary deficit.

Greece’s problem is that despite having sharply reduced its fiscal deficit by roughly 10 per cent of GDP, in the process eliminating a mammoth primary deficit (meaning expenditure greater than revenue excluding interest), and thereby achieving a very small primary surplus last year through a combination of tax increases and expenditure cuts, very little in the way of genuine economic reform has been achieved.

Cancelled credit card

The global financial crisis essentially cancelled Greece’s credit card, and even if, as Rogoff notes, the entire Greek debt had been written off, they would have been required to eliminate this deficit if no one was willing to lend them any more money. However, Rogoff argues, it should have been obvious to creditors that the debt was too high.

Cut off from world markets, Greece was not going to be able grow its way out of debt, and the debt “should have been written down”, rather than the completely unrealistic strategy followed, namely a combination of “dribbling out” money combined with “very optimistic projections” that “everybody would be fine”.

He argues, however, that voting “No” in the recent referendum, as Nobel Laureate Paul Krugman recommended “very irresponsibly”, to effectively take “the country off a cliff”, was very bad advice. Speaking no doubt from his IMF experience, he offered, “You don’t default on a debt when people are offering to lend you money.”

Instead of “spitting in the Germans’ face”, he should have taken the money and negotiated a deal later.

Rogoff correctly emphasises (unlike his Nobel laureate peers) that most of the changes have to be made inside Greece. In his words, “They have to want to become a modern European state”, and currently he “sees little sign of this so far”.

The problem for Greece has become one of “trust”, meaning that none of Greece’s European partners trust the Syriza government anymore, and indeed many have said so publicly, most notably Angela Merkel.

Although this same issue of “rebuilding trust” was apparently part of Jamaica’s most recent IMF negotiations, it was never mentioned publicly, by the multilaterals at least. Indeed, while some might see the last election as a vote against “bitter medicine”, many probably just wanted “a spoonful of sugar to help the medicine go down”.

In short, Jamaica’s broad political consensus on the measures being taken has so far been completely unlike that of Greece, although the current public sector wage negotiations appear to test this consensus. The recent stock market pullback, albeit slight, has now been confirmed by a small decline in business confidence. This suggests both the need to redouble our reform efforts, but also the need for Jamaica to receive a little help from its friends to reduce our still very high financial risk, and overly austere fiscal programme. More on this anon.

http://www.jamaicaobserver.com/business/Jamaica-has-lessons-for-Greece–Europe–particularly-Germany–and-the-IMF–Part-1-_19219096