Thursday, 13 December 2012

Killing Drachmaphobia

Greece is awaiting €44 billion in money from the Troika

By Economics Correspondent Seán Whelan in Greece @seanwhelanRTE
There is an EU Summit in Brussels on Thursday and Friday of this week, but there is also a meeting of the Eurogroup finance ministers, who are expected to take a key decision on Greece – a decision to pay over the latest tranche of bailout money this country badly needs.
Earlier today we met the Greek prime minster Antonis Samaras, who put the pending Eurogroup decision in perspective.

Greece is awaiting €44 billion in money from the Troika that it will use mostly to recapitalise the country’s banks, but it will also use €9 billion to pay off the government’s debt to its own people.
One of the less remarked on facts of the Greek crisis is the level of arrears the government has racked up by not paying for goods and services supplied by its own people.
“How can you be austere to someone when we are so unjust and owe them so much?” he told us when we met at the Prime minister’s office, the Megaro Maximos, earlier today.
Paying out the €9 billion in arrears the government has run up over the past three years will, says Mr Samara, help in terms of “justice, psychology and liquidity”.
All three are important, but Mr Samaras identifies liquidity as the biggest single problem facing the Greek economy right now.  Once the Eurogroup approve the release of funds, the government will play its part by paying its bills, and putting the money back into the economy.
The government will use the biggest part of the bailout money to recapitalise the banks. Not only are they struggling to survive in one of the deepest postwar recessions anywhere, but they have also been hit by the buyback of government bonds at a discount, which closed yesterday.
The government hope recapitalising the banks will lead to them resuming lending and increasing liquidity in the economy.
“Asphixia is the number one problem – this lack of liquidity is choking healthy, export oriented companies with specific advantages. They are dying because of lack of liquidity”, he said.
The new trench of money should mean the banks and the government will have enough money to meet the co-financing requirements to draw down EU structural funds, which the government want to use mainly for large scale infrastructure projects, which Mr Samras says have “the biggest multiplier effect in the economy”, and are big job creators.
This is particularly important in a country with 26% unemployment and youth unemployment overtaking Spain as the worst in Europe at 56%.
The fourth reason Mr Samaras cites for the importance of the drawdown is what he refers to as “the worst word I can say – Drachmaphobia”. This is the fear foreign investors (and locals too) have of Greece leaving the Euro Area and reverting to its old currency the Drachma.
“Drachmaphobia has held us hostage of these big questions – will Greece exit the Euro and the European Union.  That question is now over”, he stated.
He says payment of the €44 million tranche of funding will “kill Drachmaphobia”, because he believes markets and investors will see it as a sign that other EU governments have accepted the tough programme of measures that the new government have passed through parliament and are now setting about implementing, and are prepared to put their own money on the table to back the country.
He says the new government took a decision when it was formed to stay in Europe and the Euro Area, and is determined to work through the programme.  He also believes the rest of the Euro Area will help, as it sees the new government is serious.
“A few days ago we presented the Eurogroup with a list of 72 of the 72 required measures completed.  Credibility is important, for when you have established credibility people want to help you”.
“This is a country that has gone through thick and thin”, he told us.  “We have had lots of political turbulence.  But over the summer we formed a three party government that is stable (its the first coalition government the country has had, comprising long-time rivals the conservative New Democracy, the social democrat Pasok, and left leaning Democratic Left.)
“This creates positive spillover effects of psychology – and psychology is 50% of an economy”, he say.
Of course passing laws and budgets is one thing, implementing them is another, and that is where the government will face a tough challenge as its fiscal measures bite over the next six months.
The measures passed over the past month or so by the Greek parliament will produce a fiscal adjustment of €13.5 billion over the next two years to arrive at at primary surplus.  the effort is front loaded into next year, when 75% of the effort will apply.  Observers here say the next six months are critical.
Mr Samaras says the focus of government effort now must be on reviving the economy, getting it growing again by cutting through the frost of regulations that have made business notoriously slow  in Greece, and making it a more welcoming place for foreign capital (or returning Greek capital) “We used to offer investors red tape – we should be offering them the red carpet” he says, citing tourism and agricultural produce as two areas where Greece has comparative advantages that can be built on.
But to pull out of the vicious cycle of fiscal adjustment and recession, the government knows it must maintain social cohesion – a very difficult thing to do in any country, let alone one that will have suffered a 25% fall in GDP between 2009 and 2013, and youth unemployment is his number one priority in the social sphere.
His keywords are confidence, credibility , and killing Drachmaphobia. Talking to correspondents from a handful of EU states, Mr Samaras enquired about the italian election situation, and to the Irish journalists opined “Kenny is doing an exceptional job – he is a very good friend”.
Summing up his government’s first few months in office he said “We are happy that credibility has been re-established, and we are happy that our European allies think this way”.
Proof of that will only come in the form of hard cash from the Eurogroup meeting. 

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