In the past few days, Greece has shown a renewed willingness to negotiate with its creditors, which has come as a respite to markets. Yesterday, European markets — led by Germany’s DAX — finished 4% higher. Greek markets rose 9%, with bank stocks climbing by 20% on the back of this new promise.
But as The Daily Reckoning’s Greg Canavan explains, this market confidence doesn’t mask the underlying problems Greece faces:
‘Overnight, Greece rushed some last minute proposals through the door in what was supposed to be a last chance meeting to gain access to “bailout” funds. But the concessions came too late for Greece’s creditors to make any definitive statement on, so we are again left hanging.
‘Seriously, who’d want to be an investor in Greek stocks? That sort of volatility is enough to fray the steeliest of nerves. A 9% surge might sound good but keep in mind the Greek market is down around 45% since March 2014, and more than 55% since early 2011. A near 50% decline in just over a year tells a story of an economy in depression, choked by austerity and an uncompetitive exchange rate.’
Yet although Greek Prime Minister Alex Tspiras is readying himself for a new round of talks, the IMF is likely to reject the deal outright.
Any optimism over a potential deal is misplaced, and the reason for that is simple. Greece’s new plan involves hiking taxes.
There are two problems with this.
One is that it’s a minefield, politically speaking. Even Tspira’s own Syriza is likely to reject any plan which further taxes the Greece people. The other problem is that the IMF has flatly rejected paying off debt by raising taxes. To see why that will cause an impasse, take a look at what Greek paper Kathimerini has to say about Tspiras’ new proposal:
‘The proposals contain 7.9 billion euros of measures, of which 7.3 billion are from increases to tax and social security contributions’.
That means that Greece’s plan amounts to a 92–8% split between tax hikes and spending cuts.
Any proposal that relies on raising taxes isn’t going to convince the IMF that Greece can pay down its debt. Greece is already heavily taxed. A nation that’s going down the toilet, with 26% unemployment, can’t tax its way to growth. Not nearly enough to pay back its creditors anyway.
If Greece can’t find a way to pay off its debts, you can imagine where the IMF will tell them to go.
The IMF has already voiced what needs to happen: leave taxes, cut pensions and wages
The IMF has stated that any bailout deal will need to involve heavy spending cuts. Last week IMF’s chief economist Olivier Blanchard spelled this out explicitly. He made no mention of tax increases, because they know it will have little effect in paying down the debt. They also feel that Greece isn’t capable of following through on collecting taxes. Both of those are reasons enough for the IMF to reject any deal based around tax increases.
That’s why the IMF is hell-bent on convincing Greece to cut pensions and wages. Those two account for 75% of all spending within Greece. Currently pensions make up 16% of Greece’s GDP. The IMF is on record as saying they want to see this figure trimmed by 1%.
Tspiras will fail with any plan that doesn’t involve heavy spending cuts. When he meets with the creditors to discuss this new deal in the next week, they’ll tell him to come back when he’s serious. But if he takes their advice by slashing spending, he’ll have a hard time passing it through parliament.
In just a week, Greece’s payment to the IMF is due. After that, all bets are off. Greece may default, or we may see yet another agreement over an extension. I’ll leave it to Greg to sum up where things stand:
‘Staying with the euro means many more years of austerity and recession-like conditions. Leaving means a massive loss of asset value relative to the rest of Europe via currency depreciation. Pick your poison…’
Even if Greece is willing to negotiate, it doesn’t mean its creditors are. That means that a default, and Grexit, appears closer than ever.
Contributor, The Daily Reckoning
PS: The situation in Australia is nowhere near as bad as it is in Greece. But our economy has its own set of problems. As one of Australia’s leading investment analysts, Greg has been warning for months that we’re sleepwalking into a recession.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why economic growth is going to fall sharply over the next three quarters. Falling mining revenues are already taking their toll on the economy. Government revenues are down, household debt is up, and business spending is falling too. As a result, these factors will continue the drag on the economy over the next six months.
But there is hope for anyone who takes the effort to shield themselves from the recession. Greg will talk you through the steps you need to take to protect your portfolio and wealth. To find out how to download the report right now, click here.