Greece crisis - vaccination from greed and populism in Ukraine
The Greeks passed a 'no' vote to harsh economic reforms offered by foreign creditors to assist the country drowning in crisis. What are the consequences of the poll for Greece, Ukraine, and the whole world?
Many residents of Greece, an eternal resort now experiencing one of the deepest crises, rejoiced following the results of a Sunday vote, hoping that another belt-tightening would be postponed. Others pointed out that such defying of lenders can lead to an even tighter belt-tightening. But all of them understood: they do not hold a firm grip on the financial world; on the contrary, the global financial grip is smothering the country. And it’s not about the creditors, but rather local political populism and unfounded promises of the Greek authorities, who have already announced first wave of resignations. Just a few hours into announcement of the voting results, Yanis Varoufakis, an odious Greek Finance Minister, former blogger, seller of computer games and a “libertarian Marxist”, wrote a letter of resignation.
Co-author and an active promoter of the idea of a Greek default as the only correct answer to numerous creditors, primarily the International Monetary Fund (IMF), he said that neither the European partners, nor the Prime Minister of Greece Alexis Tsipras, his associate and collaborator, want to see him at the negotiation table. It would be “potentially helpful to him [Tsipras - UNIAN] in reaching an agreement," he wrote in his blog.
EU reacted immediately, with Federal Chancellor Angela Merkel calling an extraordinary summit of eurozone leaders July 7, following her talks with French President Francois Hollande on Monday. Finland’s Prime Minister Juha Sipilä voiced the position of the majority of EU leaders, claiming that after the referendum, the Greek government needs to tell other members of the European Union about how it is going to stabilize the situation in the country and what are their answers to the current problems, especially given that these problems did not arise just yesterday.
The state in debts
Greece is, perhaps, the only country in the European Union, which not only was affected by the global financial crisis of 2008 most severely, but also failed to find the recipe to overcome the consequences of the economic decline. For the past five years - from 2010, when signs of a recession weakened in Europe, Athens did nothing to somehow save their own economy mired in a multibillion-dollar debt, while earning money mainly from tourism and the agricultural sector. The only task of several Greek governments, which have not stayed in power for long on the waves of popular unrest and protests against the austerity measures, was to find the next big loans for maintaining "social" benefits, not supported by any economic success.
By early 2015, the total public debt of Greece reached $ 312 billion, which is equivalent to each resident to be obliged to pay off over $ 28,000. This money must be returned in the coming years.
The volume of Greece’s Pension Fund has reached 10% of GDP, which is a lot, even by pan-European standards: the average budget of the Pension Fund in developed countries with high-income and moderate unemployment rate does not exceed 4-5% of GDP. Meanwhile, almost one in four Greek citizens is unemployed. In other words, there is simply no one to earn the income which is supposed to form the Pension Fund.
In this regard, in recent years, a key condition of all loans issued to Greece was to reduce budget expenditures, reduce the state apparatus and revise the pension system, meaning cutting the pensions to the size which can be provided by the state’s economy. The International Monetary Fund particularly insisted on pension reform. Greece, as highlighted by the IMF, must learn to live within its means and not fight for the average European pension of EUR 1,500 as "economically reasonable maximum" of the pensions in Greece does not exceed EUR 500.
Terms and conditions of foreign creditors have not changed. Now, they require from Athens to “calm down its financial appetites" and start reforming the ailing economy. But the “home of democracy” honors a different opinion.
As soon as the IMF deprived the Greeks of the cash stream due to breach of loan agreements, certain politicians started raising their heads, not only promising to preserve the exaggerated social standards, but also to punish the "offenders" - namely, global capital, "which turned Greeks into slaves of other people's money." And these people today lead the country's government. Greeks gave these people a carte blanche for new negotiations with the IMF and the European Union, which might begin in the coming days, the outcome of which cannot be projected.
The Greeks joyfully fell for populist promises that whenever country gets out of the Eurozone and stops listening to the creditors, all problems will be solved automatically, according to The Economist newspaper. However, it is clear that the consequences of leaving the eurozone will probably lead to deeper economic and political crisis, especially in Greece, and then in the rest of the world.
A View from Ukraine
There are a lot of discussions today about the consequences of the Greek populism, including among the Ukrainian experts. As Anatoliy Guley, Doctor of Economics told UNIAN, the main mistake of the Greeks is overwhelming populism, which deceived the citizens. "They were sure that they would not be abandoned and they would miraculously avoid unpopular reforms. And now, I feel that Greece might experience the same scenario as in Argentina, even with the possibility of hunger riots. At present, we don’t understand the [state of] social protection in Greece. What will ordinary citizens do? Those, who depend on wages or live on welfare…" said Guley.
Head of research division at the ICU Group Aleksandr Valchyshen believes that overcoming the consequences of the Greek populism will be long and painful. "The Balkan States and Cyprus, which are more closely linked with Greece, will be in a deep recession, while it will take at least two years for Greece, itself, to get out from recession," Valchyshen told UNIAN
Along with economic troubles come political tensions. According to managing partner of Da Vinci AG Andriy Kolpakov, a possible Grexit could be the beginning of a global redistribution of the EU political-economic map. "It's not just about the economic and financial implications, but, above all, about global trends. In Europe today, Euro-skepticism is gaining its momentum. The Greece precedent only strengthens such political forces. This means that in the medium term will be seriously discussing the alteration of the EU model and the decentralization of association," the expert told UNIAN. He stressed that Russia and China started trying to strengthen their role in Europe in this context. "But if winning over support of some EU members is a matter of survival for the Kremlin, Beijing, in turn, sees an opportunity not only to undermine the US position, but also to receive additional strategic opportunities in the global political game and gain more weight," said Kolpakov .
Eric Naiman, managing partner of Capital Times investment company, voices same concerns. According to him, if Greece leaves the eurozone and starts printing its own currency, then the populists in power will inevitably print more money than necessary. “And Greece will have to survive through devaluation, inflation, problems in the financial sector and the economy, while the people will have to face poverty,” the expert believes. “However, the Greeks may China for assistance, offering its ports and islands for the Chinese bases. And this here is a threat to NATO."
We better learn
The outcome of a July 5 Greek referendum has multiple effects. It definitely became a reference point not only for the decision on further lending to Greece, but for the short-term plans of the EU governments.
Economic risks must be swiftly assessed. Last week, the underestimation of the seriousness of the whole situation has led to a 2-4% drop in stock indices of S & P 500, NASDAQ, and Euro Stoxx. To illustrate the losses, Bloomberg cited the damage suffered by the world’s richest people. As it turned out, only one day of the Greek uncertainty – on June 29 – has cost 400 top billionaires $ 70 billion.
At the same time, the experts calm Ukrainians down: there will be no direct economic consequences for our country following the Greek crisis. In any case, they will not be immediate. Even the branches of some Greek banks operating in Ukraine have significant reserves of liquidity and do not require daily support, according to the National Bank, "Today, virtually no working channels through which the negative developments in Greece may directly affect the stability of the Ukrainian banking sector. Today, there are firm restrictions in Ukraine on the movement of foreign debt capital, and it virtually eliminates the aggravation of any liquidity problems of the Ukrainian subsidiaries of the Greek banks," reported the press service of the NBU.
Another positive aspect of the Greek situation is the opportunity to learn from the mistakes of the others. The unwillingness to solve the problem and public support for populists who, for example, offer Ukrainians, to restructure their foreign currency loans at a reduced rate, return the utility tariffs to the level of the early 2014, abolish taxes on higher pensions and urgently index them for inflation - that's where the main problem is. This cannot be allowed in Ukraine, analysts say. If Ukraine fails to show real reforms and believes empty promises - it will remain with nothing, just as Greece.
“Now the Greeks give Ukrainians a vivid example, what default actually means,” said Eric Nyman, adding that from now on, money from the creditors will come only for implementation of reforms.
And this is a real downside for Ukraine, as the creditors’ conditions will be tougher. "The approach to the assistance will be reviewed. Its volume will be reduced to any countries that cannot demonstrate a willingness to change and growth. So far, such countries include Ukraine,” said Andriy Kolpakov.
Anatolyy Guley offers to draw conclusions from the Greek crisis and prevent their mistakes. "This experience, this lesson for Ukraine is very valuable - you cannot believe populists, because we can find ourselves in a situation, when the default destroys all business opportunities across the country,” said the expert, “Can Ukraine count on the fact that there will be more attention to it? To reaffirm our partners, we have to do something. As soon as we show that we are moving away from populism to professional solutions, changing the economy and its structure, which is [now] aimed at the consumer expectations, then we can say that we can draw Europe’s attention. "
Following the steps of Tsipras?
The Ukrainian authorities will have to pass their populism test in the coming days. As early as next Monday, July 13, a large Ukraine - the US investment summit is to be opened in Washington, D.C. Kyiv has high hopes about the summit regarding the search for investors and hiring consultants to implement transparent privatization, tax reform, changes in antitrust and anti-corruption legislation.
Also, a meeting of the Board of Directors of the International Monetary Fund will be held next week. It wil be decided whether to continue the loan program with Ukraine and allocate the second $ 1.7 billion tranche. The decision of another creditor, The World Bank, on allocating $ 1.3 billion will largely depend on the outcome of this IMF meeting.
By this time, Ukraine needs to do the following: to vote for a law on Naftogaz debtors, which was long drafted and discussed; on establishing economically justified tariffs: on the deposit guarantee system, and on the fight against corruption. Banking system must not be destroyed by the clearly populist solutions such as the law on the restructuring of foreign currency loans adopted by Parliament last week. President Poroshenko and the government have voiced concerns over the potential damage this document may cause by requiring banks to restructure foreign currency loans at the rate applicable to the date of conclusion of contract.
A distressful bill on the National Commission for regulation in the electric energy sector and utilities is also in a waiting queue for discussion. It must be noted that the above-mentioned bills should have been considered and voted for as early as this June, but the MPs had different plans.
“The delays in adopting these four laws put at risk financial support worth $3 billion,” Natalie Jaresko, Ukraine’s Finance Minister, wrote on Facebook, “Thus, our Government urges Ukrainian MPs to adopt these bills as swiftly as possible when they convene for next week’s plenary session. In addition to unlocking critical international financial support for Ukraine, these laws will make our country a more fair and attractive place to do business.
It is not clear whether the ministers will be able to convince the MPs. It is also unclear whether the deputies will be able to fight temptation and not go on about the electoral preferences ahead of the planned local elections planned for this autumn.
No one rushes to answer those questions. Most MPs quietly dream of vacations, perhaps, even in sunny Greece. Any tourist will be welcome there, however, not with the credit card, but with god old cash. Besides, they may at the same time share their valuable experiences of another populist tricks to influence the masses. So, you are welcome!
Olesia Safronova (UNIAN)