Greek GroundHog Day....

Dr Rebecca Harding, Economist and Liveryman, provides a chilling update....

It was hard this week not to feel like it was GroundHog day.  The IMF’s statement that Greece’s unsustainably high debt and, in its view, slow progress in implementing reforms meant, it argued, that a third bailout was unlikely, if not impossible.  Here we go again:  Creditor A raises doubts about providing Greece with more bailout money;  Creditor B says it won’t provide debt relief unless Creditor A is fully on board and Greece has started implementing reforms. The previous fragile truce ends, markets panic at the thought of Grexit and the news headlines are dominated by putative attempts to broker an agreement for the next four months.  Just when you thought it was safe to go on holiday…..

Markets and commentators alike are already suggesting that, despite the fact banks are nominally open, there will be food shortages by September.  Trade finance forecasts suggest that August will be a bad month for food and fuel importers into Greece.  The probable drop in trade finance is likely to be around 10% for both, with imports from Europe even more substantial.  The net effect for the year is a 7% drop in Trade Finance in fuel and food:  if importers don’t get finance then they will not import; analysts, including myself, are suggesting that real shortages will begin in September.

This has nothing to do with debt relief or re-building the Greek economy.  Greece has already ceded control of some €50bn of assets into a privatisation fund and the Greek government has agreed to reforms to pensions, VAT and the legal system that are, at best punishing and at worst, punitive and tougher than were rejected by the Greek people in the referendum.

The way out is neither easy nor quick.  Reform at all cost may starve the economy, and more importantly the people, with the resources to build;  but in fairness to the creditors, money that is lent should always be repaid.  The issue is the stringency of the terms against which loans are being set.  And as Greece’s imports of fuel and food are increasingly likely to come from Russia and Iran for food and, believe it or not, Brazil and Argentina for food from 2016, European policy makers should not complain if the whole process ends up with Greece aligned less towards Europe and more towards Russia and China.

Liveryman Dr. Rebecca Harding

Independent Economist