Greece has reached its limit in raising taxes and needs to refocus its austerity program on long-term spending cuts, the International Monetary Fund has said.
However, the threats have become almost meaningless at this point.
What the global financial leaders are demanding is that Greece double-down its draconian spending cuts even while its economy is collapsing.
Its GDP has been in contraction for 12 quarters running, most recently at an annualized rate of 5.5%. The rate of unemployment oscillates around the 18% mark – official unemployment, that is. Consumer confidence has collapsed, industrial production has been in decline at double digit rates since early 2008. The stock market is down by 90% from its 2007 highs and the government's one year note yields an absurd 330%. The banking system is de facto bankrupt and subject to an accelerating flight of deposits.
You get the picture – these are the kind of economic data that normally indicate that the society concerned is only a small step away from major social upheaval and a descent into conditions of chaos.
What the IMF and international bankers are demanding basically amounts to drawing blood from a stone.
Greece's GDP has dropped by 15% since the crisis started, and unemployment is expected to exceed 20% next year.
So why doesn't Greece just do what the IMF says? The simple answer is: it's impossible.
Authorities are having trouble implementing the austerity measures that they have already passed, and privatization plans have been sidelined as market conditions are making it almost impossible to divest of anything even at fire-sale prices. The IMF believes that the new government is committed to following the plan, but so far it isn't working.Put another way: Greece can't sell off its public assets at give-away prices like the bankers want, because even the vultures aren't buying.
Meanwhile, more and more draconian austerity measures are crushing the economy, thus making it more and more impossible to raise the funds to pay interest on current debts. Not to mention making it ever more difficult for working people to live.
The greek people have suffered through not just one, but two rounds of brutal austerity measures. These include a massive hike in regressive taxes across the board, salary cuts to public employees by more than 30%, and laws restricting the ability of unions to collectively bargain.
That first bailout package included a provision lowering the minimum wage for workers under 26 to 592 euros per month, supposedly to facilitate their employment.The suicide rate in Greece is now the highest in Europe.
The plan has been an utter failure. Youth unemployment (ages 22 to 34) has almost doubled from 22% in 2010 to 40% in 2011.
In September 2010, the New York Times cited a poll that found four out of 10 college-educated Greeks were looking abroad for employment. By October, setimes.com reported that number had jumped to seven out of 10.
Both sexes face some of the longest working hours and low wages in Europe (despite what you see on SNL). Meritocracy is unheard of, nepotism runs rampant and the labor climate leads to sycophancy in the work place.
The Greek people, correctly sensing the coming economic collapse, are withdrawing their money from the insolvent banking system as fast as they can.
Theodore Pelagidis, an economics professor at the University of Piraeus, said: "This is part of the death spiral of the recession as a result of austerity measures. People realise that contagion has come to banks and they are very afraid of losing their deposits. On average around €4bn-€5bn in capital flees the banking system every month."
Given this impossible situation, Greece has made a new proposal:
The banks have agreed, pretty much, that they’re going to be OK with a deal where they get 50 cents on the dollar. But that’s just the beginning, not the end, of the negotiations...The fact is that if things continue to get worse in Greece, the creditors will be lucky to even get 25 cents on the dollar.
And Greece has reportedly decided that if it’s going to restructure, it’s going to restructure right — by slashing the income associated with the bonds to such a low level that when they start trading, each $1 in old bonds is going to be worth just 25 cents on the open market.
Greece isn't only on the verge of political and economic collapse. It's may be on the verge of a complete social breakdown, and the international bankers keep demanding their pound of flesh.
[Update: Today's development shows the level of desperation.
The government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners as it sees the budget deficit soaring to over 10 percent of gross domestic product for 2011.This is a dead-end situation. Foreign creditors demand that the Greek government cut social programs and raise taxes on the working class. Those cuts and tax hikes crush the economy and cause the revenue shortfall to get worse. So the foreign creditors demand more cuts, and get similar results. Wash, rinse, repeat.
The Finance Ministry is desperately seeking ways to contain the fiscal deficit that has swollen due to additional grants to social security funds totaling 0.5-0.9 percent of GDP and due to the lagging of public revenues in the year’s first 11 months.
The only way to reduce the damage done to the 2011 budget by insufficient revenues is through further cuts to the Public Investment Program, but even then the deficit will be impossible to bring below 10 percent of GDP.
Sachinidis admitted in Parliament yesterday that both the government and its creditors have failed in their estimates for Greece’s macroeconomics this year, saying that this was also down to the financial program followed.
Only now, the Greek government has simply stopped reimbursing the money the working people of Greece rightly have coming to them. Next comes capital controls and asset seizures.