by Elliott Morss, Morss Global Finance

Introduction

Tsipras won the election, guaranteeing at least be some continuity in negotiations with other Eurozone countries going forward. But it will be far from “smooth sailing.” This article highlights the problems and argues that the only lasting solution for Greece is to leave the Eurozone.

A Quick Review

The first bailout program for Greece was in 2010 for €110 billion, with an IMF Stand-By providing €30 billion (27%) and Eurogroup countries providing €80 billion (73%). In 2012, it was cancelled after €73.7 billion had been disbursed.

It was replaced by a new IMF Extended Fund Facility (EFF) and additional Eurogroup support. The EFF was to provide quarterly payments of €6.2 billion into 2016 totaling €28 billion, provided Greece achieved numerous qualitative and quantitative performance targets. The Eurogroup promised €144 billion over the 2012 – 2014 period.

In 2011, Greece and its creditors agreed to what was effectively a 75% debt reduction. Additional support for Greece has been provided by the European Central Bank (ECB). The ECB has been buying Greek debt to keep rates from skyrocketing. And finally this summer, the Eurogroup agreed to a third bailout agreement in July worth up to €86 billion.

The above is what gets the headlines. And it sounds good: agreement on a new bailout program. But some very dark clouds remain:

The Changing Policy Stances of the IMF

The IMF’s view on what should be done in Greece has changed several times. In 2010, it supported austerity and developed a huge number of structural reforms intended to make Greece competitive. But in 2011, it realized that its austerity program was causing Greek unemployment to skyrocket way above what it had estimated. To its credit, the IMF admitted “austerity was not working and gave up on it, much to the chagrin of Germany. So the first bailout program was ended early. The second program focused on “growth” and structural reforms to make Greece more competitive. As will be pointed out below, the Fund’s competitive requirements as unworkable. In addition, many of them will require either a reduction in government expenditures or an increase in taxes bringing us back to unemployment-generating austerity.

So what are the Eurogroup and the IMF really saying in emphasizing growth and competitiveness moving forward? They are saying Greece must get their costs down so it can compete with Germany. How to get there? Greece is going to be “remade” so it can compete with Germany. What? This is not going to happen, and as long as Greece uses the Euro as its currency, Greece will continue to run out of Euros and it imports more products than it exports. This is not a sustainable situation.