Adonis Diaries

Posts Tagged ‘cash flow

Counter shock upheaval: the earlier the better (Greece)

            A developing State deciding to default on external debts should default on all its debt; then, it can rest appeased and contented for several reasons: first, defaulting does not occur frequently in any single State; second, the bad credit rating is the same whether a State default on all or partial debts; and third, the State will generate immediate cash flow on unpaid interests that covers its budget deficit.   

            Before Greece, Lithuania, Hungary, and Spain suffered the same fate of a prematurely imposed Euro on States of weak economies. There are many articles analyzing the financial crisis in Greece. I thought that I can make sense in a short post for readers eager to know but would refrain reading lengthy erudite articles.

            There are two main factors for Greece financial problems; there are two resolutions available, equally painful, but one is far better in shortening the pain and healing faster. First, the common currency Euro forced weaker economies to relinquish their sovereignty over issuing money (printing money) in time of shrinking economy to re-launch the inner trade.  Second, the US financial multinationals before the crash infused too much credit in a small economy that did not correspond to normal credit rating behaviors; this quick infusion of money inflated the sense of economic boom and generated laxity in financial control and management.  Greece is awakening to new demands for harsher financial control and imposition of higher taxes to straighten the budget balance sheet.

            The first remedy is inviting the International Monetary Fund (IMF) to intervene and infuse $1.7 billions in the Greek coffer to pay the debts due this spring. This would be a bad decision. It is worse because even the EU is encouraging Greece toward that option. For example:

            Lithuania GNP shrank 18% in the first year the IMF intervened with its draconian conditions: jobless rate climbed to 20%, the high level in health, education, and retirement suffered greatly. Actually, retired persons are bleeding and the socialist political parties lost ground.

            In Hungary, the IMF intervention made sure that the people suffer and the socialist government be replaced by like minded anti-socialist government headed by the former minister of economy. If Greece ends up asking the “help” of the IMF, as the EU wishes too, then the socialist George Papandreou will start packing; a decision that will please Merkle PM of Germany.

            Greece with budget deficit reaching 13% of GNP and growing has a reasonable solution out of this mess if it wants to avoid 10 years of suffering and humiliation. Until the EU comes up with a financial recovery plan then Greece should revert to its national currency the drachma. Greece should regain its sovereignty issuing money in this difficult period: Internal and external trades should not be hampered for lack of liquidity.

            Since Greece imports amount to only 20% of its GNP then better competitive drachma should enhance exports and reduce the loan deficit. With the already strict financial control in place, Greece will be able to shorten the period of its pain.  The EU will accept Greece currency to revert to the Euro in due time in order not to let other Euro member States following Greece decision.

            Greece should learn how Argentina recovered.  After four years insisting of keeping the currency linked to the dollar the economy faltered entirely.  Argentina decided to float its currency and it devalued accordingly. Argentina was able to default on $100 billion of foreign loans. The government insured that bank deposits of consumers keep the same purchasing power by regular re-evaluation and re-fixing of the national currency.  People living in their own properties enjoyed the same financial facility at the rate of pre-devaluation.  Within a single semester, Argentina economy was back to normal and going strong.

            Greece has choices: either the MIF intervention accompanied by ten years of suffering or reverting to the drachma until the economy is back to normal within a semester. If Greece default on all its external debts then, suppose the interest rate on debts is 8% and the debt amount to 140% its GNP, defaulting will generate fresh cash of 9% of Greece GNP which is over its annual current budget deficit. What developing State would decline such solution?  Obviously, the US, Japan, China, Germany, France, and England would refuse to default on the ground that they are actually running world economy.

            Defaulting on bad credits that financial multinational encouraged developing States to taking does not hurt badly or disturb the multinational creditors: they were not supposed to pay taxes on interests as long as debtor governments did not restitute the original entire capital; the financial multinationals have then to pay taxes on the previous 20 years of lending the same capital, minus what they submit as expenses of doing businesses.

            The neoliberal financial ideology and “The Economist” are back on the offensive after the shameful financial crash: they are ordering indebted States to reducing public employment by 10%, reducing salaries, reducing retirement benefit, and elongating the age for retirement.  The financial institutions claim that all these hassles are none of its business, even if they caused the miseries.

            Unless people revolt now with a counter shock to what they are being submitted to then any delay to the next financial crash will hurt them more than the rich classes.  People should demand that taxes be raised and increased to all capitalist transactions, financial administrators and bonuses be taxed high, and dividends to shareholders be delayed until the economy is stabilized.  Waiting for another financial crash to get in action is tantamount to increasing social injustices with a maddening upheaval that runs amuck.




September 2021

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