I would like to make some suggestions regarding possible future actions on the part of the Greek government in the context of the present crisis.
1) Greece needs to make a case that the foreign money it needs is an investment in the country’s future (instead of throwing good money after bad). That case is presently not being made in credible fashion.
2) Just by looking at statistics of the Bank of Greece, one can easily determine that the net cash inflow from abroad in the last 2 years (particularly the ECB-funding of the Greek banking system!) has served primarily the following purposes: (a) servicing foreign debt and refinancing short term credit lines of the banking sector (which were cancelled by foreign lenders); (b) capital flight; and (c) imports. That money is now in bank accounts of private parties abroad.
3) One cannot expect tax payers of Central/North European countries to spend their money on such purposes! Neither is it in the interest of Greece to do that!
4) One can certainly expect tax payers of these countries to invest in Greece’s future because that is of primary interest for the “European Project”!
5) Greece should hold on to the Euro but SIMULATE A SITUATION AS THOUGH IT HAD THE DRACHMAE! That will violate certain EU freedoms (like the freedom of transferring goods and capital) but this is a state of emergency and requires emergency measures (not to mention the fact that France/Germany were the first countries which violated EU contracts).
6) The structure of the Greek economy is such (“developing economy” with 80% in services) that Greece will for a long time to come need the savings of other countries in order to achieve the necessary growth because it cannot generate enough savings domestically (current account deficit). Those foreign savings are unlikely to come in the form of voluntary foreign loans for quite some time.
7) As a result, GREECE NEEDS TO ATTRACT FOREIGN INVESTMENT IN ORDER TO SURVIVE THE PRESENT CRISIS!
8) There is a huge pool of funds which would at least partially quickly flow to Greece if the investment framework were right. I am referring to the hundreds of billion EUR which Greeks hold in foreign bank accounts. Why would a Greek prefer earning 2% in Switzerland if he could earn a multiple thereof in Greece? For that, however, the Greek investment framework needs to be “right” (security, low costs, tax incentives, etc.).
9) One cannot change a whole country in a short time frame. However, one can change parts of the country very quickly. China is still being ruled by communism but in parts of the Chinese economy, capitalism-pure reigns.
10) Greece should establish selected Free Trade Zones where the foreign investor is offered everything which he desires. The simple question to the foreign investor (the wealthy Greeks) would be: “What would you like to have so that you invest your capital in Greece?”
11) What should be produced in those FTZ? To start with, all those products which are presently being imported but which could just as well be produced in Greece if Greece were competitive. Greece needs a manufacturing sector badly, something which is called “Mittelstand” in Germany and Austria. Those are companies with 5-500 employees who produce goods which someone else needs in good quality and at a fair price, and where the employees pay taxes (as well as the companies and their owners!).
12) Greece should take the following short-term measures to control foreign cash flows: (a) taxes on imports (up to 100% on luxury goods) and (b) a stop on capital transfers abroad unless they are economically justified. This would have to be accompanied by a temporary freeze on bank deposits with only minimal withdrawals for personal use.
13) These measures would simulate a situation where Greece had returned to the Drachmae. If Greece returned to the drachmae, the new currency would immediately devalue by at least 30%. Imports would decline and “official” capital flight (i. e. via bank accounts) would come to a halt because the banks would not have enough foreign currency (and there would be a run on banks). Exports would become competitive with a devalued drachmae but they would also become competitive in a FTZ which works with internationally competitive costs.
14) If implemented well, this would quickly translate into increased domestic economic activity. More importantly: the “story” alone, if presented well, would immediately demonstrate to foreign tax payers that their money is being spent well.
WHAT TO DO WITH THE DEBT?
1) First of all, Greece must arrange a creditors’ meeting and organize a Steering Committee of creditor institutions with which one can negotiate. That is the only way to keep private creditors “on the hook”!
2) Greece should stop talking about the sovereign debt only. The real issue is the gross foreign debt of the entire country which stood at 431 billion EUR in mid-2010 (according to the Bank of Greece). That is the amount of money which has to “stay in the country” for some time to come.
3) Greece must NEVER request a “haircut” from foreign lenders! Only countries of the 3rd world have been forgiven sovereign debt and Greece does not want to belong to that group!
4) Greece’s position must be: “We will pay our foreign debt in full! However, since we don’t have the necessary cash right now, we will pay in a different form”.
5) We will offer the owners of the 431 billion EUR the following (just an example): 20-year bonds for 50% thereof; 10-year bonds for 30% thereof; and 5-year bonds for 20% thereof.
6) During the first 5 years we will accrue interest on 2/3 of those bonds.
7) We will need Fresh Money which will be in a senior position to those bonds.
8) What do we offer in exchange? The above-described National Recovery Plan (obviously, the above is only a “quick-and-dirty” starting point. A real “plan” would need to be developed and would require the best brains not only from Greece but also from Europe). If this plan works, Greece will be able to pay these bonds in full upon their respective maturities.
9) In the meantime, there will be a secondary market for those bonds which will trade at significant discounts. New EU regulations will have to allow the banks which have long-term viability to make the necessary “mark-to-market” adjustments over time. The other banks will be liquidated in orderly fashion. This also applies to Greek banks which become holders of such bonds.
WHAT SHOULD GREECE REQUEST FROM THE CENTRAL/NORTH EUROPEAN COUNTRIES?
1) At issue are countries which presently pride themselves in arrogant fashion that they are “helping Greece” in the interest of the European Project while, in actual fact, they are using Greece’s balance sheet (and tax payers’ money!) in order to bail-out their own banks.
2) Greece should call that bluff.
3) Greece should say: “By implementing the above, we will impose on Greeks enormous adjustment pains for a number of years but at the end of this process Greece will be a value-generating member of the EU. That will be Greece’s contribution to the European Project. In exchange we request the following: when the above bonds become due and if we can pay them, the lenders can reverse their write-downs and will have windfall profits. We ask that the governments tax those profits at 100% and give that money to Greece as a grant, as reward for having saved the European Project.