Xi’s Anti-Corruption Campaign Is Key to China’s Prospects

John Mauldin

Jul 01, 2015

George Magnus is one of the most influential economists in the world today. From his position as chief economist at UBS for a number of years, he enjoyed a front-row seat to growth miracles, credit booms, and financial crises in major economies around the world and is widely credited with identifying the trigger points that eventually led to the global financial crisis in 2008.

Today, he works as an associate at Oxford University’s China Center, a senior economic adviser at UBS, and an independent economic consultant to governments and private investors who can afford his limited time.

George is the author of two of my favorite books: The Age of Aging (published in 2008), which explores the consequences of deteriorating demographic trends; and Uprising: Will Emerging Markets Shape or Shake the World Economy? (published in 2010), which takes an in-depth look at the new and more sober prospects for emerging markets going forward.

In the following chapter from our recently published e-book on China, A Great Leap Forward?, George explains that moving forward on “more substantive and politically sensitive economic reforms” depends on Xi Jinping’s ability to consolidate power and break through the disruptive vested interests that threaten the Chinese Communist Party’s legitimacy and stand in the way of true economic rebalancing.

While Beijing has made some progress on its stated reform agenda since the Party’s Third Plenum in November 2013, it remains to be seen whether President Xi and his allies have not only the stomach for more difficult reforms and deleveraging but also the political capital needed to move forward without a revolt within the Party.

As George explains, China’s ruling elite find themselves at a do-or-die moment for the ruling Communist Party. Their ability to follow through on tough reforms is one of the biggest points of uncertainty in assessing whether the Middle Kingdom will rise above the muck to escape the middle income trap or fall victim to the same fate that beset the former Soviet Union.

By the way, China is a tad more important than Greece. For starters, there are 20 cities in China whose economies are bigger than Greece’s. Etc. etc. Greece is more dramatic – more hot news – and thus the mainstream media loves it, but the rebalancing act going on in China that we write about in our book is one of the most important economic events of this century so far.

For those of you interested in more of what George writes about China, and the other 16 contributors in A Great Leap Forward?, you can get it as an e-book on Amazon Kindle, iTunes iBook, or Barnes & Noble Nook. It’s a very reasonable $8.99 and has been getting great reviews. China matters and coauthor Worth Wray and I did this book to give you the background and current information to truly understand what is happening. If you don't understand China, it’s like trying to build a house without all the right tools. You can still build one, but it won't be as good.

I’m on a train from Princeton back to NYC, where I will have dinner with Art Cashin, Barry Ritholtz, Rich Yamarone, and a few of the other usual suspects. One of the fun things about dinner with these guys is that you never know who else might show and how the conversation might unfold. Last night I spent a few hours at Nouriel Roubini's apartment, sitting outside and discussing one thing after another. You gotta love New York.

I am about halfway through my rather unusual new training, where I sit for an hour a day, wired in, trying to control a computer with my mind. I know, it sounds like I’ve gone off the deep end, but there is serious science at work. The idea is to help me to learn to focus better and think more clearly. At times, I feel like a young Luke Skywalker being coaxed by Yoda: “There is no try. Just do.” The conversations that surround this research and practice truly open your eyes to the amazing discoveries being made in a hundred different fields by a variety of geniuses focused on particular new ideas or the solutions to thorny problems. What an amazing world. (The training I’m taking is not ready for commercial application yet, so no use even asking. But in a few years? Oh, yeah; it will be everywhere.

I will get to spend July 4 in NYC. I assume we will find some fireworks somewhere. I tried some BBQ last night, which was guaranteed to be world-class. That would be the case only for people who have never had Texas BBQ. Or BBQ almost anywhere in the South. There is some great food here, but it is NOT BBQ. And now, let's turn to George Magnus.

Your seeing Chinese in my dining future analyst,

John Mauldin, Editor
Outside the Box

Xi’s Anti-Corruption Campaign Is Key to China’s Prospects

By George Magnus

President Xi Jinping’s anti-corruption campaign has been underway now for almost three years and shows no sign of relenting. One major bank has estimated that the cost of the campaign in terms of lower luxury goods purchases and less ostentatious consumption may have been about 1.5% of GDP in 2014, but even if this were really measurable, it would only skim the surface of significance. For it is now undeniable that China’s economic prospects are inextricably bound up with the substance and consequences of the anti-corruption campaign. Any short-term effects on consumption pale into insignificance against the weightier matter of whether the campaign serves to stimulate or stifle the entire economic reform agenda. China’s economic performance in coming years, its chances of avoiding the middle income trap into which most emerging countries have lapsed over the last 60 years, the fate of President Xi and perhaps even of the Communist Party, itself, dep end on nothing less.

Party purity as major weapon of governance

Anti-corruption measures are not new in China, but in the past they were short-lived and their principle purpose was to punish or remove foes. The current campaign is different. It is both a traditional purge and a major weapon of governance, designed to bolster the power and legitimacy of the Communist Party at a time of change that is considered threatening. It is probably no exaggeration to say that the current leadership sees the campaign as a sort of do-or-die moment for the Party, specifically to save it from the fate of that of the former Soviet Union. The prevailing narrative is that China must not succumb to the Soviet Communist Party’s failure to stick with Leninist discipline, which allowed political rot, ideological heresy and military disloyalty to undermine and destroy it.

The campaign actually started before Xi came to power. At the Party school in Beijing in March 2012, Vice-President Xi spoke at length on the very familiar Leninist topic of ‘party purity’, which is about the integrity, reputation and effectiveness of Party members at all levels. Cadres were told to take their Marxism seriously and to implement the programmes, regulations and policies of the Party, and shun all interest in personal gain and influence.

This was no run-of-the-mill political speech. Xi insisted then and since that ‘party purity’ was essential if China was to succeed in building a prosperous society, implementing reform, and changing the development model. This could only happen if members opposed and struggled against all forms of corruption, and defended the health of the Party.

Two weeks after the speech, Bo Xilai, governor of Chongqing who was also vying for the job of President, was removed from office. Over time, as is now known, he was stripped of all his Party posts, expelled from the Party, found guilty of corruption, bribery and abuse of power, and sentenced to life imprisonment. This was the curtain-raiser to an unrelenting and comprehensive anti-corruption campaign that shows no sign of winding down.

Implemented by the extra-legal Central Commission for Discipline Inspection (CCDI), the campaign has targeted over 200,000 ‘tigers and flies’, that is high and lower level officials in the Party, People’s Liberation Army (PLA), and state enterprise system. In 2014 alone, 68 top officials and over 70,000 lower level officials were investigated for violations of anti-graft rules. Roughly 36 tigers have been brought down, including Zhou Yongkang, former Minister of Public Security and member of the Politburo Standing Committee, and Xu Caihou, former general in the PLA, who died from illness in March. Also being investigated for corruption is Zhang Dongsheng, a former director of the finance department in China’s powerful National Development Reform Commission, China’s top macroeconomic management agency. In December 2014, Ling Jihua, once Political Secretary to former President Hu Jintao and Director of the Party’s General Office was put under investigation for disciplinary violations. This move showed that Xi had no inhibitions about going after close associates of both Hu and former Party General Secretary Jiang Zemin, who, at 88, continues to wield influence, and actually supported Xi for the job of President.

In the first three months of 2015, the chief of military intelligence Xing Yunming was removed from office, scores of PLA officials, including up to 16 generals, were placed under investigation, and senior commanders in the PLA were in the process of being reshuffled. The CCDI announcement that it would target state-owned enterprises (SOEs) in a new intensification of the campaign resulted in the removal or investigation of senior personnel, including Song Lin, the Chairman of China Resources, and Xu Jianyi, the Chairman of the FAW automotive group.

The anti-corruption campaign, therefore, is certainly designed to fight foes, and favour friends. Indeed, one of the objectives is to sideline past leaders and others who continue to wield power in the Party so that the current leadership gets a clear run in getting its nominated members on to the elite Politburo Standing Committee at the 19th Party Congress 2017. Five of seven will stand down having reached the age of 68. The other two members are Xi, himself, and Premier Li Keqiang, both of whom will serve until 2022.

But the campaign is also designed as a weapon of governance to make the Party and the state sector more responsive and efficient, as leaders try to guide China through a very important, and potentially unstable economic transition. To this end, they have raised an enormous flag of economic reform. The broad goals were laid out at the Party’s Third Plenum at the end of 2013, and subsequently, including at the Fourth Plenum in October 2014, which focused on the ‘rule of law’, which is better referred as rule by law, or rule according to law. There is no possibility of the re-ordering Chinese society to make the state and party subservient to an independent judiciary.

It is undeniable that changes are occurring. Progress has been most marked in areas that less politically contentious, for example, financial and capital account liberalisation, and the environment. The government has been reducing some of the red tape required for the approval of public projects, it has introduced important, if partial, reforms affecting the pension system and the household registration system in small and medium-sized cities, and more recently, it proposed fiscal reforms affecting local governments and measures to streamline SOEs.

The key issue, though, is whether the anti-corruption campaign succeed in facilitating the implementation of more substantive and politically sensitive economic reforms. These are widely acknowledged to be essential to rebalancing China’s economy away from an excessive reliance on investment and credit, sustaining a new phase of high economic growth based on service industries, productivity and greater efficiency, and to avoiding the fabled middle-income trap.

Anti-corruption, the paradox of reform, and the economy

Optimists argue that even if anti-corruption measures are dampening down ostentatious consumption now, they will ultimately have strong, positive effects on economic growth. The argument goes that the purge of corrupt Party officials and business managers should lead to more efficient business enterprises. And by making the Party structure more effective, and members more compliant, the implementation of multi-purpose economic reforms and of greater ‘marketisation’ of the economy should lead to better resource allocation, and rising productivity and prosperity. But this is political rhetoric, not judgement.

To be sure, President Xi is using the anti-corruption campaign to amass and centralise power around himself in order to strengthen the Party’s control and primacy. To further this process, Xi has expanded his existing authority over the State Council, the military and the Party by establishing 4 additional ‘leading groups’, which he heads, on national defence and the military, state security, cybersecurity and information, and ‘deepening reform comprehensively’. These secretive groups are key to policy implementation, and the last of those listed is perhaps the most significant because it has a comprehensive portfolio, and unprecedented scope of power and responsibility.

Yet this strategy is also throwing up an intriguing paradox. On the one hand, the centralisation of power and cleansing of the Party are necessary to serve the prospects of successful reform. On the other hand, the same concentration of power raises significantly the danger that the political structure being created will stifle and suppress real reform. How so?

First, a major anti-corruption campaign isn’t an engineering challenge with a neat beginning and end. It is likely to spawn consequences, and could be dangerous. Without an open, transparent and legally accountable campaign, picking off a few rotten apples may still leave an essentially diseased tree intact. It is simply impossible for the government to call an entire ruling class to account.

Second, it risks spreading conservatism throughout the Party and system, so that cadres fear stepping out of line, using initiative or experiment by being disruptive and innovative. Worse, it threatens vested interests that may dilute or stall significant reforms, even if they don’t (yet) come out in open opposition. The latter, though, remains a distinct possibility, perhaps at a point when economic growth slows down more significantly or if and when Xi’s corruption and economic plans should go awry in other ways.

The behaviour of vested interests is already evident in key reform areas, such as capital account liberalisation, where SAFE — the State Administration for Foreign Exchange rules the roost, SOE’s that fall under SASAC — State-owned Assets Supervision and Administration Commission, and local and provincial governments.

Capital account liberalisation has been a Party goal for about 20 years but there is still strong resistance to giving citizens free rein to import and export capital. The capital account is actually more porous than one would imagine, but most of the changes that have occurred have been designed to facilitate capital inflows into China rather than out. Free trade zones have been created in Shanghai, Tianjin and Guandong and it is proposed to create a further 18, but Shanghai — a bellwether — has been criticised by some experts as unworkable because of spillover effects to the rest of the country, which would not be welcome. Businesses generally have expressed disappointment over the incremental and limited scope of liberalisation, and few foreign firms have set up in the zone.

SOE reform is also a key slogan, and the new broom in the country is certainly making waves in getting SOEs to tow the line on outsized executive compensation and perks. SOEs are also being encouraged to become more efficient, pay higher dividends to the government, and merge. But the prime motive of reform isn’t to transfer ownership to the private sector, put SOEs on an equal financial footing with private companies, or increase productivity and other growth-oriented outcomes. Rather it is to strengthen the Party in the iron triangle of Party-State-Business.

Local and provincial governments, which account for the bulk of public revenues and spending, were encouraged to raise copious amounts of debt after the financial crisis. They are now being brought into line a bit as the financing platforms they created are banned from new borrowing. They are being encouraged to refinance expensive and in some cases unserviceable debt through the fledgling municipal bond market though the degree to which they will save debt service costs is probably quite limited. In any event, the incentive system in local governments, in which there’s a strong tendency to push for growth and compete with one another, isn’t really being changed, and there remains a strong resistance to the kind of fiscal and financial reforms that might make them legally accountable and subservient to a central fiscal authority.

Third, the drive for Party purity can already be seen to be leading to a dictatorial style based around the prestige and personality of the leader. While this enhances his authority and increases the ‘fear factor’ among opponents and underlings, it also runs the risk of alienating the urban middle class, on which so much of China’s future success depends. With an on-line population of over 600 million people, a throughput of over 7 million college graduates a year, and a more significant exposure to foreign influence than ever before because of travel, trade and cultural exchanges, it would be rash to assume that the Party will command unswerving support under all or any circumstances.
Increasingly uncertain prospects

There is little doubt that China will continue to introduce economic and governance reforms in its attempts to bolster efficiency and achieve an orderly rebalancing of the Chinese economy. Equally, there is little doubt that these reforms will not seriously ‘marketise’ the economy (other than to serve the iron triangle better), effect a meaningful transfer in structure from the public to the private sector, or introduce rule of law based on an independent legal system and neutral contract enforcement. The question then arises as to what the implications of this juxtaposition might be for the economy over the next several years?

For the time being, the government is likely to struggle to sustain economic growth at the new target of ‘about 7%’ while the economy is rebalancing or after. The downturn in investment growth, especially of real estate and construction, is a secular phenomenon. The government will have to acknowledge this sooner or later because it must also address the challenge of unwinding the economy’s reliance on credit creation and debt accumulation, sooner or later. That will doubtless affect economic growth.

The major problem is that in spite of the rhetoric about managing debt, there is little political appetite at the moment to do so. Credit growth has slowed down from over 30% a few years ago to about 14.5%, but so has the growth rate of money GDP, from 15% to about 7.5-8%. So there will be no let-up in the increase in the ratio of debt to GDP, which is on course to double again by around 2020 or just after, having done so already since 2004. Debt has to be paid for via losses and write-offs, losses have to be assigned and recognised in the balance sheets of private and public enterprises, and the state. Reform, as such, cannot resolve this, only proper de-leveraging can.

Reform, though, is in some ways exacerbating the problem of indebtedness. While financial, fiscal and capital account liberalisation policies are all in principle desirable, they tend to stimulate the demand for and supply of credit, which is precisely what the authorities are supposed to be trying to tame. Deleveraging, meanwhile, is still at a very early stage and it will probably entail several quarters of declining transactions volumes in real estate, defaults, falls in the investment rate, and declining credit to GDP. These trends, though, would add to deflationary pressures, put employment creation at risk, and pose a significant political and economic challenge to the government.

In the longer-term, economic reforms have to go much further now that China’s potential to derive growth from the deployment of physical labour, or from limitless capital accumulation is diminishing quickly. A different sort of economic growth is required for China to grow its per capita GDP strongly as well as its nominal GDP. This would be based much less on the dominance of state institutions, and more on innovation, higher educational attainment standards, stronger productivity, and entrepreneurship. This is all the more relevant because China’s working age population share of the population is declining, and rising wage costs and digital technologies are encouraging foreign companies to go home or to cheaper manufacturing nations in Asia, such as Vietnam, Cambodia, Bangladesh, and now perhaps Modi’s India.

China’s leaders are well aware that the growth and development model has to change. The anti-corruption campaign is essential to securing the reforms that would lead to that change. But, as argued, the campaign has weaknesses and shortcomings. Reforms, especially to create robust and inclusive institutions that would really put China on course to become a high income country are most likely incompatible with the central philosophy of Party, which is to rule unchallenged. A purified Party is no substitute for political reforms in which the Party has no interest.

We can understand the resulting insecurity that seems to pervade the behaviour of the leadership, which has manifested itself in fear, distrust, and a major crackdown on opponents, critics, liberals, and most recently, Western values and influences. The government has forbidden universities from teaching or discussing universal values, press freedom, civil society, civil rights, historical errors of the Party, capitalism and an independent judiciary — collectively known as the ‘seven don’ts’. Ironically, allowing these don’ts would go much further in purging the country of corruption than an extra-legal campaign of going after tigers and flies that by comparison, seems quite limited.

Why the Greek Bailout Failed

Kenneth Rogoff

JUL 1, 2015

Alexi Tsipras

CAMBRIDGE – As the Greek crisis painfully illustrates, a structural-adjustment program to enhance long-term debt sustainability can work only if the country takes ownership of it. The immediate sticking point for Greece is its unwillingness to make its pension system sustainable in a credible way – but this is only the latest example of intransigence. In fact, lenders have long been giving Greece significantly more money than it has been asked to pay, though one might never know it from global press coverage. With trust on both sides having evaporated, striking a lasting deal has proved impossible.
Greece’s membership in the European Union gives its creditors significant leverage, but evidently not enough to change the fundamental calculus. Greece remains very much a sovereign country, not a sub-sovereign state. The “troika” of creditors – the International Monetary Fund, the European Central Bank, and the European Commission – simply do not enjoy the kind of leverage over Greece that, say, the Municipal Assistance Corporation wielded over New York City when it teetered on the edge of bankruptcy in the mid-1970s.
The best structural-adjustment programs are those in which the debtor country’s government proposes the policy changes, and the IMF helps design a bespoke program and provides the political cover for its implementation. Imposing them from the outside is simply not an effective option. So, for reforms to take hold, the Greek government and its electorate must believe in them.
That a country must take ownership of its reform program is not a new lesson. The IMF’s rocky relationship with Ukraine began long before the latest round of negotiations. Back in 2013, IMF staff wrote a sobering report on the organization’s experience in the country. Their conclusion, in essence, was that the government’s failure to embrace the reform process fully all but guaranteed that its program would not work.
If a government is incapable of or uninterested in making the needed adjustments, the report argued, the best option is to drip money out as reforms are implemented, as is now being done in Greece.
Unfortunately, that approach has not proved adequate to overcome the challenges there. Structural-reform conditions often tilt the balance between competing domestic factions, for better or for worse.
If there is no will inside the country to maintain the reforms, they will quickly be undermined.
Left-wing ideologues have long viewed structural-reform programs with deep suspicion, accusing international lenders like the IMF and the World Bank of being captured by neoliberal market fundamentalists. This critique has some truth in it, but is overblown.
To be sure, structural reforms often favor policies like labor-market flexibility. But one should not make the mistake of viewing these interventions in black-and-white terms. Breaking down dual labor markets that are excluding young workers (as they do in much of southern Europe, including Italy and, to some extent, France) is very different from making it easier to fire all workers. Making pension systems sustainable does not amount to making them stingier. Making tax systems simpler and fairer is not the same as raising all taxes.
Recently, opponents of structural reform have put forward more exotic objections – most notably the problem caused by deflation when policy interest rates are at zero. If structural reforms simply lower all wages and prices, it may indeed be difficult in the short-term to counter the drop in aggregate demand. But a similar critique could be made of any other change in policy: if it is poorly designed, it will be counter-productive. The truth is that the way forward in Europe requires achieving greater productivity.
The lessons from Greece and other unsuccessful bailout programs are sobering. If a debt bailout program requires a wholesale change in a country’s economic, social, and political model, the best course of action might be to write off the private losses, rather than pour in public money to cover them. In cases like Greece, the creditors’ passion for structural reforms might be better directed at home – particularly toward improving financial regulation.
The vast majority of Greeks want to stay in the EU. In an ideal world, offering financial aid in exchange for reforms might help those in the country who want to shape it into a modern European state. But given the difficulty Greece has had so far in making the necessary changes to reach that goal, it might be time to reconsider this approach to the crisis completely. In place of a program providing the country with further loans, it might make more sense to provide outright humanitarian aid – regardless of whether Greece remains fully within the eurozone.

June 29, 2015 4:40 pm

Europe’s dream is dying in Greece

Gideon Rachman

By locking the nation into a failed economic experiment the EU is destroying wealth and stability

illustration of EU flag©James Ferguson
The shuttered banks of Greece represent a profound failure for the EU. The current crisis is not just a reflection of the failings of the modern Greek state, it is also about the failure of a European dream of unity, peace and prosperity.
Over the past 30 years Europe has embraced its own version of the “end of history”. It became known as the European Union. The idea was that European nations could consign the tragedies of war, fascism and occupation to the past. By joining the EU, they could jointly embrace a better future based on democracy, the rule of law and the repudiation of nationalism.

As Lord Patten, a former EU commissioner, once boasted, the success of the union ensured that Europeans now spent their time “arguing about fish quotas or budgets, rather than murdering one another”.

When the Greek colonels were overthrown in 1974, Greece became the pioneer of a new model for Europe — in which the restoration of democracy at a national level was secured by a simultaneous application to join the European Economic Community (as it then was).
Greece became the 10th member of the European club in 1981. Its early membership of an EU that now numbers 28 countries is a rebuke to those who now claim it has always been a peripheral member.

The model first established in Greece — democratic consolidation, secured by European integration — was rolled out across the continent over the next three decades. Spain and Portugal, which had also cast off authoritarian regimes in the 1970s, joined the EEC in 1986.

After the fall of the Berlin Wall, almost all the countries of the former Soviet bloc followed the Greek model of linking democratic change at home to a successful application to join the EU.

For the EU itself, Greek-style enlargement became its most powerful tool for spreading stability and democracy across the continent. As one Polish politician put it to me shortly before his country joined the EU: “Imagine there is a big river running through Europe. On one side is Moscow. On the other side is Brussels. We know which side of the river we need to be on.” That powerful idea — that the EU represented good government and secure democracy — has continued to resonate in modern Europe. It is why Ukrainian demonstrators were waving the EU flag when they overthrew the corrupt government of Viktor Yanukovich in 2014.

The danger now is that, just as Greece was once a trailblazer in linking a democratic transition to the European project, so it may become an emblem of a new and dangerous process: the disintegration of the EU. The current crisis could easily lead to the country leaving the euro and eventually the union itself. That would undermine the fundamental EU proposition: that joining the European club is the best guarantee of future prosperity and stability.

Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity.

The dangers of that process are all the more pronounced because Greece is in a highly strategic location. To the south lies the chaos and bloodshed of Libya; to the north lies the instability of the Balkans; to the east, an angry and resurgent Russia.

Knowing all this, the administration of Barack Obama is increasingly incredulous about the EU’s apparent willingness to let Greece fail. To some in Washington, it seems as if the Europeans have forgotten all the strategic lessons learnt during the cold war about the country’s importance.

That, however, is unfair to the Europeans. Their response to the criticism from Washington is that the EU works only because it is a community of laws and mutual obligations. If you allow a country such as Greece to flout those laws and obligations — by, for example, reneging on its debts — then the club will begin to disintegrate anyway. If, by contrast, you kick Greece out there is still a chance of confining the damage to one country.

The crisis also has profound implications for democracy, the original rallying point that drew Greece into the EU more than three decades ago. Alexis Tsipras, the prime minister, now argues that far from securing Greek democracy, the EU has become its enemy, trampling on the will of the people.

In reality, of course, this is a clash of democratic mandates — pitting Greek voters’ desire to ditch austerity against the voters (and taxpayers) of other EU countries, who want to see their loans repaid and are loath to let an unreformed Greece continue to benefit from EU money.

It may be that those two democratic wills can be painfully reconciled in next Sunday’s referendum. If the Greek people vote to accept the demands of their EU creditors — demands that their government has just rejected — Greece may yet stay inside both the euro and the EU.
But it will be a decision by a cowed and sullen nation. Greece would still be a member of the EU. But its European dream will have died.

Greek banks down to €500m in cash reserves as economy crashes

The daily allowance of cash from many ATM machines has already dropped from €60 to €50, purportedly because €20 notes are running out

By Ambrose Evans-Pritchard, in Athens

7:20PM BST 02 Jul 2015

A man walks past a graffitti with a EU flag reading in German

The vote was originally intended to secure a stronger negotiating mandate for a showdown with Europe, but it is rapidly turning into an 'in-or-out' decision on euro membership Photo: AFP
Greece is sliding into a full-blown national crisis as the final cash reserves of the banking system evaporate by the hour and swathes of industry start to shut down, precipitating the near disintegration of the ruling coalition.
Business leaders have been locked in talks with the Bank of Greece, pleading for the immediate release of emergency liquidity funds (ELA) to cover food imports and pharmaceutical goods before the tourist sector hits a brick wall.
Officials say the central bank will release the funds as soon as Friday, but this is a stop-gap measure at best. "We are on a war footing in this country," said Yanis Varoufakis, the Greek finance minister.

The daily allowance of cash from many ATM machines has already dropped from €60 to €50, purportedly because €20 notes are running out. Large numbers are empty. The financial contagion is spreading fast as petrol stations and small businesses stop accepting credit cards.

Constantine Michalos, head of the Hellenic Chambers of Commerce, said lenders are simply running out of money. "We are reliably informed that the cash reserves of the banks are down to €500m.

Anybody who thinks they are going to open again on Tuesday is day-dreaming. The cash would not last an hour," he said.

"We are in an extremely dangerous situation. Greek companies have been excluded from the electronic transfers of Europe's Target2 system. The entire Greek business community is unable to import anything, and without raw materials they can't produce anything," he said.

A banner reading 'no to austerity and fear' atop Lycabettus hill in Athens

Pavlos Deas, owner of an olive processing factory in Chalkidiki, told The Telegraph that he may have to shut down a plant employing 250 people within days.

"We can't send any money abroad to our suppliers. Three of our containers have been stopped at customs control because the banks can't give a bill of landing. One is full of Spanish almonds, the others full of Chinese garlic," he said.

"We don't know how we are going to execute and export an order of 60 containers for the US. We don't even have enough gas. We asked for 10,000 litres but they are only letting us have 2,000. It's being rationed by the day. Factories are closing around us in a domino effect and we're all going to lose everything if this goes on," he said.

The fast-moving events come amid signs of deep dissension within the coalition over the wisdom of the country's referendum this Sunday. The vote was originally intended to secure a stronger negotiating mandate for a showdown with Europe's creditor powers, but it is rapidly turning into an "in-or-out" decision on euro membership and the survival of the Syriza government.

Four members of the nationalist Independent Greeks party (Anel) - the junior partners - said they would break ranks and vote "Yes" to creditor demands - though no offer is now on the table - admitting that they were aghast by the closure of the banking system and the drastic events of recent days.

The party's hardline chief and defence minister, Panos Kammenos, dismissed them contemptuously. "We are at war and there will be no backing down. Whoever does not have the stomach for war, be gone," he said.

Yanis Varoufakis, Greece's finance minister, said he would resign is the Greek people voted "yes" on Sunday

Mr Varoufakis vowed to resign if the Greek people voted yes. "I prefer to cut off my own arm rather than sign an agreement without debt restructuring," he told Bloomberg TV.

He said there is not a "smidgeon of an iota of possibility" that the terms on offer can lift the Greek economy out of a deflationary tailspin, insisting that the talks broke down because the creditors refused to face up to the fact that Greece's debt is unpayable.

The International Monetary Fund has tacitly endorsed his claims, admitting that the country needs large-scale debt relief and €50bn of fresh funds over the next three years to give the economy time to recover.

Mr Varoufakis said acceptance of the creditors's proposals would merely mean another bruising fight in a few months' time and a permanent cycle of hostility.

The mood within the Syriza movement is increasingly bitter and polarized. One MP appeared to have lost confidence in the party leadership. "We have had months of childish tactics. They thought they could blackmail Europe into making concessions instead of going to the root of the problem facing this country and accepting that we have to break free altogether. They don't know what they are doing," he told The Telegraph.

Private citizens have requested an injunction from Greece's top court to halt the referendum, claiming it is unconstitutional. Yiorgos Kaminis, the mayor of Athens, said the vote on a creditor package that no longer even exists - and with a question that nobody understands - reduces the country to ridicule.

"We are facing a national catastrophe, it is so self-evident. If Greece votes 'no' we will be obliged to go back to the drachma immediately, and sooner of later we may be forced to leave the EU as well. I don't want my children to be part of North Africa," he said.

The mayor said the whole structure of the Greek state was falling apart as the political crisis grinds on into its sixth month. "Nobody is paying any taxes any longer. The state has no money.

We're facing a disaster," he said.

Mr Kaminis, a law professor and an independent politician, is widely-deemed more credible than politicians from the establishment parties and has emerged as the preferred figurehead of the "yes" movement.

Yet he admitted having "no contact" so far with the other groups in favour of a deal, a power structure known as the "inner Troika" in the demonology of the Greek Left. It is a sign of how fractured the "yes" camp still is with just two days left to put out their message, and polls showing the vote too close to call.

"We have to explain in a very determined way what is at stake. People seem to think that it was the EU that closed our banks," he said.

Mr Michalos, from the Hellenic Chambers, said a five-man committee at the Greek treasury is rationing foreign funds for companies on a top priority basis but it is entirely overwhelmed.

"They can't possibly deal with thousands of requests," he said. The net effect is total paralysis.

His own two companies are still hanging on but the danger is mounting. One produces latex for kitchen gloves and the teats on baby bottles. "If I can't import gum from Malaysia I am going to have a serious problem. I have four weeks' inventory," he said.

His other company imports meat for supermarkets and restaurants. That is in dire straits already.

"I can't import anything. Restaurants are starting to close down because they can't obtain food and we are going straight into the peak tourist season. It is going to be utterly horrendous if this goes on," he said.


The Greek Crisis Is About More Than Money

Greece was critical to the Cold War policy of Soviet containment. It is no less so in the age of Putin.

By Robert D. Kaplan

Updated June 30, 2015 7:40 p.m. ET

Russian President Vladimir Putin and Greek Prime Minister Alexis Tsipras at an international investment conference in St. Petersburg, Russia, June 19.  

Russian President Vladimir Putin and Greek Prime Minister Alexis Tsipras at an international investment conference in St. Petersburg, Russia, June 19. Photo: Alexander Zemlianichenko/Associated Press

Geopolitics can be more important than economics. Just look at Greece. On purely economic grounds, Greece should never have been admitted to the European Union in 1981 and might have been ejected from the eurozone months ago.

But what many European policy makers know—even if few articulate it—is that Europe will be increasingly vulnerable to Russian aggression if its links to Greece are substantially loosened. Greece is the only part of the Balkans accessible on several seaboards to the Mediterranean, and thus is a crucial gateway to and from the West.

Given the bellicosity of Russian President Vladimir Putin, it is useful to contemplate what would have happened had Stalin not ceded Greece to the West in return for the rest of the Balkans at the start of the Cold War. With Greece inside the Communist bloc, Italy would have been permanently endangered, to say nothing of the whole eastern Mediterranean and the Levant. Indeed, American bases in Greece were critical to the policy of containment.

But Greece, in terms of its politics and culture, is not fully anchored in the West. Greece is more properly viewed as the child of Byzantine and Ottoman despotism than of Periclean Athens. The mid-19th century revolutions in Europe were often of bourgeois origins with political liberties as their goal. Yet the Greek independence movement was more of an ethnic movement with a religious basis.

Greece, by virtue of its Eastern Orthodox Christianity, has an emotional and spiritual bond with Russia. This helps explain why most Greeks sided with Russia in favor of the Serbs and against Europe during the 1999 Kosovo War, even if the Greek government’s position was more equivocal.

Greece never had modern political parties to the degree of Central and Western Europe. Greek parties have been largely paternalistic, coffeehouse fiefs organized around charismatic individuals, featuring a reactionary-style right-wing movement and a radical-style left-wing movement. Andreas Papandreou, Greece’s prime minister for much of the 1980s and ’90s, was never a modern European socialist, as many in the West in the 1980s believed. Rather, as I know from living in Athens during that decade, he is better understood as a Latin-American style populist in the tradition of Juan Perón.

Papandreou is one forerunner to the current Greek disaster, a cynical politician, who, rather than use aid from Brussels to create a more streamlined polity after Greece joined the EU, enlarged the bureaucracy and created an impossible-to-sustain welfare state. Greece today is a badly institutionalized country where too few pay taxes as they should, further burdened by a bloated bureaucracy. Most Greek businesses are family owned, and meritocracy is in short supply. The Greek political culture is not wholly Western, so why should the economy be?

The newspaper with the largest circulation and influence in Greece during the Papandreou era was the left-wing Ethnos (the Nation), which had suspected links to the Soviet intelligence services. The Soviets found it easier to operate in Greece than perhaps in any other NATO country. Greece during the Cold War was never comfortable inside NATO, and instead yearned for a dreamy, nebulous neutrality. NATO and the EU kept Greece free and prosperous, unlike the other states of the Balkans, but Greeks, having never experienced life inside the Warsaw Pact, were never grateful for being kept out of it.

All this is prologue to the rise of Greek Prime Minister Alexis Tsipras and his hard-left Syriza party. Because modern conservatism and modern socialism only arrived in Greece toward the end of the 20th century, they were quickly swept aside for the hard left and fascist right (the Golden Dawn party) once the economy imploded in recent years. Given the Kremlin’s long-standing relationships in Greece, it is conceivable that the Russians now have better ties with—and intelligence on—Syriza and its various factions than the Europeans do.

Russia may be helping to inflame Syriza’s internal divisions in the hope that Greece’s ruling party cannot make the difficult concessions necessary to stay in the eurozone. If Greece does leave the eurozone, the economic aftershocks to the domestic economy could reduce it to a semi-failed state that, along with the dismemberment and weakening of Ukraine, will seriously weaken Europe’s geopolitical position vis-à-vis Russia.

If this happens not only will the Iberian states of Spain and Portugal be more susceptible to euro-debt contagion, but Balkan states with weak institutions and fragile economies like Albania, Bulgaria and Romania will be in a more exposed position. While those states were never part of the eurozone, the spectacle of a major Balkan country pivotally loosening its ties with the West, even as Russia appears momentarily ascendant in the region, will be sobering in the extreme.

Then there is the larger picture. The first post-Cold War decades featured a secure Eurasian maritime sphere from the Mediterranean across the Indian Ocean to the Western Pacific. Thus, the weakening of Greece’s ties with the West in the eastern Mediterranean has to be seen alongside the ascendancy of Iran in the Persian Gulf and the rise of China in the South and East China seas as a singular process in the chipping away at American power.

The EU, as frustrating as its policies can be, represents the ultimate triumph of American power emerging from the bloodshed of World War II. If Greece does leave the eurozone, whatever the country’s sins, it is demonstrably in Europe’s and America’s interest to nurse it back to health to keep, for example, Russian warships away from Greek ports. Greece, whether with the euro or the drachma, is in need of nation-building. Europe, after all, to be true to its own values, must give hope and succor to its periphery.

Mr. Kaplan is a senior fellow at the Center for a New American Security. He is the author of “In Europe’s Shadow: Two Cold Wars and a Thirty Year Journey Through Romania and Beyond,” to be published in next February.

Beyond the Greek Impasse

By George Friedman

June 30, 2015 | 08:00 GMT 

The Greek situation — having perhaps outlived the term "crisis," now that it has taken so long to unfold — appears to have finally reached its terminal point. This is, of course, an illusion: It has been at its terminal point for a long time.

The terminal point is the juncture where neither the Greeks nor the Germans can make any more concessions. In Greece itself, the terminal point is long past. Unemployment is at 26 percent, and more than 50 percent of youths under 25 are unemployed. Slashed wages, particularly in the state sector, affecting professions including physicians and engineers, have led to massive underemployment. Meanwhile, most new economic activity is occurring in the untaxable illegal markets. The Greeks owe money to EU institutions and the International Monetary Fund, all of which acquired bad Greek debts from banks that initially lent funds to Greece in order to stabilize its banking sector. No one ever really thought the Greeks could pay back these loans.

The European creditors — specifically, the Germans, who have really been the ones controlling European negotiations with the Greeks — reached their own terminal point more recently. The Germans are powerful but fragile. They export about a quarter of their gross domestic product to the European free trade zone, and anything that threatens this trade threatens Germany's economy and social stability. Their goal has been to keep intact not only the euro, but also the free trade zone and Brussels' power over the European economy.

Germany has so far avoided an extreme crisis point by coming to an endless series of agreements with Greece that the Greeks couldn't keep and that no one expected them to keep, but which allowed Berlin to claim that the Greeks were capitulating to German demands for austerity. This alleged capitulation helped Germany keep other indebted European countries in line, as financially vulnerable nations witnessed the apparent folly of contemplating default, demanding debt restructuring and confronting rather than accommodating the European Union.

Greece and the Cypriot Situation

For the Germans, Greece represented a dam. What was behind the dam was unknown, and the Germans couldn't tolerate the risk of it breaking. A Greek default would come with capital controls such as those seen in Cyprus, probably trade barriers designed to protect the Greek economy, and a radical reorientation of Greece in a new strategic direction. If that didn't lead to economic and social catastrophe, then other European countries might also choose to exercise the Greek option. Germany's first choice to avoid the default was to create the illusion of Greek compliance. Its second option was to demonstrate the painful consequences of Greece's refusal to keep playing the first game.

This was the point of the Cyprus affair. Cyprus had reached the point that it simply could not live up to the terms of its debt repayment agreements. The pro-EU government agreed under pressure to seize money in bank accounts holding more than 100,000 euros (around $112,000) and use that money to make good on at least some of the payments due. But assigning a minimum account balance hardly served to lessen the blow or insulate ordinary Cypriots. A retiree, after all, may easily have more than 100,000 euros in savings. And hotels or energy service companies (which are critical to the Cypriot economy) certainly have that much in their accounts. The Germans may have claimed the Cypriot banking system contained primarily Russian money, but — although it undoubtedly contained plenty of Russian funds — most of the money in the system actually represented wealth saved and used by Cypriots in the course of their lives and business. The result of raiding those accounts was chaos. Cypriot companies couldn't pay wages or rent, and the economy basically froze until the regulations were eventually eased — though they have never been fully repealed.

The Germans were walking a fine line in advocating this solution. Rather than play the pretend game they had played in Greece, they chose to show a European audience the consequences of genuine default. But those consequences rested on a dubious political foundation. Obviously the Cypriot public was devastated and appalled by their political leaders' decision to comply with Germany's demands. But even more significant, the message received by the rest of Europe was that the consequences of resistance would be catastrophic only if a country's political leadership capitulated to EU demands. Seizing a large portion of Cypriot private assets to pay public debts set an example, but not the example the Germans wanted. It showed that compliance with debt repayments could be disastrous in the short run, but only if the indebted country's politicians let it happen. And with that came another, unambiguous lesson: The punishment for non-compliance, however painful, was also survivable — and far preferable to the alternatives.

The Rise of Syriza

Enter the Coalition of the Radical Left party, known as Syriza, one of the numerous Euroskeptic parties that have emerged in recent years. Many forces combined to drive pro-EU factions out of power, but certainly one of them was the memory of the behavior of pro-EU politicians in Cyprus.

The Greek public was well aware Athens would not be able to repay outstanding debt on anything even vaguely resembling the terms set by the pro-EU politicians. Cognizant of the Cypriot example, they voted their own EU-friendly leaders out, making room for a Euroskeptic administration.

Syriza ran on a platform basically committing to ease austerity in Greece, maintain critical social programs, and radically restructure the country's debt obligations, insisting that creditors share more of the debt burden. EU-friendly parties and individuals — and the Germans in particular — tended to dismiss Syriza. They were used to dealing with pro-EU parties in debtor countries that would adopt a resistant posture for their public audience while still accepting the basic premise put forth by Germany and the European Union — that in the end, the responsibility to repay debts was the borrower's. Regardless of their public platform, these parties therefore accepted austerity and the associated social costs.

Syriza, however, did not. A moral argument was underway, and the Germans were tone deaf to it. The German position on debt was that the borrower was morally responsible for it. Syriza countered that, in effect, the lender and the borrower actually shared moral responsibility. The borrower may be obligated to avoid incurring debts that he could not repay, but the lender, they argued, was also obligated to practice due diligence in not lending money to those who were unable to repay.

Therefore, though the Greeks had been irresponsible for carelessly borrowing money, the European banks that originally funded Greece's borrowing spree had also been irresponsible in allowing their greed to overwhelm their due diligence. And if, as the Germans have quietly claimed, Greek borrowers misled them, the Germans still deserved what happened to them, because they did not practice more rigorous oversight — they saw only euro signs, just as the bankers did when they signed off on loans to Greece rather than restraining themselves.

The story of Greece is a tale of irresponsible borrowing and irresponsible lending. Bankruptcy law in European and American culture is a system of dualities, where expectations for prudent behavior are placed on both the debtor and creditor. The debtor is expected to pay everything he can under the law, and when that is ability is expended, the creditor is effectively held morally responsible for his decision to lend. In other words, when the debtor goes bankrupt, the creditor loses his bet on the debtor, and the loan is extinguished.

But there are no bankruptcy laws for nation-states, because there is no sovereign power to administer them. Thus, there is no disinterested third party to adjudicate national bankruptcy.

There are no sovereign laws dictating the point where a nation is unable to repay its debt, no overarching power that can grant them the freedom to restructure debts according to law. Nor are there any circumstances where the creditor is simply deemed out of luck.

Without these factors, something like the Greek situation emerges. The creditors ruthlessly pursue the debtor, demanding repayment as a first priority. Any restructuring of the debt is at the agreement of creditor and debtor. In the case of Cyprus, the government was prepared to protect the creditors' interests. But in Greece's case, Syriza is not prepared to do so. Nor is it prepared, if we believe what the party says, to simply continue crafting interim lies with the country's creditors. Greece needs to move on from this situation, and another meaningless postponement only postpones the day of reckoning — and postpones recovery.

The Logic and Repercussions of a Grexit

A Greek withdrawal from the eurozone would make sense. It would create havoc in Greece for a while, but it would allow the Greeks to negotiate with Europe on equal terms. They would pay Europe back in drachmas priced at what the Greek Central Bank determines, and they could unilaterally determine the payments. The financial markets would be closed to them, but the Greeks would have the power to enact currency controls as well as trade regulations, turning their attention from selling to Europe, for example, to buying from and selling to Russia or the Middle East. This is not a promising future, but neither is the one Greece is heading toward now.

Many have made a claim that a Greek exit could lead the euro to collapse. This claim seems baffling at first. After all, Greece is a small country, and there is no reason why its actions would have such far-reaching effects on the shared currency. But then we remember Germany's primordial fear: that Greece could set a precedent for the rest of Europe. This would be impossible if the rest of Europe was doing well, but it is not. Spain, for example, has unemployment figures almost as terrible as Greece's. Some have pointed out that Spain is now one of the fastest-growing countries in Europe, which would be impressive if growth rates in the rest of Europe weren't paralyzed. Similarly, Spain's unemployment rate has fallen — to a mere 23 percent. Those who are still enthused about the European Union take such trivial improvements as proof of a radical shift. I see them as background noise in an ongoing train wreck.

The pain of a Greek default and a withdrawal from the eurozone would be severe. But if others see Greece as a forerunner of events, rather than an exception, they may calculate that the pain of unilateral debt restructuring makes sense and gives Greeks a currency that they can at last manage themselves. The fear is that Greece may depart from the euro, not because of any institutional collapse, but because of a keen awareness that sovereign currencies can benefit nations in pain — which many of Europe's countries are.

I do appreciate that the European Union was meant to be more than an arena for debtors and creditors. It was to be a moral arena in which the historical agony of European warfare was abolished.

But while the idea that European peace depends on prosperity may be true, that prosperity has been lost. Economies rise and fall, and Europe's have done neither in tandem. Some are big winners, like Germany, and many are losers, to a greater or lesser degree. If the creation of a peaceful European civilization rests on prosperity, as the founding EU document claims, Europe is in trouble.

The problem is simple. The core institutions of the European Union have functioned not as adjudicators but as collection agents, and the Greeks have learned how ruthless those agents can be when aided by collaborative governments like Cyprus. The rest of the Europeans have also realized as much, which is why Euroskeptic parties are on the rise across the union.

Germany, the country most threatened by growing anti-EU sentiment, wants to make clear that debtors face a high price for defiance. And if resistance is confined to Greece, the Germans will have succeeded. But if, as I think it will, resistance spreads to other countries, the revolt of the debtor states against the union will cause major problems for Germany, threatening the economic powerhouse's relationship with the rest of Europe.

viernes, julio 03, 2015



Op-Ed Contributor

Don’t Bet on Syriza


JULY 1, 2015                 

                           Credit Bratislav Milenkovic                    
NEW YORK — The human costs of five years of austerity have been catastrophic for Greece but the decision to hold a referendum on Sunday will only make matters worse.
The one unambiguous benefit, for Prime Minister Alexis Tsipras, has been to unite his party, Syriza, which had been growing increasingly restive as the negotiations went on. Overnight, he has cemented his political base and strengthened his hand internally. Syriza is back in the position it likes best: standing for opposition to the global status quo.
But what has this done for the country as a whole? That the Constitution seems to exclude referendums on fiscal matters is perhaps a legal nicety but it highlights the government’s rather cavalier attitude toward existing political institutions. It talks about the people’s will but shows a worrying disregard for the democratic bodies and procedures it says it is protecting.
Mr. Tsipras has asked Greeks to vote on an already expired bailout package and has made clear his desire to see a “no” vote prevail. The only logical inference, although he denies this, is that he is willing to see Greece abandon the euro. He denies it because he knows this would be unpopular and a huge gamble.
He believes a “no” vote would let him return to negotiate in Brussels from a position of strength. This reveals a stubbornness to face facts that amounts to a kind of magical thinking.
Greece is not the only country with voters, and each of Mr. Tsipras’s fellow European prime ministers already has their own democratic mandate. Will they defy the will of their voters and cave in to save the euro? Almost certainly not to Mr. Tsipras, given the trust that he has frittered away over the past five months. Whatever he may say, the likely outcome of a “no” vote is thus an eventual return to the drachma.
If the electorate votes “yes,” more political uncertainty and new elections would be the likely outcome. At least abstention implicitly recognizes the futility of the whole exercise.
What Mr. Tsipras has fundamentally disregarded is Greece’s extreme weakness. On the one hand, it is weak like any small country, with limited capacity to affect the rules of international life. But it has the additional weakness of a poorly functioning economy and a crushing debt.
This rhetoric didn’t appear out of thin air. It bears the marks of the milieu that formed Mr. Tsipras as he grew up in the years after Greece’s seven-year military dictatorship ended in 1974. A student culture flourished in the following decades that placed a premium on activism, and saw a revolutionary potential in every high school occupation.

It was passionate, literate in Marxist theory, highly factional and partisan. Manifestoes and party lines proliferated. A lot of time was spent in meetings debating the democratic implications of everything from canteens to faculty appointments. Student leaders, obsessed by the history of the German occupation, devoured memoirs of wartime resistance heroes and dreamed of a struggle to rival theirs.

A few of these activists remained in party politics, a smaller number founded communes or became anarchists and a handful flirted with revolutionary violence. Many contributed in important ways to the flourishing cultural and intellectual scene that has emerged in Greece over the past few decades. Most got degrees and jobs and families. And some are now in government.
Having made pledges to voters that they can’t fulfill, Mr. Tsipras and his colleagues present this as their generation’s heroic moment. Bolshevism collapsed; wartime resistance was crushed. But perhaps, they hope, Syriza can lead the country to a new kind of revolutionary victory, striking a decisive blow against international finance capital.

I wouldn’t bet on it.
The last time Greece repudiated its debt was in 1932: a short-term recovery followed, which was already petering out when World War II began. Repudiating debt back then was a positive move because the entire world was doing it and the real costs of default were low.
This time around, the situation is very different. The consequences and costs would be far worse, the potential for domestically generated growth much less, and many of the benefits associated with Europe — Greece as an attractive site for foreign investment, putting its geopolitical position to good use, and the transformation in values that came with the opening up of what was 40 years ago a much more introverted society — will be put at risk.
Thanks to this ill-advised plebiscite, Greece faces major turmoil that will test the democratic institutions it established after 1974. The country doesn’t need a return to the worst excesses of student politics. Still less does it need the overheated rhetoric of violent struggle, national disaster and civil war that is already in the air. Sanity may yet prevail and a “yes” vote on Sunday may finally lead to the formation of the national unity government the country has lacked since the crisis started. If it does not, further political polarization and a future of growing pauperization on the margins of Europe beckons.