Greece Prime Minister takes on financial speculation

Prime Minister of Greece, George Papandreou spoke at Brookings recently. The speech is a must read as he talks about Greece’s woes and the measures taken by Greece government  to ease the crisis situation.

Ladies and gentlemen, 53 years ago this week, on March 12th, 1947, President Truman rose before a special joint session of Congress. He was there to warn America of a looming new crisis, a crisis the revolved in part around Greece but was in essence a European crisis, one that directly affected America’s interests. In that speech, President Truman introduced a vision and laid down the sturdy foundation for policies and institutions, such as the Marshall Plan and the Bretton Woods arrangements that enabled our two continents to rise above the crisis and build an unprecedented era of shared peace and prosperity.

 So today I have come to Washington this week to speak about another crisis in Europe. This crisis too revolves in part around Greece. This crisis too very much involves America’s interests. And as in 1947, if we act with sufficient foresight, I believe this crisis also contains opportunities, great opportunities to strengthen our respective countries and our shared interests for decades to come.

He talks about Greece woes and says apart from huge budget deficit it also faces a credibility deficit:=

And we know Greece faced not only a fiscal deficit, but I would call it a credibility deficit. As a matter of fact, I call that the biggest deficit we had as a result of the fabricated budget figures our predecessors had published. So our partners in the European Union were understandably skeptical about our promises to rein in the deficit and crack down on issues such as corruption, but today we are demonstrating the decisiveness of Greece.

Apart from usual cost cutting measures, he talks about other challenges and some innovative solutions:

At the top of the list is tax evasion. To give you just one measure of the scope of that problem, fewer than 5,000 Greeks declare incomes of $100,000 Euros or more, and that pattern must end, and it will end. We will be prosecuting offenders, no matter how rich or powerful, to show that we mean business. The rule of law means that the law applies to all. Such changes, we are sure, will bring in billions of unpaid taxes and help underpin our return to fiscal health.

We’re also tackling the challenge of corruption head-on. Within the first weeks of my administration, I dismissed a deputy minister and friend who was trading minor favors for voters. Corruption, of course, is hardly unique to Greece, but it is a problem we are determined to address as part of our broader reforms.

To usher in a new norm of transparency, we are televising our cabinet meetings.

We have launched an open online application process for public sector jobs, even at the highest of levels, and passed a law so that every government expense will be published online, a first in Europe. Every signature, from mine to the civil servants in local government, will be online.

We post all our proposals on the web to allow for deliberation and participation in a Web 2.0 application which empowers our citizens, puts a check on lawmakers and strengthens the quality of our policies.

Watching cabinet meetings live is going to be very exciting.

He takes on financial market speculation for just creating panic and leading to higher interest rates on Greek debt:

So Greece may be doing all the right things to revive our economy, but not everyone may want us to succeed, and this brings me to my second point — the need to address the threat of speculation and ill-regulated financial markets, a threat that imperils not only Greece but the entire global economy.

I see that threat every day as we manage this crisis, for the immediate problem we face is not dealing with the recession but in servicing our debt. Despite the deep reforms we are making, traders and speculators have forced interest rates on Greek bonds to record highs. Many believe that there have been malicious rumors endlessly repeated and tactically amplified, that have been used to manipulate normal market terms for our bonds. Partly as a result, Greece currently has to borrow at rates almost twice as high as other European Union countries. So when we borrow 5 billion Euros for 5 years, we must pay about 725 million Euros more in interest than Germany does.

It would be like let’s say California having to borrow at a rate with 5 billion Euros which would mean that they would have to pay 725 million U.S. dollars more than another state in the U.S.

And when you have a common currency that is simply not viable. So we will have a very hard time in implementing our reform program if the gains from our austerity measures are simply swallowed up by prohibitive interest rates.

This whole affair has a horrible sense of déjà vu. The same financial institutions that were bailed out with taxpayers’ money are now making a fortune from Greece’s misfortunate while those same taxpayers are paying the price in deep cuts to their salaries and social services. So unprincipled speculators are making billions every day by betting on a Greek default.

And all this despite Greeks taking all the necessary steps:

All this may sound a bit familiar to American ears. Yet, unlike the bankers, Greece isn’t asking for a bailout, let alone a bonus. Indeed, we have slashed the salaries of every single government official. I myself and my cabinet members have all taken significant pay cuts in our salaries.

Yet, our correct decisions may still be undermined by speculation, and to me this is a challenge to our democratic institutions. An elected government making huge changes with the consent of its people is being undermined by concentrated powers in an unregulated market, powers which go beyond those of any individual government.

He calls for cooperation between Europe and US to curb this speculation:

That’s why Europe and America need to work together, to say enough is enough to these speculators who only place value on immediate returns with utter disregard for the consequences of the larger economic system, not to mention the human consequences of lost jobs, foreclosed homes and decimated pensions.

These market manipulations which were at the heart of the banking system’s collapse are still legal practice. So it’s hard to fathom that we have allowed this to continue after what we went through. It is common sense, enforced by insurance regulators, that a person is not allowed to buy fire insurance on his neighbor’s house and then burn it down to collect on that insurance. Yet, that is exactly what is done in the market for credit default swaps. This malaise has led banks to foreclose on the homes of millions of Americans, but this malaise now haunts not only Greece but all of us.

Read the whole thing. He revisits Greece history to show how these challenges are not unique and have existed in the past as well.

All this is fine but he cannot ignore the fact that Greece has been in debt problems 50% of the time since its independence (see this interesting history as well). So the problems of debt have always existed and not really worked on. So, the meltdown had to occur at some point of time. Financial speculators may be making life tough but Greece problems have existed long before.

But still, we need to look at this whole idea of financial markets activity just oriented towards short term returns. Some say that is the way financial markets work but others like Papandreou disagree. Financial markets are important as they help discipline the government but the herd behavior (with all worrying about Greece) in markets also acts as a deterrent in governments trying to discipline themselves.

The biggest irony in all this is as Papandreou and others point out, the sovereign debt crisis is a result of saving financial firms and economic activity from collapsing. How do policymakers and economists address this issue? If the financial firms are not saved, it leads to a deep economic crisis. If they are saved, it leads to deep debt crisis.

All this leads to acting on financial regulation quickly. These events make the case for a some kind of provision in good times to prevent such series of crisis. But then we are just in thinking mode with new proposals every hour. There is not enough action.

3 Responses to “Greece Prime Minister takes on financial speculation”

  1. Greece Prime Minister takes on financial speculation « Mostly … Economic Finance news Says:

    […] Here is the original: Greece Prime Minister takes on financial speculation « Mostly … […]

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    […] then like Greece PM looks at the role of speculators for undoing much of the action by […]

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    […] most European policymakers blame the financial markets for their short-termism strategies. But are finally bailed out by the […]

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