Saturday 17 March 2018

George Papandreou: face of the crisis

Smooth-talking Papandreou could well hold the future of the eurozone in his hands

As its financial crisis deepens, Greece looks set to become the first eurozone country to call in the IMF to restructure its debts. However, regardless of the eventual outcome, Greek prime minister George Papandreou has become the public face of the crisis.

This week the Greek financial crisis went nuclear. As the markets lost patience with the EU's seemingly endless efforts to "solve" the crisis, the spread on Greek government bonds over German bonds ballooned to more than 460 basis points (4.6pc) and the cost of insuring Greek public debt against the possibility of default rose to prohibitive levels.

At one stage this week, it was costing €470,000 to insure €10m of Greek government debt. That and the huge premium over German bonds that investors are now demanding to hold Greek government bonds demonstrates that the markets have lost faith in the EU's attempts to prevent Greece defaulting on its €300bn of debts.

Unless the EU can devise a credible solution before then, matters are likely to come to a head next month when Greece needs to roll over €11bn of maturing debt. If this week's developments are any guide, Greece will only be able to raise this money on usurious terms. With the yield on 10-year Greek government bonds exceeding 8pc at one stage this week, the cost of servicing its debt will soar over the next few years, even if it could persuade investors to lend it the money.

This combination of soaring bond yields and a still-shrinking economy threatens to make a nonsense of the Greek government's proposals to cut its budget deficit from 12.7pc to less than 3pc of that country's GDP over the next three years.

The Greek financial crisis has opened up the contradiction that lies at the heart of the eurozone. With no central eurzone treasury, there was always the implicit assumption that the richer EU countries, like Germany, would ultimately come to the assistance of any weaker eurozone country that got into financial difficulty. This was despite the fact that the 1992 Maastricht Treaty explicitly prohibited such a bailout.

Now that push has come to shove, Germany is sticking to its guns and rather awkwardly insisting that the Maastricht Treaty actually means what it said.

While it appeared as if the eurozone countries had agreed a €22bn bailout package for Greece last month, the Germans insisted that the rescue could only be implemented if the eurozone countries voted unanimously to do so, thus giving Germany an effective veto.

With German Chancellor Angela Merkel insisting that Greece pay "market" interest rates on any bailout cash it receives from other eurozone countries, last month's deal is effectively dead. No Greek government could possibly contemplate paying anything like the current interest rates being demanded by the market and hope to remain in office.

With the EU's "rescue" package having come up short, it is now virtually inevitable that Greece will turn to the IMF, possibly as early as next week, to lend it the money it needs to fund its budget deficit and refinance existing debt as it falls due for repayment. Financial analysts estimate that any rescue package would need to provide up to €50bn of cheap loans in order to be credible.

In the modern media-dominated era every crisis seems to need a public face. Brian Lenihan has filled that role in Ireland, while George Papandreou has performed a similar function in the Greek crisis. Ever since the newly elected Greek government shocked financial markets by revealing in December that its predecessor had massively under-stated the country's budget deficit, Papandreou has been a permanent fixture on our TV screens.

If, with his slick, personal PR and totally fluent American-accented English Papandreou appears very American, it's because in a sense he is. He was born in St Paul, Minnesota, in June 1952, the son of Andreas Papandreou and his then wife, American Margaret Chant. He spent the first seven years of his life in the United States before returning to Greece in 1959. He left Greece once again after the 1967 Colonels' coup, only returning when democracy was restored in 1974.

However, despite having spent most of his formative years abroad and having been largely educated outside the country, Papandreou remains a very Greek figure. Both his grandfather, George Papandreou senior, and his father, Andreas Papandreou, also served as Greek prime minister.

Unlike his father, who despite his American education and wife, always advocated strongly anti-American policies, George Papandreou has always adopted a more emollient tone in his dealings with Uncle Sam and other countries. As foreign minister between 1999 and 2004, Papandreou worked hard to improve relations with Greece's traditional enemy Turkey. In this he has tended to follow the example of George Papandreou senior, who unlike the firebrand Andreas, was inclined to govern from the centre.

This didn't stop him from inheriting the leadership of his father's old party, the grandly titled Panhellenic Socialist Movement (PASOK), in 2004.

He spent the next five years as leader of the opposition before coming to power following the October 2009 general election. In addition to becoming prime minister, he also became foreign minister.

It is a testament to the power of nepotism in Greek politics that his predecessor as prime minister, Kostas Karamanlis, is the nephew of former Greek prime minister and president Konstantin Karamanlis. Talk about keeping things in the family.

With Germany seemingly determined to block anything that smacks of an EU bailout, and with borrowing costs having risen to prohibitive levels, IMF intervention now seems inevitable. The IMF would lend money to Greece at a far lower interest rate than it would pay if it borrowed from the either EU or on the open market.

The downside is that in return the IMF would insist on swingeing spending cuts. Would Papandreou be able to sell this to the electorate? Previously announced austerity measures which included such modest steps as freezing public sector and higher fuel and tobacco duties brought hundreds of thousands of people on to the streets. Could Greece's still fragile democracy survive this stress?

Perhaps even more vulnerable than Greek democracy is that country's membership of the eurozone. It doesn't help matters that a previous PASOK government cooked the books to ensure that Greece met euro membership criteria in 2001. This, when combined with the more recent evidence that Greece was still fiddling its economic statistics, has merely reinforced German determination not be seen to encourage Greek misbehaviour with a bailout package.

The tough line being taken by Germany has in turn stoked Greek resentment, where memories of the brutal 1941-44 Nazi occupation are never far beneath the surface. In February, deputy prime minister Theodoros Pangalos spoke for many Greeks when he blamed the crisis on Germany's theft of the Bank of Greece's gold reserves during World War II.

This renewed bitterness means that Greece is unlikely to meekly accept its fate. If it must go the IMF, what are the chances that it will seek to mitigate the pain by leaving the euro and restoring Greek competitiveness through a lower exchange rate? Despite the apparent weakness of his position, the smooth-talking Papandreou may hold the fate of the euro in his hands.

Irish Independent

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