Walter Molano is the head of research at BCP Securities, an emerging markets-focused investment bank.
More than two thousand years ago, Aristotle stipulated that the art of rhetorical arguments was divided into three fundamental styles. Logos was the reasoning behind an argument. Pathos appealed to emotional responses, and Ethos was based on the character of the author. Aristotle wrote that the most persuasive appeals skilfully combined all three styles to deliver a convincing conclusion. Two thousand years later, as Athens tries to persuade the world that it is on the path to reform, it must reach back to its ancestors to present its case. However, it is moving in an antithetical direction.
The first impediment consists of the fundamental problems confronting the Greek economy. At first cut, it seems that the country faces a liquidity problem. On May 19th, Greece amortizes an €8.5bn 10-year bond. Given that the country’s CDS spreads are soaring, it could not raise the funds to do so. However, the problems go well beyond issues of liquidity. The main problem is a lack of competitiveness. Between 2000 and 2009, Germany’s deflator increased 10 per cent. Greece’s soared 33 per cent. This jump in relative prices was the reason why the county’s current account deficit widened to 9.7 per cent of GDP in March. To make matters worse, the country’s fiscal deficit reached 13.7 per cent of GDP in 2009. The only way to finance the shortfalls was through the issuance of debt, which is now running at more than 120 per cent of GDP. Therefore, the accumulation of additional debt will do little to convince investors that the crisis is over. On the contrary, another €120bn in euro liabilities will only push the country to insolvency.
Moreover, no investor will want to lend to a country where the IMF and the ECB stand as senior creditors. The Argentine case painfully reminded us that the multilateral lending agencies are senior creditors, and that they do not tolerate haircuts. That means that the brunt of any future restructuring will be assumed by the private sector. The only way Athens can logically convince investors that it is taking measures to realign its relative prices is either through a credible deflationary adjustment or devaluation/default. Otherwise, it will need to use Pathos and/or Ethos to make its appeal.
Unfortunately, it is hard to feel sorry for Greece. The average retirement age is 53. Last year, Germany increased its retirement age to 67. Public sector workers and pensioners receive multiple bonuses throughout the year. With a per capita GDP of $32,000 per year, it is one of the highest in the world. However, Greece’s productivity is low. The Greek public sector accounts for 40 per cent of the economy, and tourism and shipping are the only major components of the private sector. While Spain’s unemployment rate recently crested over 20 per cent, it was only 11 per cent in Greece. A comfortable lifestyle, thanks to an overvalued exchange rate and generous transfers from Brussels hardly brings tears to investors’ eyes. Moreover, the public is staunchly opposed to the economic austerity demanded by the IMF, ECB and EU. Thousands of protesters took to the streets on May 1st to rail against the austerity measures that Prime Minister George Papandreou was forced to introduce. Although the measures were in line with what Greece must do, most people doubt that the government will follow through. This leaves ethos as the country’s only remaining appeal.
Regrettably, Greece has one of the least ethical reputations of the euro zone. Besides employing investment banks, such as Goldman Sachs, to move its liabilities off balance sheet, it is notorious for its creative accounting and the under-reporting of its fiscal shortfalls. For years, the European Statistical Agency, Eurostat, warned about the quality of Greece’s statistical information. Only as recently as a few weeks ago, it revised Greece’s 2009 fiscal deficit by one point higher. The infamous cost overruns of the 2004 Olympics highlighted the country’s mismanagement, corruption and inefficiency. Last of all, Athens’s recent revision of the national income accounts to include illicit activities, such as prostitution, as a way to improve the country’s credit indicators, did little to improve its ethical reputation. Aristotle was right when he described Logos, Pathos and Ethos as the keys to making a convincing argument. However, Athens, Germany and the IMF are not doing anything to improve the credibility of such a flawed state. This means that the new bailout package will not do much to convince investors that it is safe to return to Greece. On the contrary, it will only buy a little more time for investors to liquidate their positions, and raise more doubts about the fate of the other European states. Unfortunately, a little emphasis on basic Aristotelian concepts could have allowed policymakers to develop a more convincing appeal.
Related links:
Spain’s PM decries market ‘madness’ – FT Alphaville
Going nuclear at the ECB – FT Alphaville
Sovereign woes are a pain in the periphery – FT Alphaville
Merkel’s calls for ‘orderly insolvencies’ threaten more disorder – FT Alphaville