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    Debt stock of Greece will grow further with the unlawful bailout package.

    Güven Sak, PhD06 May 2010 - Okunma Sayısı: 1111


    European Union is going through hard times. There are three recent challenges the Union is faced with. First, €80 billion of €110 billion bailout plan prepared for Greece will be financed by EU countries and the rest will be financed by the IMF. So, where is the challenge?  It is quite simple: As per the Lisbon Treaty, the constitution of the EU, bailout plans cannot be implemented. The 'every man for himself' provision in the Article 125 of Lisbon Treaty was revoked with the bailout plan for Greece. So, the bailout plan for Greece is unconstitutional. Thus, it is necessary to revise the EU constitution which was adopted after a long period of efforts. Life has superseded the constitution. This is the first challenge the Union is faced. There exists a constitutional crisis.

    The second challenge is economic. A big bailout plan for Greece is designed. Nonetheless Greece has to pay 5 percent interest rate in exchange for the share of EU in the credit. What point did we stress in the first commentary of this week? We said: 'Bailout plan cannot be based on market interest rates.' But it is now. Then we cannot call this a bailout plan. This is at most a time saving plan for European banking system. There is nothing much to do for Greece. The reason is quite simple: with this unlawful bailout plan, the ratio of domestic debt stock to national income will increase from 120 percent to 150 percent. This is what we call an 'oxymoron' or what Hodja Nasrettin says "If this is the cat, where is the meat?" If this is supposed to be a bailout plan, if Greece will tighten the belts and reduce budget deficit by 11 percent, how does the domestic debt stock rise? It rises because the interest rate on the liquidity to be injected with the bailout plan equals market rate. And this is because of the EU constitution.

    So if the share of domestic debt stock in national income increases, what does tightening the belts to achieve primary surplus imply? The challenge EU is faced with this respect is as follows: Greece bailout plan will not solve the problems of Greece or the EU. The crisis will spread all around the EU and then the rest of the world through balance sheets of banks. How is this going to happen? Evidently through balance sheets of banks which purchase Greece's government debt securities (GDSs). If a country has trouble in turning over the domestic debt stock corresponding to 120 percent of the national income, that country cannot turn over the debt stock corresponding to 150 percent of national income regardless of how solid the implemented measures are. This is not a Greek tragedy. This is torture at national level. This is a Greek torture.

    So, what will happen? Greece's GDSs will either remain unpaid or be monetized. The former is more possible since Greek government do not issue Euros. Then what? First, liabilities of European banks will remain unchanged while assets will decrease. And we will have a new 'who has what in their balance sheet' game. Banks will cease transactions with each other. We have to start taking measures immediately. A new wave appears to be approaching.

    So, what is the challenge for the EU? With the unlawful bailout plan, things will arrive at a place where the debt of any member country is considered as the debt of the EU. In this case commentators will soon stop to examine the share of debts in EU countries' national incomes. In fact this tendency has already become to emerge. Do you know the ratio of total domestic debt stock across the EU region to Germany's national income? It is 330 percent! It is quite high indeed. In the last instance EU's debt is considered as Germany's debt. So this is the second challenge EU is facing. Coupled with the constitutional crisis, there exists a large debt crisis that can encompass the continent as a whole.

    The third challenge is directly political. European Union countries do not have the tools to intervene in immediately to tackle the crisis. They do not have tools that allow intervening in rapidly evolving crisis quickly. EU was established and then enlarged with political decisions. Greece crisis has proved that EU's enlargement solely upon political decisions was not a beneficial thing. The main logic of the enlargement process turned into waste with recent developments.

    Let us conclude with an issue we have been emphasizing for some time now. For Turkey, there are two questions to ask. At the point we have arrived, is Turkey's membership still on the agenda? Note that we were to fulfill our commitments this year and close the deal. This is the first question to keep in mind. Second question is soon will there be a European Union to become the member of? The answer to this second question is highly doubtful.

    We are going through interesting times.

    We shall take a closer look at the possible implications of these developments on Turkey. We shall examine and get prepared.


    This commentary was published in Referans daily on 06.05.2010