MacroPolis

The concept of learned helplessness was accidentally discovered by psychologists Seligman and Maier back in 1967. They initially observed helpless behaviour in dogs that were conditioned to expect an electrical shock after hearing a tone and they made no attempts to escape, even though they could avoid the shock by simply jumping over a low barrier. They developed a cognitive expectation that nothing they did would prevent or eliminate the shocks.

Learned helplessness also applies to situations involving human beings. Its effects can be seen in people. When they feel they have no control over their situation, people may also begin to behave in a helpless manner. This inaction can lead them to overlook opportunities for relief or change.

Over the last year, the Greek public has been conditioned, even by leading figures in its own government, to believe that Greece’s debt is sustainable. There seems to be a concerted effort by decision makers to instill the expectation that nothing can be done to change the situation and no alternatives should be sought.

Forget it

A country that effectively went bust because its political class had accumulated a debt of 299.7 billion, a burden of 129 percent on an economy of 232.1 billion, is now expected to collectively believe that its debt is sustainable and it should not pursue any debt relief. “Forget it Yiannis,” as Greece’s previous Finance Minister Yannis Stournaras admitted he was told by his German counterpart Wolfgang Schaeuble when he brought up the issue.

It spoils the narrative to argue that Greece’s debt as of the end of last June stood at 322.4 billion euros - almost 23 billion euros higher than in 2009 – or over 170 percent of GDP given that roughly a quarter of the economy has evaporated over the last five years and economic activity will reach just 182 billion euros in 2014.

In 2010 Greece was denied a debt restructuring by its eurozone partners although it was evident that one was necessary. Instead, Athens was offered a loan arrangement that would act as a temporary holding operation until an unprepared eurozone built a firewall around Greece to avoid contagion.

Had the Greek crisis spread to other weak nations in the periphery, core eurozone banks would have taken a massive hit. Ten years of integration in the monetary union would have created the perfect storm in the vicious cycle between sovereigns and banks.

The IMF reveals in its own evaluation document of the first Greek loan arrangement that Greece was denied the debt relief it needed because: “For the eurozone as a whole, there might be limited gain in bailing in creditors who subsequently might themselves have to be bailed out”

Conveniently, Greece’s solvency crisis was presented as a liquidity one, prompting the eurozone and the IMF to put together a loan package of 110 billion euros for a period of three years.

For a sense of scale, when the program was initially set up, out of the 87 billion euros scheduled to be disbursed between May 2010 and the end of 2011 - the period that Greece was expected to be fully locked out of markets – the eurozone and the IMF had no issue with laying a path as wide as 37.5 billion euros so existing private creditors, mostly French and German banks, got paid in full and escaped from Greece scot-free.

Another 10 billion euros were earmarked should Greece’s banks need any capital injections - although only 1.5 billion was drawn during the first program - and 21 billion euros to cover the public deficit including interest payments.

Over the program’s three-year period Greece was expected to pay back 88.3 billion euros of long-term debt via troika financing and a gradual return to markets.

Even if the troika had taken the most conservative approach and allowed re-profiling of debt maturities and lowering of interest payments of the same volume during the programme’s life, Greece would now be looking at a completely different debt pile and profile.

By way of comparison, when the eurozone realised Greece would need more financing without market access and considered it was safer by that time for the private sector to be bailed in, the new bonds that were offered for exchange in the PSI had a 30-year maturity period, no principal repayment before the 11^th year and a coupon of just 2 percent in interest payments to 2015 and 3 percent to 2020.

Non-concessionary

The eurozone instead chose punishing, or “non-concessionary,” interest rates at the start of the program. It charged Euribor plus 300 basis points and then added another 50 basis points as a handling fee. This just exacerbated the debt dynamics. The rates that were so punishing they pushed the budget’s interest payments to 15 billion euros in 2011, from 11.9 billion euros in 2009, before Greece lost market access. In 2009 interest payments represented 5.2 percent of GDP but in 2011 they shot up to 7.2 percent.

Greece has a further grievance in that the ECB offered private creditors who owned Greek bonds an additional path of escape via the SMP program, which exceeded 50 billion euros of the country’s debt that was deemed senior and was excluded from the PSI.

Even the arrangement to return to Greece the profits that eurozone central banks made from their Greek bond holdings is opposed by some within the eurozone who trot out the tired argument that this process is monetary financing.

Greece’s arguments for meaningful debt relief extend to the almost 50 billion euros it was obliged to borrow to keep its banking system afloat. The magnitude of the figure does not only relate to the PSI. The collateral damage of the austerity imposed on Greece was the destruction of Greek banks’ balance sheets, with 22 billion euros of the estimated capital needs resulting from the deterioration of the loan portfolio.

When the troika came to Greece it described a resilient banking system with good capital adequacy and non-performing loans of just 8 percent. Since then, though, the economy has fallen off the cliff, unemployment has shot up to 28 percent, household’s budgets have been destroyed through internal devaluation and businesses’ plans through severe loss of revenue. As a result, one in three loans are now in the red and despite a heavy round of state aid and a recent recapitalisation from the private sector, Greek banks still face uncertainty.

Their balance sheets were not done any favours by the deposit flight instigated by the repeated statements of European officials in 2011 and 2012 that either insinuated or outright threatened a euro exit for Greece.

It is not an unlucky coincidence that even though Greece cut 138 billion euros of debt -106 billion through the PSI at the start of 2012 and another 32 billion through a debt repurchase in December 2012 – it will close this year with more debt than when this miserable experience started. The Bank of Greece estimates that the true reduction on a net basis did not exceed 51.2 billion euros. This is a product of the eurozone denying a decisive solution from the start and never having a genuine intention of resolving the issue that was at the epicentre of Greece’s crisis: The debt.

Core eurozone governments did not want to find themselves on the hook for bank bailouts in their countries, the ECB vehemently opposed any debt restructuring up to the last minute and in April 2011 went as far as threatening to cut off Greek banks from its financing operations had Greece decided to pursue a debt rescheduling. The IMF never strongly argued the case within the awkward and politically confines of the troika.

Forgotten promise

The aversion of eurozone politicians and officials to deal with Greece’s debt is so strong that they do not have any reservations about blatantly backtracking on their pledge to discuss further debt relief measures once Greece achieves a primary surplus. They have pushed the matter from the end of 2013, to until after Eurostat confirmed the surplus in April this year, then after the European Parliament elections, to after the summer and not before the conclusion of the upcoming review. We have gone through almost an entire year of embarrassing excuses to avoid a discussion on this issue even though when it does finally happen it will be in a contained environment, focusing only on the eurozone’s preferred terms of loan extensions and some further interest rate reductions.

There is a lot to debate about the pace, the intensity and the mix of austerity but the necessity to restore Greece’s finances back in 2010 is beyond any doubt and without the eurozone and IMF loans a default would have been severe.

At the same time, justifying certain aspects of the Greek bailout only by pointing to the severity of the alternative of an outright default is an indication that those refusing to discuss true debt relief have run out of meaningful arguments.

The German finance minister certainly does not want to go to his Parliament and explain that much of the Germany's share of the Greek loans was so Hypo Real Estate could reduce its exposure to Greece, an exposure which according to a recent article in the German press was as much as all the other German banks combined.

For how long are we going to ignore that Greece was coerced into becoming the conduit for a quasi core eurozone bank bailout?

Relief needed

If the country is to have a genuine shot at recovering from the deepest depression in history, it cannot be left to achieve that with a debt of such a magnitude, while being expected to generate an annual primary surplus of 8 billion euros to cover debt repayments for more than a decade.

It is economically irresponsible and nationally damaging to sell country assets at knocked down prices via fire sale processes that have been questioned by the courts. It is socially damaging not to be given the opportunity to redirect budget resources and allocate any spare fiscal capacity to restore social welfare, the safety net for the most vulnerable and more targeted public investment that will generate much needed growth and jobs.

When the European Commission called via a report in July for 450 billion euros to be invested over the next six years in human capital, employment, and expansion of the economy’s technology and knowledge base, Greece cannot leave its own human capital to wallow in long-term unemployment or see its talented young people leave the country.

The government now seems to be abandoning its strategy of seeking debt relief in favour of securing the swift departure of the troika; a combination of institutions that were put together to deal with an emergency debt crisis and will be leaving Greece with more debt, a broken economy, 27 percent  unemployment, wages down by 24 percent, disposable income reduced by a quarter, household expenditure shrunk by 27 percent and 34.6 percent of the population at risk of poverty and social exclusion.

This is not just a fiscal adjustment program that went wrong, this is economic and social devastation that we cannot allow to be passed of as a success. After the price it has paid over the last few years, we should not permit Greek society to slip into learned helplessness on the debt issue.