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Sympathy for the Schäuble

Things are still fluid, but the time for kicking the can is over. Greece agreed to re-work their sovereignty configuration (what a phrase) because the reform package demanding it is less painful to Greece than what the market would bring down on their head. It’s as simple as that. In exchange for debt relief, they agreed to post an estimated €50 billion in assets as security on any future lending. Nothing like pain for feeling motivated.

This is exactly what a cold-eyed accountant would demand from any debtor. As a creditor-the guys holding the bag when things go awry- collateral goes hand-in-hand with restructuring. And restructuring isn't fun. It is a painful rebalancing of the books. But getting reveneue in line with expenses is a necessary part of any restructuring, whether a company or a sovereign. Sovereigns aren't used to it, and socialist governments are buffoons from beginning to end and think it is all a game until they get throttled with such demands.

You knew it had to get ugly. You knew it had to get emotionally charged. When one side has shown no meaningful intention of making reforms that return them to solvency and the other side is weary of multi-rounds of financial rescue, there was no other way.

To get both sides back to the table, Greece had to get a taste of how hard and merciless the market can be to a severely indebted country with no access to credit markets. They figured out the pain was far greater than the conditions of just about any bail-out. The EU had to get real reforms and collateral to put any more cash into the situation. Looks like the third time around is the charm.

Taking a very sympathetic view of the Troika position—perhaps a too sympathetic view—they are not looking to punish or inflict unnecessary pain. They are looking for meaningful reforms that will harmonize Greek society and institutions in more or less the same way that the rest of EU institutions are constituted. In short, Greece has to transform into something more like the Eurozone and less like a banana republic otherwise they lose the posted collateral.

The required reform package is decent and actually reasonable steps toward getting Greek finances in shape. But they are necessarily intrusive in the sovereign prerogatives of an elected socialist government that hasn’t the first clue about how to resolve the problems the country faces. They are infuriating to voters told that “sticking it to the man” offers a viable solution to insolvency. They are frightening to the established elite that has made an art-form of tax evasion and corruption.

See for yourself. They are listed below (with some commentary):

  • Streamline VAT (balance your books by enhancing revenue and making flows transparent)

  • Broaden the tax base (improve asset quality by share tax burdens across society, not by taxing private enterprise out of existence)

  • Reform the pension system (Entitlement spending expense needs to reasonably match revenue)

  • Adopt a civil code of procedure (This is huge and will mean wholesale legal transplantation of an existing commercial code from somewhere)

  • Safeguarding the legal independence of the Greek statistical office (Make your numbers trustworthy and improve quality)

  • Full implementation of automatic spending cuts (there has to be a primary balance)

  • Meet bank recovery and resolution directive (there has to be a thorough purging of the excesses and the unfit cannot survive regardless of who their cronies are)

  • Deal with non-performing loans (NPLs) in a consistent way (actually sell assets to the best cash offers, not to cronies or those offering kick-backs on the side)

  • Privatize the electricity transmission grid (de-socialize, not re-socialize)

  • Ensure independence of privatization body TAIPED (the revenue-maximizing bid gets lifted,

  • De-politicize the Greek administration (Insulate Greek government officials from those that lose from these reforms)

  • The Troika will return to Greece (Greek will need a sign-off on everything before acting)

Maybe one day Greeks will look back at Schäuble as a stern taskmaster that pushed through what was needed, but he could have done it differently. Unlikely. The guys that force through the tough and painful decisions are rated lower than the devil himself. It would take centuries for this truth to come to surface. Long before then, he will be forgotten like all us bean counters.

He deserves a beer for getting things done, right or wrong. Not the weak American beer either.

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