Posts Tagged ‘Greek debt restructuring’

Η Ελληνική οικονομική κρίση και ο ρόλος της Γερμανίας

The Political Economics of Europe’s Resurrection

EurFeatured imageope has died and resurrected itself several times in the past but more recently during the first and second world wars. Understandably the European Union’s inception is rooted in the dismay against these wars. Many Europeans now proudly place Euros on the graves of their ancestors who died during the second world war; ironically they succeeded where their ancestors failed.

Greece suffered from political turmoil and a weak currency in the past. Economically premature ascension to the European Union and to the Eurozone, possibly fueled to a small extent by creative accounting arguably done by other countries as well, was the means to secure political stability and a stable currency. For a country that relies on imported consumption and investment goods, the constantly needed Drachma depreciation caused imported inflation and instability. The added benefit of joining the Euro was easy access to credit at terms near those for Germany. But when in recession, you cannot bail yourself out by depreciating your currency, since the value of your currency is now controlled by a group of other countries. And so the problem is born.

Germany, in particular, knows well that a depreciated Euro effectively reduces the prices of European goods. But Germany does not need this because it can still move its Mercedeses, BMWs and Porsches at higher prices. Plus their accumulated wealth and purchasing power is in Euros. Germany also argued that they were operating near capacity and had no room for productive expansion. Yet their output gap was negative, with room for expansion. Some people argued that if Germany exited the Eurozone it would be a win-win situation (the Deutsche Mark would appreciate and the Euro would depreciate). But Germany has now reluctantly accepted ECBs quantitative easing, so there may be no scope for that. And Germany, the engine of Europe, is a net contributor of funds.

Most economists probably agree that once the public debt-to-GDP ratio exceeds 90% or so the debt cannot be serviced. The Maastricht criteria in Europe stipulate a limit of 60%, perhaps so that even with miscalculations or misfortunes the real debt-to-GDP ratio will be reasonable. There is more market leniency with countries whose debt is held internally to a large extend (e.g., Italy) or have a strong industrial base (e.g., Japan). Private debt is typically ignored when the country is developed enough so that such debt is collateralized (e.g., Ireland).

The Greek governments tantalized by easy credit, and while experiencing economic euphoria and high growth rates, before the crisis erupted, thought they could get away with a high debt-to-GDP ratio because the heavyweights, Germany, France and Italy, exceeded the 60% threshold, and second, a favorable GDP expansion would restore the ratio. But the market dice were cast against them.

Whereas the Fed has an inflation and unemployment mandate, the ECB only has an inflation mandate which is exacerbated by German excessive fears of inflation (traced back to hyperinflation in the Weimar Republic). So while the Dollar was correctly being depreciated through quantitative easing policies in the U.S., the Euro was kept strong yielding unnecessary high pride to the Europeans. And high were kept the interest rates to ease fears of inflation. And a problem which could have been solved in short time through expansionary monetary policies blew itself into gargantuan proportions. Many people speculate that if the current ECB President were not Italian, we might have not seen the quantitative easing policies recently announced. But are they a little too late?

And we come to the “troika” (i.e., European Commission, ECB and IMF) prescribed, well-intentioned but bitter, medicine: austerity coupled with structural reforms. Why austerity? To pay back the loans and regain access to credit markets as soon as possible. And to penalize the Greeks for not playing by the rules. After all, if you tolerate moral hazard and reward it with forgiveness, it is bound to happen again. Why reforms? To stimulate growth and economic development. But structural reforms will primarily bear fruit in the long-run. And austerity jeopardizes short and long-term growth prospects during a recession. In other words, a well-intentioned, albeit ill-conceived plan. Some people may argue that the surgery was successful, as pre-election economic data for Greece connoted, but the patient has certainly died. It does not take much to see this, just drive around Athens and see the pawn shops (almost unheard of in Greece before the crisis) and the people searching the garbage dumpsters for items to pick up and sell. Are they given a death sentence for electing inadequate politicians? It may be a more efficient use of resources to let unproductive companies default and dissolve. But can this be done to a whole country, indiscriminately to all its citizens, when this country happens to rightfully be the cradle of western civilization?

And so we got polarization. New Democracy and PASOK, the culprits behind the economic failure and the undersigners of the hated (by the people) Memorandum of Understanding that brought about the austerity and reforms, fail tragically in the recent elections. Why did Samaras rush into trying to elect a President prematurely? Because he had lost public support and presumably had warned the troika that the latest demands would make the government fall anyway. Self-fulfilling prophecies perhaps? And here we are, a few steps before the finish line, back on the hills below the mountain, like Sisyphus. The Greek tragedy is not an uncommon tragedy.

Is Tsipras’ new government on a collision course with the troika? It certainly wanted the Greek public and the troika to think so. But default as a threat point is not credible here. The promised default cannot be delivered now. Debt restructuring should have happened before Greece sought IMF and European help. There is no default premium on IMF and ECB loans, and it is imperative that they are not defaulted on. But a large chunk of debt is held by Greece’s Eurozone partners. It would be national suicide to default on these loans. Granted, the virtually dead have nothing to lose. But they do. All it takes is a few wrong steps to lose European political support and be outcasted, having to resort to the dreaded Drachma in order to pay the abundant governmental employees. And then what? Immediate serious devaluation and Argentinization (in Greek, Αργεντινοποίηση). The good case scenario is an agreement on further extending the maturity of the loans with slight improvements in the interest rate terms. If Syriza also follows up with fighting corruption (a promise which at least initially has already been followed through the appointment of a proven anti-corruption czar, secretary Nikoloudis), this is a good start. Will the Greek public swallow a simple extension of the loan maturity instead of the promised haircut and abolishment of the “Memorandum”? Maybe yes, maybe not. It will be up to Tsipras’ rhetoric to convince them; and he is good at that. If not, the new government will collapse in the near future. And then Samaras will take the reins again.

So what’s needed for resurrection? Quantitative easing is a good start, albeit late in the game. Europe needs a Pan-European growth vision, needs more money directed towards R&D, education, innovations and entrepreneurship, especially in the South. Europe has now exhibited solidarity, but if they cannot handle the Greek problem convincingly, they certainly cannot handle the much bigger Italian problem. And Italy is too big to save. Either the EU is dissolved, or there is more integration. In the first case, the Euros on the European graves will be meaningless. In the second case, Europe can go back to its root principles of social egalitarian democracy and avoid the Sisyphus vicious cycle. Only full stakeholders should remain in an integrated Europe. You cannot be enjoying the benefits of a customs union and a common market without willingness to share the risks. And for God’s sake, change the ECB mandate.


How to Restructure Greek Debt

November 17, 2010 Leave a comment

Read this article on “How to Restructure Greek Debt,” by L. C. Bucheit and G. M. Gulati.