Economics
Europe's debt crisis
The implausibility of denial
May 11th 2011, 19:39 by R.A. | WASHINGTON
I APOLOGISE if you all are growing weary of our insistence that Greek default is inevitable (here's Buttonwood making the point just this morning). If we repeat ourselves, it is partially because the gap between reality and the message coming from European leaders is so yawning. Greece cannot continue on as it is doing now. And as Martin Wolf notes today:
If one takes seriously the view that any debt restructuring must be ruled out, advanced by Lorenzo Bini Smaghi, an influential Italian member of the board of the European Central Bank, official sources must finance Greece indefinitely. Moreover, they must be willing to do so on terms sufficiently generous to make a long-term reduction in the debt burden feasible. That is possible. But it is a political nightmare: the moral hazard involved would be enormous. Greece would lose almost all sovereignty indefinitely and resentments would reach boiling point on both sides. Non-European members would also prevent the IMF from offering such indefinite largesse. The burden would then fall on the Europeans. It seems unlikely that needed agreement would be sustained.
Unlikely is an understatement. The alternative is a restructuring, but officials at the ECB and elsewhere continue to protest the idea that this is necessary. There even appears to be an emerging agreement about the broad strokes over what kind of restructuring is necessary. As The Economist wrote in April and as Barry Eichengreen suggested yesterday, the Brady Plan, through which Latin American and Eastern European debts were restructured in the 1980s, is the right framework to begin with.
Even Timo Soini, chairman of the economically left-wing Finnish fringe party "True Finn" agrees:
For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country's debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.
The question, if all of this is so blindingly obvious, is why Europe is delaying action. The charitable explanation is that leaders are working frantically behind the scenes to make sure they have their procedural ducks in a row before announcing anything official. The less hopeful explanation is that Europe's leaders recognise the need for restructuring but can't reach a political agreement on how to handle the associated costs. And the really unsettling explanation is Mr Wolf's: that Europe is just hoping to put things off as long as possible in the hope that something good happens. But bad things can also happen while you wait.
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Readers' comments
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@shaun39:
And how do you propose the Greek government handle the many thousand soldiers that it just laid off? Unemployment benefits? Expensive pensions? Either way, it is going to blow up the Greek society.
Doug, I think he meant the balanced Greek budget when he said it wouldn't happen any time soon. Not the restructuring.
"Perhaps when Greece reaches a balanced budget and doesn't need any more support it will restructure, but to think that this would happen in 2013 is plainly idiotic." I must be dumb as a box of rocks, then, because I think it would happen tomorrow if it weren't for a small number of heroes busy wrecking everything.
The deficit has to be brought down - for the most part, that will be slow and painful.
However, most of the deficit could be covered (over the next 3 years) by selling all military assets, privatizing state-run industries and selling land for development (with development permission).
Greek interest payment for legacy debt is about 5% of GDP. Military spending is 4.3% of GDP, and constitutes wasted resources. Add two and two - if the government can just bring the budget to primary balance, and then it ceases with all military spending (sack all soldiers, navy and airforce personnel), then it can essentially balance its budget.
That would seem to be the least painful way (for the Greek population) of placing the finances on a sustainable footing.
More reform would be needed for more rapid GDP growth, a more equitable income distribution and better public services - but the extra reform is optional (and political).
Given less sclerosis and incompetence in Greek politics, the Greek debt level would be entirely sustainable.
Perhaps the European leaders are just scrambling to come up with a term (in a couple of dozen languages) which isn't "restructuring" but amounts to the same thing. That's got to be a complex undertaking! Otherwise, all you have is a serious case (common to politicians everywhere) of insisting that wishing will make it so.
Then again, they may be struggling to come up with a solution which can be imposed from the outside. Given that the sentiment of the Greek population (witness the latest general strike) makes it unlikely that any Greek government will be able to ba a party to real reform. Especialyl when draconian measures are clearly going to be necessary, figuring out how to ram them down the Greeks protesting throats could well be a challenge.
You say restructuring is inevitable. But...why? If Greece renounced ALL its debt today, it would still be running a 5%+ deficit. What would they do then? A 50% haircut gives them about 2.5% of GDP in interest payments that don't need to be made. But what good would that do when the deficits persist, and the structural problems with the Greek political system, judicial system, and economy structure in general persist?
Perhaps when Greece reaches a balanced budget and doesn't need any more support it will restructure, but to think that this would happen in 2013 is plainly idiotic.
The EU is such a great idea with its Schlengen borders, open markets and trade, freedom of movement, and workforce mobility.
Its a pity the powers that be had to go screw it up with a single currency that could never really work while member states remained in effect 'more sovereign' than the Union itself.