The International Monetary Fund's annual meeting kicks off in
Washington on Friday, and while America's budget standoff will top the
agenda, Greece's won't be too far down. At stake now, three and half
years after Athens was made to accept its first bailout, is whether
Greece will have to endure decades as a ward of its euro-zone neighbors.
That's not the story you hear in Brussels, Berlin and Frankfurt. In
their tale, Greece's fiscal adjustment is on track and its economy is
bottoming out. Greek banks have been recapitalized with private money,
and Athens's budget is approaching an annual surplus—excluding debt
service—for the first time since 2002.
None of this is false, but it obscures certain unpleasant facts. The
Greek government's small budget surplus this year is partly the result
of delaying tax refunds and the payment of bills to private contractors
and suppliers. Kathimerini reported this week that the Greek labor
ministry is considering expropriating private companies' assets to
collect on unpaid social-security contributions. Possible asset
confiscations may be one reason the Greek finance ministry predicts
higher revenues next year due to an increase in "tax compliance."
Meanwhile, the real stain on the country's future is government debt
expected to hit 175.5% of GDP this year. The discussion continues over
whether to write down a portion of European governments' loans to
Greece, but it is vague and unconstructive. The IMF demands that
European institutions forgive a chunk of what Greece owes them, but for
self-serving reasons: It wants the EU to take a haircut so the IMF can
be repaid in full.
The German government thinks Greece's debt load can be made bearable
by lowering the debt's average interest rate and extending its average
maturity. Last year's debt buyback means most of the EU's loans to
Greece already carry an average maturity of 15-30 years and an average
interest rate of around 3.5%. Greece's third bailout, due next year,
will involve more loans that will be repaid in a trickle over decades.
There is even talk of swapping some euro-zone bilateral loans to Greece
for 50-year bonds.
Yet once Greece starts looking at 50 years of repayments, why not 100
years, or 200? Extend-and-pretend is a strategy with long standing in
the history of sovereign-debt crises. But it would be a terrible way for
economic historians to remember the first several decades of Europe's
great monetary experiment, assuming it lasts that long.
Greece's creditors are already taking an economic loss as the
interest rate on their loans approaches zero and the maturity approaches
infinity, even if they don't have to book an accounting loss. But an
outright haircut is the more transparent and democratic solution. The
euro zone's taxpayers deserve to know the consequences of their
governments' decision not to let Greece default in the spring of 2010.
Drastically reducing Greece's debt overhang would also improve Athens's
chances of borrowing again in private markets.
German officials have several objections to a haircut. Under German
law, Berlin isn't allowed to lend further to any borrower that defaults
on a German-government loan commitment or guarantee. This means debt
restructuring is a lever that can be pulled only if it's clear Greece
will never need new rescue money again. That's far from obvious for at
least the next few years. But once Athens starts consistently running
small budget surpluses, Berlin and Brussels might be more comfortable
turning off the bailout tap for good and accepting default.
Another objection is that a writedown will take the pressure off
Athens to reform the Greek economy. This fear is well-founded. Yet if
Greece's government isn't willing to fulfill its euro obligations even
after bailouts, then the real issue is whether Greece belongs in the
currency union. Better to face that now than put Athens on a 50-year
bailout IV drip.
One compromise could be to do away with the charade of constantly
rolling over bailout loans and simply swap all of Greece's existing
borrowing for 200-year, zero-coupon bonds at 1% interest. This would be
an admission of the bailout's failure while possibly avoiding the legal
difficulties of an immediate haircut. The clarity would make private
creditors more willing to start lending again to Athens in small
quantities to cover financing needs.
The tragedy is that Europe's politicians prefer the status quo of
eternal, rolling bailouts because it serves their purposes. They never
have to present their taxpayers with a bill for the Greek rescue. And
while Greece's economy never really recovers, it might avoid any new
crisis. The political bet is that the follies of the last five years
will slowly be forgotten.
It could even work, assuming there's no new recession—and unless
you're a Greek young person looking for a better economic future.
WALL STREET JOURNAL, 10/10/2013
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