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Thread: Greek opposition sets demands as EU/IMF verdict nears

  1. #11
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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by washunut View Post
    I think you miss the point of the article. With Greek long term debt paying 16%, that means that it is selling well below face value today. That should mean that the hit banks would take is less than many might expect.
    The expectation of a possible default has driven Greek debt prices below face value. That does not alter the need for banks to recapitalize were a haircut imposed in order to comply with statutory capital requirements. The impact of such a move has led the ECB to adopt the posture that it would cease to accept Greek debt as collateral in the wake of a default. Given the fiduciary role of the ECB, I don't disagree with its stance.

    My guess is that the foreign non-banks, from which the strongest support for restructuring has come, would vigorously oppose a haircut from which the IMF, ECB, EU, and banks were held immune. Moreover, I suspect that they would also oppose a deal that imposed an equal haircut on all parties and then also assessed a surcharge on all parties for the costs of banking recapitalization. The reality is that banks would be more adversely impacted than some of the other holders of Greek debt due to having to meet mandatory capital requirements. They would need to raise capital, and with little luxury for waiting, they would very likely wind up with a higher cost of capital. Finally, were Greek debt restructuring to lead to spillovers, I highly doubt that the foreign non-banks would be willing to help cover the costs of the resulting fallout. IMO, it is always easier to advocate a risky debt restructuring when one has much less at stake and is largely insulated from the consequences e.g., having to share in the costs of the externalities associated with such a move. The foreign non-banks' exposure would essentially be limited to the extent of the restructuring. The Greek non-banks would also face exposure to the macroeconomic impact in Greece. In contrast, the EU's, and ECB's exposure is not largely limited. Both would likely have to bear the full burden of the costs associated with banking recapitalizations and a disproportionate share of the costs of any spillovers that would follow.

    Having said this, I don't rule out such a move, but only if it were accompanies by substantial structural reforms and some kind of mechanism to mitigate the impact of spillovers. The timing would also have to be careful. If the restructuring occurred in the face of growing expectations of a default, rather than after some kind of stabilization had been achieved and progress was being made, the move could be seen as a self-fulfilling prophecy. If so, markets could react adversely and abruptly in other indebted countries (Ireland and Portugal being likely candidates) and possibly spread into Italy and Spain despite differing circumstances. The latter outcome would be particularly hazardous to the EU and would pose a global risk.

    I also disagree that this would mean that Greece wold be cut off from funding down the road. Just the opposite. Greece would then have a debt burden that would allow people to have a better sense that it can be paid. Interest rates could find a normalized number using Germany as Europe's equivalent to treasuries.
    The experience with sovereign debt default has been a loss of such access for a period of time. Sometimes, loss of access has lasted for an extended period of time e.g., Argentina. Moreover, while Greece's relatively high debt has led to the current crisis, that debt is really the symptom of a much larger need for structural reform. The cause of that debt is the structural revenue-expenditures imbalance. Without tough structural reforms, including major tax policy changes, a reduction in Greece's debt would offer a temporary remedy.

    This is just my view but the ECB like the Fed wants to kick the can down the road. I see your concerns above and some are valid. But what would you suggest? The Greek public does not want to take all the burden and at the end of the day will not. Bondholders will have to take a haircut.
    I agree about the political sustainability of the situation. Indeed, that dynamic is in play in the U.S. to some extent, even as the U.S. faces choices far less painful than those confronting the Greeks.

    Given the information I have at present, including the prevailing market psychology, my suggestion would be to provide one more tranche of assistance in exchange for:

    1. Structural reform (austerity) to address the structural problems (tax, expenditures, benefits) leading to Greece's increase in debt.

    2. Sizable sales of Greek government assets to cut operating costs of the government and to raise cash to reduce outstanding debt (preferably > 100 billion Euros over the next 12-18 months). All proceeds would automatically be used to buy back debt. Priority could be given to debt held by the EU/IMF (lenders of last resort) and then the banking system (to reduce the recapitalization costs from any future restructuring). Clearly, many holders of Greek debt would find such priority "unfair." But the reality is that they are not likely to be willing to share in the externalities associated with a restructuring, hence measures that could minimize the overall costs of restructuring would make sense.

    3. An EU/IMF Board that would serve as a sort of "Budget Office" to monitor Greece's progress and lend technical assistance to the government. This Board would have full access to all of Greece's fiscal data. It would produce monthly reports to provide the kind of transparency Greece has lacked to date.

    4. International cooperation to expedite efforts to repatriate assets tied to tax evasion. An amnesty period for tax evaders to pay their obligations. Passage of the amnesty period should result in substantial penalties for tax evaders.

    5. Once things have stabilized and there is reasonable consensus that the structural problems are being addressed, I would not necessarily oppose some form of restructuring. However, my first preference would be the Eurobond approach, modeled after the Brady bonds.

    I do believe a preemptive restructuring early on when there were few expectations of a default might have been feasible, despite various risks. But that moment of opportunity has passed.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by donsutherland1 View Post
    The expectation of a possible default has driven Greek debt prices below face value. That does not alter the need for banks to recapitalize were a haircut imposed in order to comply with statutory capital requirements. The impact of such a move has led the ECB to adopt the posture that it would cease to accept Greek debt as collateral in the wake of a default. Given the fiduciary role of the ECB, I don't disagree with its stance.

    My guess is that the foreign non-banks, from which the strongest support for restructuring has come, would vigorously oppose a haircut from which the IMF, ECB, EU, and banks were held immune. Moreover, I suspect that they would also oppose a deal that imposed an equal haircut on all parties and then also assessed a surcharge on all parties for the costs of banking recapitalization. The reality is that banks would be more adversely impacted than some of the other holders of Greek debt due to having to meet mandatory capital requirements. They would need to raise capital, and with little luxury for waiting, they would very likely wind up with a higher cost of capital. Finally, were Greek debt restructuring to lead to spillovers, I highly doubt that the foreign non-banks would be willing to help cover the costs of the resulting fallout. IMO, it is always easier to advocate a risky debt restructuring when one has much less at stake and is largely insulated from the consequences e.g., having to share in the costs of the externalities associated with such a move. The foreign non-banks' exposure would essentially be limited to the extent of the restructuring. The Greek non-banks would also face exposure to the macroeconomic impact in Greece. In contrast, the EU's, and ECB's exposure is not largely limited. Both would likely have to bear the full burden of the costs associated with banking recapitalizations and a disproportionate share of the costs of any spillovers that would follow.

    Having said this, I don't rule out such a move, but only if it were accompanies by substantial structural reforms and some kind of mechanism to mitigate the impact of spillovers. The timing would also have to be careful. If the restructuring occurred in the face of growing expectations of a default, rather than after some kind of stabilization had been achieved and progress was being made, the move could be seen as a self-fulfilling prophecy. If so, markets could react adversely and abruptly in other indebted countries (Ireland and Portugal being likely candidates) and possibly spread into Italy and Spain despite differing circumstances. The latter outcome would be particularly hazardous to the EU and would pose a global risk.



    The experience with sovereign debt default has been a loss of such access for a period of time. Sometimes, loss of access has lasted for an extended period of time e.g., Argentina. Moreover, while Greece's relatively high debt has led to the current crisis, that debt is really the symptom of a much larger need for structural reform. The cause of that debt is the structural revenue-expenditures imbalance. Without tough structural reforms, including major tax policy changes, a reduction in Greece's debt would offer a temporary remedy.



    I agree about the political sustainability of the situation. Indeed, that dynamic is in play in the U.S. to some extent, even as the U.S. faces choices far less painful than those confronting the Greeks.

    Given the information I have at present, including the prevailing market psychology, my suggestion would be to provide one more tranche of assistance in exchange for:

    1. Structural reform (austerity) to address the structural problems (tax, expenditures, benefits) leading to Greece's increase in debt.

    2. Sizable sales of Greek government assets to cut operating costs of the government and to raise cash to reduce outstanding debt (preferably > 100 billion Euros over the next 12-18 months). All proceeds would automatically be used to buy back debt. Priority could be given to debt held by the EU/IMF (lenders of last resort) and then the banking system (to reduce the recapitalization costs from any future restructuring). Clearly, many holders of Greek debt would find such priority "unfair." But the reality is that they are not likely to be willing to share in the externalities associated with a restructuring, hence measures that could minimize the overall costs of restructuring would make sense.

    3. An EU/IMF Board that would serve as a sort of "Budget Office" to monitor Greece's progress and lend technical assistance to the government. This Board would have full access to all of Greece's fiscal data. It would produce monthly reports to provide the kind of transparency Greece has lacked to date.

    4. International cooperation to expedite efforts to repatriate assets tied to tax evasion. An amnesty period for tax evaders to pay their obligations. Passage of the amnesty period should result in substantial penalties for tax evaders.

    5. Once things have stabilized and there is reasonable consensus that the structural problems are being addressed, I would not necessarily oppose some form of restructuring. However, my first preference would be the Eurobond approach, modeled after the Brady bonds.

    I do believe a preemptive restructuring early on when there were few expectations of a default might have been feasible, despite various risks. But that moment of opportunity has passed.
    My sense is that politics will not allow for a textbook solution. People in Greece will be hard to convince they need to restructure while the people in Germany and France will not be happy about bailing out overspending in these other nations. Not unlike the debate the U.S. will continue to have about bailing out bankrupt states.

    My sense is that Greece is in too deep to realistically fix their issue without giving a haircut to debtholders. Time will tell.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by washunut View Post
    My sense is that politics will not allow for a textbook solution. People in Greece will be hard to convince they need to restructure while the people in Germany and France will not be happy about bailing out overspending in these other nations. Not unlike the debate the U.S. will continue to have about bailing out bankrupt states.

    My sense is that Greece is in too deep to realistically fix their issue without giving a haircut to debtholders. Time will tell.
    I'm not sure that there is such a thing as a textbook method for dealing with debt crises. Each crisis has its unique attributes. Some may be more psychology-driven than others. Some may result from the collapse of an asset bubble. Some may result from a currency collapse. Some may be the result of large structural fiscal problems. Those resulting from structural fiscal problems can be difficult to address and they have a fairly high risk of relapse. Unfortunately, Greece's debt crisis falls into that category. Indeed, in its 2009 Article IV consultation (prior to the IMF's eventual intervention), the IMF found that Greece's public debt was on a path that would bring it past 800% of GDP by 2060, in no small part, because Greece faced the largest age-related exposure of any EU member coupled with a pension system that based payments on a worker's earnings during the last five year's of his/her career rather than lifetime earnings. Even a restructuring that wiped out all Greek external debt would accomplish little in the long-term without Greece's addressing the drivers of that enormous imbalance. Doing so will be painful. There is no way around it.

    The big challenge is to avoid a disorderly situation that results in macroeconomic and financial costs that greatly exceed the magnitude of Greece's current difficulties on account of spillovers or, in a worst case, contagion. As noted earlier, I am not aware of the willingness to share the costs of the resulting externalities from restructuring e.g., banking system recapitalization, among any of the parties pushing for rapid debt restructuring. Some of those costs can reasonably be estimated, e.g., the amount of financial system recapitalization (gap between the impact of the Greek debt writedown and regulatory capital requirements).

    As a result, on account of their understanding the numerous linkages associated with Greek debt, my guess remains that the EU and IMF will proceed cautiously. They will likely provide another round of liquidity to help Greece avert an immediate crisis in exchange for tougher terms aimed at reducing opposition in the states financing the lending and pushing Greece toward necessary structural reforms.

    Ultimately, Greece will need to address its solvency issues. At some point afterward, when there is less market anxiety, there might be a renwed opportunity for some kind of restructuring, especially as the limits of what Greece could achieve via its own structural reforms would become much clearer. Right now, though, I would be surprised if the EU and IMF moved immediately to restructuring.

    The major caveat involved is how one of Greece's opposition parties will conduct itself. Should that party continue to put its own political objectives ahead of Greece's national welfare, one cannot rule out a breakdown in efforts to provide fresh financing. Such an outcome would also present the risk of a disorderly reduction in Greek debt.

  4. #14
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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by donsutherland1 View Post
    I'm not sure that there is such a thing as a textbook method for dealing with debt crises. Each crisis has its unique attributes. Some may be more psychology-driven than others. Some may result from the collapse of an asset bubble. Some may result from a currency collapse. Some may be the result of large structural fiscal problems. Those resulting from structural fiscal problems can be difficult to address and they have a fairly high risk of relapse. Unfortunately, Greece's debt crisis falls into that category. Indeed, in its 2009 Article IV consultation (prior to the IMF's eventual intervention), the IMF found that Greece's public debt was on a path that would bring it past 800% of GDP by 2060, in no small part, because Greece faced the largest age-related exposure of any EU member coupled with a pension system that based payments on a worker's earnings during the last five year's of his/her career rather than lifetime earnings. Even a restructuring that wiped out all Greek external debt would accomplish little in the long-term without Greece's addressing the drivers of that enormous imbalance. Doing so will be painful. There is no way around it.

    The big challenge is to avoid a disorderly situation that results in macroeconomic and financial costs that greatly exceed the magnitude of Greece's current difficulties on account of spillovers or, in a worst case, contagion. As noted earlier, I am not aware of the willingness to share the costs of the resulting externalities from restructuring e.g., banking system recapitalization, among any of the parties pushing for rapid debt restructuring. Some of those costs can reasonably be estimated, e.g., the amount of financial system recapitalization (gap between the impact of the Greek debt writedown and regulatory capital requirements).

    As a result, on account of their understanding the numerous linkages associated with Greek debt, my guess remains that the EU and IMF will proceed cautiously. They will likely provide another round of liquidity to help Greece avert an immediate crisis in exchange for tougher terms aimed at reducing opposition in the states financing the lending and pushing Greece toward necessary structural reforms.

    Ultimately, Greece will need to address its solvency issues. At some point afterward, when there is less market anxiety, there might be a renwed opportunity for some kind of restructuring, especially as the limits of what Greece could achieve via its own structural reforms would become much clearer. Right now, though, I would be surprised if the EU and IMF moved immediately to restructuring.

    The major caveat involved is how one of Greece's opposition parties will conduct itself. Should that party continue to put its own political objectives ahead of Greece's national welfare, one cannot rule out a breakdown in efforts to provide fresh financing. Such an outcome would also present the risk of a disorderly reduction in Greek debt.
    My sense is that you are right, there will be another bailout in some manner. It will probably be money down the drain. Much like all the money the U.S. has spent on keeping people in homes they can't afford and probably don't want with prices down. Just makes the problem ever larger so that when people finally say no mas the pain will be that much more.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by washunut View Post
    My sense is that you are right, there will be another bailout in some manner. It will probably be money down the drain. Much like all the money the U.S. has spent on keeping people in homes they can't afford and probably don't want with prices down. Just makes the problem ever larger so that when people finally say no mas the pain will be that much more.
    If I had to push an immediate restructuring--and I'm not doing so right now, even as I share the concern that Greece will not do what is needed, but believe that the timing of a restructuring right now would be suboptimal with a much higher risk of a disorderly outcome--taxpayers and depositors would be given priority over all other creditors. This would not necessarily protect taxpayers and depositors from having to accept a hair cut, only that the hair cut faced by the EU, IMF, and banks would be smaller than that faced by the other creditors. Ideally, difference in the hair cuts would reasonably reflect the externalities associated with the restructuring, e.g., the impact were the costs of those externalities shared by all the holders of Greek debt, not borne solely by the EU's governments/ECB. Unfair as this would be, a reasonable goal of any restructuring effort has to include limiting the risk of a systemic banking crisis that could exacerbate the debt crisis, have a far broader macroeconomic impact, and entail spillovers or even contagion.

    In short, were I in a policy position, I would cut a very tough deal on the amount of debt that would be restructured. There are no "innocent parties." The parties' choices and decisions, including a lack of due diligence, led to today's predicament. Policy makers have responsibilities that go beyond the narrow interests of any single creditor/investor. Avoiding systemic financial crisis is one such responsibility.
    Last edited by donsutherland1; 05-31-11 at 06:03 PM.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by donsutherland1 View Post
    If I had to push an immediate restructuring--and I'm not doing so right now, even as I share the concern that Greece will not do what is needed, but believe that the timing of a restructuring right now would be suboptimal with a much higher risk of a disorderly outcome--taxpayers and depositors would be given priority over all other creditors. This would not necessarily protect taxpayers and depositors from having to accept a hair cut, only that the hair cut faced by the EU, IMF, and banks would be smaller than that faced by the other creditors. Ideally, difference in the hair cuts would reasonably reflect the externalities associated with the restructuring, e.g., the impact were the costs of those externalities shared by all the holders of Greek debt, not borne solely by the EU's governments/ECB. Unfair as this would be, a reasonable goal of any restructuring effort has to include limiting the risk of a systemic banking crisis that could exacerbate the debt crisis, have a far broader macroeconomic impact, and entail spillovers or even contagion.

    In short, were I in a policy position, I would cut a very tough deal. There are no "innocent parties." The parties choices' and decisions, including a lack of due diligence, led to today's predicament. Policy makers have responsibilities that go beyond the narrow interests of any single creditor/investor. Avoiding systemic financial crisis is one such responsibility.
    Just seems to me the concept of a single currency for very varied economies has been proven unworkable. With no enforcement policy about adhering to the rules about deficits as an example allowing Greece for all intents the ability to borrow at a rate just higher than Germany never made any sense.

    So not sure when the perfect time to work through the problems, but my experience is that problems do not heal themselves with more time ( and money). There will never be an optimal time to take the medicine that needs to be taken. Perhaps I am too pessimistic.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by washunut View Post
    Just seems to me the concept of a single currency for very varied economies has been proven unworkable. With no enforcement policy about adhering to the rules about deficits as an example allowing Greece for all intents the ability to borrow at a rate just higher than Germany never made any sense.
    On this, I have no disagreement. I believe it was a mistake for the European Union to admit Greece. Greece was, in my view, too weak economically, competitively, and fiscally to warrant membership in the EU. As a result for becoming part of a framework with a stronger currency--stronger than the Drachma had been--only put Greece's already weak export sector at a further disadvantage. It is also a matter of debate whether a regional monetary union makes sense when fiscal policy is not regionwide.

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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by donsutherland1 View Post
    On this, I have no disagreement. I believe it was a mistake for the European Union to admit Greece. Greece was, in my view, too weak economically, competitively, and fiscally to warrant membership in the EU. As a result for becoming part of a framework with a stronger currency--stronger than the Drachma had been--only put Greece's already weak export sector at a further disadvantage. It is also a matter of debate whether a regional monetary union makes sense when fiscal policy is not regionwide.
    The monetary union is not truely an issue. Greece not being able to print its own money has been a good thing for Greece or at least would have been under better governship. Greece should have enacted structural reforms in its economy during its boom times which were made possible by its joining the EU and the Euro, as Greece did have lower interest charges on its debt then it normally would have outside of the Euro. In response to the current crisis Greece could follow the example of Lithuania which cut government employment drastically, and saw wages decrease in nominal and real terms, improving its competitive ability. It is of course a harder measure politically to achieve then currency debasement, but it tends to have longer lasting effects while debasement tends to be required on an ongoing basis until the structural reforms are made

    See Germany post WW2 vs Italy post WW2 on which used debasement vs structural reforms to improve competive advantages. I would say Greece should not have been included due to poor governship rather then pure economic issues

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    Re: Greek opposition sets demands as EU/IMF verdict nears


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    Re: Greek opposition sets demands as EU/IMF verdict nears

    Quote Originally Posted by PeteEU View Post
    And yes, the conservatives in Greece are playing major politics with the future of Greece. Personally I think they want to leave the Euro, but do not realise what consequences that would have for the average man in Greece and the Greek banking system. They want to go back to the "good old days" of the Drachma where they just devalued to get out of the problems they were in, instead of dealing with the issues that caused the problems in the first place.
    What would be so bad about going back to the Drachma? It would make their exports competitive and keep the tourists coming (cause lets face it they have f**k all else going for then)

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