Greek opposition sets demands as EU/IMF verdict nears

[donsutherland1]

From Reuters:

Greece's conservative opposition demanded tax cuts on Monday as the price for a consensus deal with the Socialist government on imposing yet more austerity, a major condition for getting further aid from the EU and IMF.

Conservative leader Antonis Samaras called for a flat 15 percent corporate tax and rejected government plans for hiking taxes to tackle Greece's budget deficit and please fiscal inspectors mulling the next, key tranche of a 110 billion euro bailout.

Greek opposition sets demands as EU/IMF verdict nears | Reuters

This latest situation provides an example that labor unions are not always the only foes of fiscal consolidation in the midst of debt crises. Such crises, precisely because difficult terms are required to stabilize finances, require broad and often painful sacrifice. In the midst of the sacrifice, populists often sense an opportunity to exploit a country's situation for political gain.

Were Greece not to meet the terms required to receive additional funding, the country would fall into default. Slashing tax revenue would only exacerbate the country's funding gap and make default even more likely. Such a default, could trigger a systemic banking crisis, wiping out the savings of many depositors. Such an outcome would not be a unique occurrence.

At present, it is unclear that the Greek populists fully understand the gravity of the situation, though they might. What may be more clear is that they find the opportunity to pursue political advantage too tempting to pass up, even if it means cutting off Greece from further IMF/EU assistance and taking a chance on default.

The assistance provides Greece with liquidity to avoid a liquidity crisis. Greece, itself, needs to address its solvency issues. To date, it has missed deficit reduction targets (by around 1% of GDP) and perhaps others, as well. The big risk has been whether the Greek government can sustain an austerity program in the face of strong popular opposition (very difficult in democratic states). That a populist party has now taken up the anti-austerity banner in pursuit of political advantage reflects the hazards of that course.

It is possible that the Greek government might accept an EU or EU/IMF finance board that would have broad authority over Greek fiscal decisions e.g., it could veto revenue slashing measures proposed by the populists were they to gain power. However, the big problem with such an arrangement is that there would be no guarantees that a successor government, if it were elected, would accept or adhere to the Board's decision making. Hence, even if such a mechanism were adopted, there would be limits to its credibility. That's why the EU/IMF are seeking broad consensus among Greece's political parties.

Ultimately, more fiscally responsible parties within Greece will need to build popular support for the measures required to address Greece's finances. At the same time, they will need to find a way to marginalize populists that wish to exploit the crisis for political gain, making abundantly clear to Greece's people that such populists offer "false solutions" and a readiness to trigger a default that would wipe out the savings of potentially a significant number of Greeks.

 

[PeteEU]

From Reuters:

Greek opposition sets demands as EU/IMF verdict nears | Reuters

This latest situation provides an example that labor unions are not always the only foes of fiscal consolidation in the midst of debt crises. Such crises, precisely because difficult terms are required to stabilize finances, require broad and often painful sacrifice. In the midst of the sacrifice, populists often sense an opportunity to exploit a country's situation for political gain.

Ahh yes blame the labour unions..... it is all the evil socialists fault ... pathetic attitude.

Were Greece not to meet the terms required to receive additional funding, the country would fall into default. Slashing tax revenue would only exacerbate the country's funding gap and make default even more likely. Such a default, could trigger a systemic banking crisis, wiping out the savings of many depositors. Such an outcome would not be a unique occurrence.

.... you again show a total lack of knowledge of the Greek problem. You do know that the problem with Greece is a LACK of tax revenue right? Their tax system is and has been the joke of the industrialized world for decades. The best description of the Greek Tax Collection system... a tip box in a corner of a room. Just like the US, you can not cut your way out of the Greek financial problem.

At present, it is unclear that the Greek populists fully understand the gravity of the situation, though they might. What may be more clear is that they find the opportunity to pursue political advantage too tempting to pass up, even if it means cutting off Greece from further IMF/EU assistance and taking a chance on default.

They understand it fully. On one side they have the opposition conservatives that created in large part the **** hole they are in now, and on the other side they have a socialist government that has been unable to convince the people with money, aka the private sector, to fix the massive structural problems in the Greek economy. People in Greece are fed up with the politicians on BOTH sides, who have screwed over the common man and made the rich richer.

The assistance provides Greece with liquidity to avoid a liquidity crisis. Greece, itself, needs to address its solvency issues. To date, it has missed deficit reduction targets (by around 1% of GDP) and perhaps others, as well. The big risk has been whether the Greek government can sustain an austerity program in the face of strong popular opposition (very difficult in democratic states). That a populist party has now taken up the anti-austerity banner in pursuit of political advantage reflects the hazards of that course.

LOL the populist party... they were the freaking party and people who in caused the bloody problem in the first place and the Greek people know this. That the western Anglo-American press could not see the truth in a story if it bit them on the pekker only makes it worse.

It is possible that the Greek government might accept an EU or EU/IMF finance board that would have broad authority over Greek fiscal decisions e.g., it could veto revenue slashing measures proposed by the populists were they to gain power. However, the big problem with such an arrangement is that there would be no guarantees that a successor government, if it were elected, would accept or adhere to the Board's decision making. Hence, even if such a mechanism were adopted, there would be limits to its credibility. That's why the EU/IMF are seeking broad consensus among Greece's political parties.

LOL do you even follow the situation? What the outside board/people want to do is fix the Greek tax collection system so they can raise more tax income, and sell off state owned companies. The Greek conservatives and "rich" are against this because it would mean that they would actually have to pay taxes! Instead these baffoons want to CUT taxes lol,... yea cut taxes on paper to claim a victory but work as always and still not pay your taxes... classic American conservative financial bs.

Ultimately, more fiscally responsible parties within Greece will need to build popular support for the measures required to address Greece's finances.

It is already in power. They just need the balls to go after the bankers and wealthy industrialists also, something they have not done so far and the IMF/EU are pressuring them to do by going after tax cheats.

At the same time, they will need to find a way to marginalize populists that wish to exploit the crisis for political gain, making abundantly clear to Greece's people that such populists offer "false solutions" and a readiness to trigger a default that would wipe out the savings of potentially a significant number of Greeks.

Oh you mean the right wing? Fine by me, they caused the problem in the first place by lying their asses of and having American bankers come help them in their criminal activities.

 

[donsutherland1]

.... you again show a total lack of knowledge of the Greek problem. You do know that the problem with Greece is a LACK of tax revenue right? Their tax system is and has been the joke of the industrialized world for decades. The best description of the Greek Tax Collection system... a tip box in a corner of a room. Just like the US, you can not cut your way out of the Greek financial problem.

If you read my whole message and considered the totality of what I posted, it would have been crystal clear that the populist group I was criticizing is the Greek opposition party, the conservatives who are demanding tax cuts. As no other party was cited in the article as deviating from supporting austerity, one could not have missed that it is the conservative party that is acting recklessly and irresponsibly.

The reality remains that steep expenditures reductions and significant tax hikes will be required to address Greece's solvency challenges. There is opposition to both of those aspects, and those leading the opposition to the spending reductions and tax hikes are both putting narrow interests ahead of Greece's fiscal viability. Restoring Greece's fiscal viability should take priority over those narrow interests.

 

[PeteEU]

If you read my whole message and considered the totality of what I posted, it would have been crystal clear that the populist group I was criticizing is the Greek opposition party, the conservatives who are demanding tax cuts. As no other party was cited in the article as deviating from the supporting austerity, one could not have missed that it is the conservative party that is acting recklessly and irresponsibly.

The reality remains that steep expenditures reductions and significant tax hikes will be required to address Greece's solvency challenges. There is opposition to both of those aspects, and those leading the opposition to the spending reductions and tax hikes are both putting narrow interests ahead of Greece's fiscal viability. Restoring Greece's fiscal viability should take priority over those narrow interests.

My bad, miss read it then. Guess my anger at CNBC over the same story got the better of me... talk about biased reporting.

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.

Greeces problems are simple to fix... make the Greeks, and especially the rich and bankers pay their bloody taxes. That along with cuts and other changes would do wonders for the Greek economy. Tax cuts would make it much much worse since no one in their right mind wants to invest in Greece as long as they dont fix their structural problems.

 

[donsutherland1]

My bad, miss read it then. Guess my anger at CNBC over the same story got the better of me... talk about biased reporting.

No problem at all. Don't worry about it, Pete.

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.

Greeces problems are simple to fix... make the Greeks, and especially the rich and bankers pay their bloody taxes. That along with cuts and other changes would do wonders for the Greek economy. Tax cuts would make it much much worse since no one in their right mind wants to invest in Greece as long as they dont fix their structural problems.

You're probably right about the conservatives wanting a path out of the Euro. I don't believe it would be helpful for Greece. Also, I agree about the tax evasion problem in Greece. It is quite substantial and it should be addressed.

 

[washunut]

My bad, miss read it then. Guess my anger at CNBC over the same story got the better of me... talk about biased reporting.

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.

Greeces problems are simple to fix... make the Greeks, and especially the rich and bankers pay their bloody taxes. That along with cuts and other changes would do wonders for the Greek economy. Tax cuts would make it much much worse since no one in their right mind wants to invest in Greece as long as they dont fix their structural problems.

Have either of you read the cover story in Barrons this weekend. It talks to the debt problem in Greece.

 

[donsutherland1]

Have either of you read the cover story in Barrons this weekend. It talks to the debt problem in Greece.

I have. It should be noted that Barron's is among those calling for a significant restructuring of Greece's debt (50% of its debt). I suspect that a preemptive restructuring engineered by the IMF early on in the crisis might have had better prospects than a restructuring now in the face of growing expectations of a default among market participants, though even then a preemptive resturcturing would have had risks.

My worry is that even if Greece has its debt restructured in the near-term, events have gotten so far down the road that there would be significant spillovers that could, in the global context, create a much larger problem than what Greece presents. Aside from Portugal and Ireland, there would be a risk that Italy and Spain could be adversely impacted by spillovers, even as their credit situation is nowhere comparable to that of Greece's. Irrationality could lead to a panic that ignores the superior credit status of Italy and Spain and increases the problem by magnitudes of order.

Greece's banking system would also very likely need to be recapitalized, especially as its links to the ECB would be severed. Who would provide the funding (Greece would likely be shut off from international markets for an extended period of time) and what magnitude of funding would be required remains unclear. Such recapitalization could easily exceed the continuing loans that are envisioned for Greece under the austerity program. Moreover, some systemic banking crises have witnessed a 10% to 20% collapse in GDP. Even a contraction of the lower part of that range would exacerbate Greece's fiscal woes.

Also, Russia's case of a significant restructuring is rather exceptional. Russia, unlike Greece, has vast oil and natural gas reserves. As a result, it possessed ample means for developing a large cash flow in the future that mitigated the risks associated with the bad outcome of its substantial restructuring. Argentina, on the other hand, lacked adequate means for developing large cash flows. Hence, even today, it remains cut off from international finance. Even as part of the EU, Greece would probably face a situation closer to that of Argentina than Russia were it to restructure along the lines of what the Barron's piece suggests.

Given the above, I suspect that the EU-IMF, while finding some missed targets, will provide additional funding to Greece. Efforts to limit the conservative party's ability to derail Greece's finances might be part of the package e.g., an EU or joint EU-IMF Board with broad powers of major Greek fiscal decisions. Of course, as noted previously, such a Board's major limitation would be that it could not supersede the determination of a sovereign state to go its own way. Were the conservatives to gain a majority in the 2013 parliamentary election--and, in a classic example of putting political advantage against the national welfare, pursuit of that majority is almost certainly the overriding goal of their anti-austerity position--they could well reject the Board's authority. But that's a theoretical prospect that is still a few years away. In the meantime, the EU and IMF will likely take measures they believe can tide over Greece's current liquidity challenge, with the hope that it will buy time for Greece to make meaningful progress on its solvency issues.

 

[washunut]

I have. It should be noted that Barron's is among those calling for a significant restructuring of Greece's debt (50% of its debt). I suspect that a preemptive restructuring engineered by the IMF early on in the crisis might have had better prospects than a restructuring now in the face of growing expectations of a default among market participants, though even then a preemptive resturcturing would have had risks.

My worry is that even if Greece has its debt restructured in the near-term, events have gotten so far down the road that there would be significant spillovers that could, in the global context, create a much larger problem than what Greece presents. Aside from Portugal and Ireland, there would be a risk that Italy and Spain could be adversely impacted by spillovers, even as their credit situation is nowhere comparable to that of Greece's. Irrationality could lead to a panic that ignores the superior credit status of Italy and Spain and increases the problem by magnitudes of order.

Greece's banking system would also very likely need to be recapitalized, especially as its links to the ECB would be severed. Who would provide the funding (Greece would likely be shut off from international markets for an extended period of time) and what magnitude of funding would be required remains unclear. Such recapitalization could easily exceed the continuing loans that are envisioned for Greece under the austerity program. Moreover, some systemic banking crises have witnessed a 10% to 20% collapse in GDP. Even a contraction of the lower part of that range would exacerbate Greece's fiscal woes.

Also, Russia's case of a significant restructuring is rather exceptional. Russia, unlike Greece, has vast oil and natural gas reserves. As a result, it possessed ample means for developing a large cash flow in the future that mitigated the risks associated with the bad outcome of its substantial restructuring. Argentina, on the other hand, lacked adequate means for developing large cash flows. Hence, even today, it remains cut off from international finance. Even as part of the EU, Greece would probably face a situation closer to that of Argentina than Russia were it to restructure along the lines of what the Barron's piece suggests.

Given the above, I suspect that the EU-IMF, while finding some missed targets, will provide additional funding to Greece. Efforts to limit the conservative party's ability to derail Greece's finances might be part of the package e.g., an EU or joint EU-IMF Board with broad powers of major Greek fiscal decisions. Of course, as noted previously, such a Board's major limitation would be that it could not supersede the determination of a sovereign state to go its own way. Were the conservatives to gain a majority in the 2013 parliamentary election--and, in a classic example of putting political advantage against the national welfare, pursuit of that majority is almost certainly the overriding goal of their anti-austerity position--they could well reject the Board's authority. But that's a theoretical prospect that is still a few years away. In the meantime, the EU and IMF will likely take measures they believe can tide over Greece's current liquidity challenge, with the hope that it will buy time for Greece to make meaningful progress on its solvency issues.

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. 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.

Will there be pain for banks, yes. But like the U.S. it is less a matter if pain can be avoided than when to take the hit and how bad will it be.

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.

 

[PeteEU]

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. 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.

Will there be pain for banks, yes. But like the U.S. it is less a matter if pain can be avoided than when to take the hit and how bad will it be.

Well I some what agree and yet I do not. Greece is a small economy and its over all debt load is 400+ billion Euros out of an economy of 310 billion. Now in the grand scale of things this is peanuts if we are talking about big countries like France, Germany, US, Italy, Japan and so on. But the problem is that 400 billion is not small change for the real lenders, aka the banks in France and Germany and yes Switzerland. Could the banks deal with the loss, yes, but it would be very painful and could easily require a government "bail-out" of some kind.

The next problem is of course Ireland who is worse of than Greece in many ways, and in some part Portugal. Let them have a haircut also? That would hit the UK hard when it comes to Ireland and Spain when it comes to Portugal (some what). Then that in turn would hurt yet again Germany and France and so on and so on. All this would hurt American companies big time and the American economy as well, and that in turn..

remember the biggest elephant in the room is still the US and its massive debt-load and unsustainable budget problems and lack of political will to do anything what so ever at local, state or federal level.

All in the while, the real problem with Greece would not have been solved by giving their debt a haircut, since their tax system is still a mess and their spending is far to high considering the pathetic tax system. That is where the IMF comes in, along with the EU.. they want to fix the tax system as a priority since without that fix any long term solutions will not work.

This is just my view but the ECB like the Fed wants to kick the can down the road.

They hope in part to let inflation take its toll, but also it is political. Many of the major countries (France, Germany, US) have elections next year or the year after that.. so it is the passing of the buck attitude since the sitting governments could easily loose power.

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 a haricut is needed but not before Greece fixes their structural problems. I would rather give Ireland a haircut and even Portugal than Greece.

In the end of a day, having a high debt load for a country is not the major problem as many think it is, as long there is no massive over spending and lack of revenue. And no, tax cuts is not the solution since it means less revenue. Structural changes to make an economy more efficient is key.

 

[washunut]

Well I some what agree and yet I do not. Greece is a small economy and its over all debt load is 400+ billion Euros out of an economy of 310 billion. Now in the grand scale of things this is peanuts if we are talking about big countries like France, Germany, US, Italy, Japan and so on. But the problem is that 400 billion is not small change for the real lenders, aka the banks in France and Germany and yes Switzerland. Could the banks deal with the loss, yes, but it would be very painful and could easily require a government "bail-out" of some kind.

The next problem is of course Ireland who is worse of than Greece in many ways, and in some part Portugal. Let them have a haircut also? That would hit the UK hard when it comes to Ireland and Spain when it comes to Portugal (some what). Then that in turn would hurt yet again Germany and France and so on and so on. All this would hurt American companies big time and the American economy as well, and that in turn..

remember the biggest elephant in the room is still the US and its massive debt-load and unsustainable budget problems and lack of political will to do anything what so ever at local, state or federal level.

All in the while, the real problem with Greece would not have been solved by giving their debt a haircut, since their tax system is still a mess and their spending is far to high considering the pathetic tax system. That is where the IMF comes in, along with the EU.. they want to fix the tax system as a priority since without that fix any long term solutions will not work.



They hope in part to let inflation take its toll, but also it is political. Many of the major countries (France, Germany, US) have elections next year or the year after that.. so it is the passing of the buck attitude since the sitting governments could easily loose power.



I agree a haricut is needed but not before Greece fixes their structural problems. I would rather give Ireland a haircut and even Portugal than Greece.

In the end of a day, having a high debt load for a country is not the major problem as many think it is, as long there is no massive over spending and lack of revenue. And no, tax cuts is not the solution since it means less revenue. Structural changes to make an economy more efficient is key.

Let me start where you ended. I did not nor do I recommend any type of tax cut.

I agree they need structural changes. My sense is that if Greece wants to get new financing they either will have to fix their problem of having too large a deficit or will have a hard time raising money in the capital markets at rates that are not destructive.

The debt fix and restructuring will have to be hand in hand. I would not get hung up on which comes first, but that is just my take.

 

[donsutherland1]

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.

 

[washunut]

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.

 

[donsutherland1]

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.

 

[washunut]

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.

 

[donsutherland1]

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.

 

[washunut]

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.

 

[donsutherland1]

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.

 

[Lord Tammerlain]

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

 

[The Prof]

today: FT.com / Brussels / Economy - Greece goes further into junk territory

 

[Red_Dave]

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)

 

[Lord Tammerlain]

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)

Currency devaluations tend to be short term bandaids that countries use over and over again, leading to massive inflation and degrading the standard of living over time.

If it is used correctly and buys the economy time to make structural reforms it could be benifitial. But in Greeces case it is not likely to achieve much without a technical defualt on its foreign debts

 

[PeteEU]

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)

1. Their debts would still be in Euros and dollars. The burden would explode to say the least and drive them off the cliff. It would be impossible for Greece to get any funding for quite a while. The economy would tank totally with the social problems that follow such a problem. And the value of the new currency would make 1000 Italian lire sound like chomp change. Think Zimbabwe in many ways. "6 eggs mamn? that will be 7 million Drachma please. .. 30 seconds later.. 7.2 million now mamn since you are so slow. "

2. It would not fix the structural problems that caused the problem in the first place.

3. The cost of changing currency is quite considerable and it can not happen over night. It took a politically agreed Euro-zone approx 6 years to go over to the Euro. Money has to be printed, electronics has to be changed (cash registrars and so on) and a lot of administrative crap has to be change. The cost for companies would be considerable.... a cost that they cant get loans for..

Now Greece might become "cheap" for the rest of Europe but they dont have much industry as it is, and if the country goes into social meltdown as expected, then who the hell would want to go there on holiday or buy a house there?

No the only way Greece gets out of this, is by fixing their structural problems.. then sure go back to the Drachma if they want, but without the structural fixes, it is a very stupid idea.

 

[The Prof]

yesterday, before his state dinner for ms merkel:

President Barack Obama on Tuesday urged European countries and bondholders to prevent a "disastrous" default by Greece and pledged U.S. support to help tackle the country's debt crisis.

Obama, whose political prospects have suffered from persistently high unemployment and ballooning U.S. debt, has pinpointed the euro zone crisis as one foreign "headwind" hitting the U.S. economy.

After a meeting with German Chancellor Angela Merkel, he stressed the importance of German "leadership" on the issue - a hint that he expects Berlin to help - while expressing sympathy for the political difficulties European Union countries face in helping a struggling member state.

"I'm confident that Germany's leadership, along with other key actors in Europe, will help us arrive at a path for Greece to return to growth, for this debt to become more manageable," Obama said.

"But it's going to require some patience and some time. And we have pledged to cooperate fully in working through these issues, both on a bilateral basis but also through international and financial institutions like the IMF."

"America's economic growth depends on a sensible resolution of this issue," he said. "It would be disastrous for us to see an uncontrolled spiral and default in Europe because that could trigger a whole range of other events."

But his main message was aimed at EU countries - and, by default, wealthy Germany - to step up to help Athens. "Other countries in the euro zone are going to have to provide them a backstop and support," he said.

"And frankly, people who are holding Greek debt are going to have to make some decisions, working with the European countries in the euro zone, about how that debt is managed."

CNBC: Obama Pledges Help For Greece

 

[The Prof]

today:

Unemployment in debt-ridden Greece hit new record highs in March as government officials wrangled over tough new austerity measures required to tap the country's rescue funds.

The jobless rate increased to 16.2 percent in March from 15.9 percent in February, the country's statistics agency said Wednesday. The total number of Greeks out of work was 811,340, up 40 percent from a year earlier, when the unemployment rate was 11.6 percent.

March's is the highest level of joblessness recorded since the statistics agency began issuing figures in 2004. The government had projected an overall unemployment rate of 14.5 percent for this year in its 2011 budget.

The situation is expected to get worse as the government imposes yet more austerity measures to meet targets set out in the agreement for Greece's euro110 billion ($161 billion) package of rescue loans.

Strikes have affected virtually all sectors at some stage, with workers holding demonstrations or picketing ministry buildings.

AP: Greek Joblessness at Record as Austerity Looms

don't worry

led by president barack the slasher hussein, the united states taxpayer is racing to the rescue

 

[The Prof]

well, here's a novel approach, a new greek export industry!

yesterday: Debt-hit Greece sees profit in air pollution: report - Yahoo! News

Greece could earn up to 170 million euros for its cash-strapped treasury from a trade of greenhouse-gas emission allowances on the Athens stock exchange, a report said Sunday.

Eleftherotypia daily said a first-ever auction of one million emission allowances (EUAs) will be held on Wednesday, ironically as many Greek factories will be shut by a general strike against the government's economic policies.

The Athens stock exchange, which is overseeing the sale alongside the Greek environment ministry, has said that 10 million EUAs will be traded this year.

Eleftherotypia said emission rights fetch up to 17 euros (24 dollars) a tonne in other parts of Europe.