Hellenic Haircut?

Greek Drama's Two Endings

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Whether or not to help Greece?
  • Why it matters

    Why it matters

    After Greece is de facto bankrupt and voters rejected a new bailout package, the euro zone is pressed to take a final call on the country’s debt.

  • Facts

    Facts

    • Supporters of a debt haircut argue that the move is economically and politically necessary.
    • Opponents counter that Greece needs fundamental reforms instead of debt relief.
    • All 28 European Union countries will come together for final negotiations on Sunday.
  • Audio

    Audio

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“Before us lies an inefficient, jobless and disorganized Europe being torn apart by inner turmoil and international hatred as it fights, starves, pillages and lies.”

With these dramatic words, British economist John Maynard Keynes called for Germany’s debt to be waived at the Versailles Peace Conference after the end of the First World War.

We were recently reminded of his argument by Amartya Sen, Nobel Prize Laureate in Economics. Fortunately, most of Europe is a long way from such misery, although Greece seems to be nearing it.

Keynes’ insight that it can be devastating to demand the impossible of a debtor was true back then and it still is today. Greece is incapable of paying off its mountain of debt, €317 billion in total. The International Monetary Fund described the current repayment schedule, ending in 2057, as unrealistic and has proposed an extension. Greek debt relief is therefore both economically and politically necessary. It will happen in any case, whether it’s arranged within the euro zone or enforced by a Grexit.

“Hold on,” say opponents, “a debt reduction at the present time wouldn’t mean much financial relief for Athens anyway. Greece is not obliged to begin repaying its euro-zone partners until 2020 and the European Financial Stability Facility until 2023 for their loans.”

But this doesn’t apply to the roughly €40 billion that Greece owes the European Central Bank and the IMF. So Greece would regain some financial leeway through debt relief, now and even more so in the future.

What doesn’t go towards repaying principal and interest can be used for investments or rebuilding the state and the economy. It is Greece’s task to ensure this happens – and that must be a condition for reducing debt.

So far, experiences with debt relief bound to economic reforms have been positive. Debt reductions have led many debt-ridden developing countries back toward growth.

A covert form of debt relief is already underway. Because of interest rate cuts and credit period extensions, creditors have already foregone more than €40 billion of their original demands. But it’s easier for the bookkeepers in Europe’s capitals to put off the moment of truth – honesty comes with a political price: A direct debt reduction would require finance ministers to enter bad debts in the books immediately. German Finance Minister Wolfgang Schäuble’s balanced budget, the so-called “black zero”, would be no more.

So far, experiences with debt relief bound to economic reforms have been positive. According to studies by the World Bank and the IMF, debt reduction has helped many developing countries with debts back to growth.

Politically, too, debt relief in return for reforms makes sense. This is surely the only and last chance to prevent Greece leaving the euro. And neither side would lose face. Greek Prime Minister Alexis Tsipras would have made concessions to the creditors while German Chancellor Angela Merkel and the rest of Europe would have maintained the principle “aid comes at a price”.

Debt relief is not fair – after all, it appears to reward Athens’ gamblers and affront those nations willing to reform – Portugal, Spain and Ireland.

But debt relief is nonetheless the right thing to do because it makes sense. The Civil Code reads accordingly: “Impossibilium nulla est obligatio” or “Nobody has any obligation to the impossible.” This also applies to countries in debt.

 

 

Greeces Debts-01

 

No way!

It sounds so nice and easy: The euro zone will relieve part of Greece’s debt burden – and everything will be fine. This is what Greek Prime Minister Alexis Tsipras has been saying since his election victory in January. Unfortunately, there are many others beyond Greece’s borders who are falling for this diversionary tactic.

Instead of finally making a start on overdue reforms, Mr. Tsipras has been pointing an accusing finger at his financiers for six months now.

He clearly thinks that it is not he, the debtor, who should be making an effort, but rather the creditors. In other words: The Greek prime minister is asking the 18 other euro states to dig deep in their pockets, effectively to serve Greece umpteen billions of euros on a plate.

Mr. Tsipras’ expectations of his European partners are audacious.

After all, there are poorer countries in the euro zone than Greece. Pensions and minimum wages in Slovakia or Latvia, for instance, are significantly lower. Portugal, Ireland and Spain have accepted painful austerity and reforms without complaint which Greece has been persistently refusing for years. Why should the citizens of these countries now grant the Athens government a generous debt reduction?

Politically, it is inexplicable to anyone outside of Greece. And it does not make much economic sense either because in reality, Greece’s mountain of debt is not an obstacle to the country’s economic recovery.

The country is barely even servicing its debts. The European Financial Stability Facility’s (EFSF) loans will be repaid in 30 years at the earliest. And interest does not accrue for another seven years, and even then it is at a minimal level. This year, Greece has to repay only a small part of its total liabilities: its debts to the International Monetary Fund and the European Central Bank, the ECB.

The government in Athens could easily have managed that if it had collected taxes properly, cut superfluous military expenditure and downsized the unwieldy state apparatus. So far, Mr. Tsipras’ government has done nothing of the kind.

If the country is to keep the euro, a new auxiliary loan of at least €50 billion will be necessary. Athens desperately needs this money.

As long as nothing changes, debt relief won’t help. On the contrary: It would inflict great political and economic damage. In the rest of the euro zone it would fuel resentment toward Greece and the European Union, doing dangerous nationalists like French National Front leader Marine Le Pen a big favor. At the same time, it could encourage Greece to procrastinate still further on indispensable yet unpleasant reforms, of the pension system for example.

So far, Greece has obtained loans amounting to €184 billion from the euro zone. And it will not end there. If the country is to keep the euro, a new auxiliary loan of at least €50 billion will be necessary. Athens desperately needs this money – not least for the repayment of ECB bonds, due on July 20.

All in all, Greece’s borrowings exceed many E.U. states’ economic output. The money will not reappear for another 40 or 50 years, if ever. For the euro zone has already offered to extend EFSF maturities yet again. Over the years, this realistically means nothing other than debt relief – even if no head of state would refer to it as such. And so we have reached our pain threshold. An additional nominal debt reduction at this time is out of the question.

 

To contact the authors: riecke@handelsblatt.com; berschens@handelsblatt.com

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