A realistic approach to the Greek crisis
Over the past months the Greek crisis has taken on dramatic proportions, creating a serious risk of disintegration of the Euro-zone.
With enormous difficulty, the members, jointly with the International Monetary Fund, have committed loans amounting to 110 billion €uro. On its side the European Central Bank has finally resolved to derogate to its announced policy: it will continue to accept Greek paper as valid collateral. A program of quantitative easing is also mentioned as a further and last measure.
As a condition to this extraordinary help, a punitive program of cost cutting is imposed on Greece which faces a decade of deflation or at best very low growth. Perhaps more ominously social unrest is looming, the consequences of which could be far reaching.
And despite this extraordinary effort, skepticism prevails. Both the Greek debt and the €uro continue to be dumped in the markets. If we take into account the possibility of a crisis affecting other members (Portugal, Spain) it is clear that this approach is bound to fail, with devastating consequences.
Is not it time to step back and recognize that Greece faces a problem of solvency beyond the pressing liquidity needs?
The successful precedent of the Brady Bonds could be used to support an entirely different approach to the problem.
The Banks holding Greek Bonds (French, German, others) would be invited to swap them for newly issued obligations on the same terms but with much longer maturities - 20-30 years. Actuaries calculate that this restructuring would be equivalent to a “haircut of 20 to 25%” (because of the low interest rates for a considerable number of years). This may be sufficient to restore Greek solvency whilst at the same time providing the needed liquidity. Instead of committing hard cash the members of the Euro-zone (Germany, France , others) would underwrite the ultimate repayment of the bonds. The Banks involved would sacrifice the extra yield that bonds issued on the open market would command, but no loss as regards redemption. They could also refinance this paper with the European Central Bank.
Concomitant with the restructuring, Greece would be invited to resign from the Euro-zone perhaps temporarily. Greece could continue to use the €uro for its international transactions including the billing of services such as tourism. But the drachma would be reintroduced for the domestic economy.
This realistic approach would achieve several objectives:
- It would save the €uro-zone from gangrene from the poor performers: gangrene of the financial system and perhaps more importantly spreading of social unrest.
- It would send a strong signal to other potential defaulters to put their house in order before it is too late.
- It would crystallize a reality: so long as the members remain sovereign states, the €uro-zone must function as a club. In the last resort the members unwilling or unable to comply with the rules must be expelled.
- Finally it should galvanize the whole Community to improve the monitoring and coordination of policies, leading perhaps to closer institutional links, once the current crisis of Euro-skepticism is overcome.
