Friday October 24, 2014 Search
Weather | Athens
19o C
12o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Is a haircut the right solution?

By Kostas Karkagiannis

There are very good reasons for arguing in favor of Greek public debt undergoing a haircut. Unfortunately, there are also some reasons for wondering whether things are not that simple and that it might not be the ideal solution.

One good reason for a writedown of Greek public debt is that it has reached terrifying proportions. In the third quarter of 2013 it reached 171.8 percent of GDP. There are countries that have an even higher debt-to-GDP ratio, such as Japan, but none of their economies has the same characteristics as Greece’s: a very small productive base, limited exports and a big, expensive and above all unproductive public sector.

If one takes into account the size of Greek debt and the way the Greek economy is structured there can be no other conclusion than that Greece’s public debt is unsustainable. The situation is even worse if we recall – and how could we forget? – that the unemployment rate in Greece reached 28 percent in November last year and youth unemployment rose to 61.4 percent. The picture is even darker when one considers that 3.55 million Greeks have jobs but 4.75 million (unemployed and inactive) are out of work.

How can Greek workers manage to support the unemployed and pensioners? How can a state that will spend the equivalent of 42.1 percent of its GDP to cover its primary expenditure plus debt servicing costs? All this remains a mystery.

It is equally significant that Greek debt is not sustainable from a political point of view. Four years after Greece’s bankruptcy almost all the Greek parties continue to maintain the preservation of their patron-client network as their top priority. New Democracy and PASOK, which have been forced to implement the fiscal consolidation program in the last few years, are threatened by extinction chiefly because they thought they could serve two masters: The EU-IMF memorandum and their vested interests.

Naturally, they were unable to do this, resulting in the fiscal adjustment being achieved without overcoming the weaknesses that led us to bankruptcy. This means that the results are only temporary. The local and European Parliament elections are likely to show that even the second master is not satisfied, leading to a further destabilization of a government that has a parliamentary majority of just three.

Why then should the debt of Greece, a country that is economically and politically bankrupt, not be cut? Because the vast majority of our debt is held by our eurozone partners. At the end of this year, Greece will have a total debt of 320.1 billion euros, 235.7 billion of which will be owed to eurozone member states and the International Monetary Fund. The euro area seems determined, yet again, to restructure part of Greece’s loans with the aim of annual debt servicing costs being reduced to between 3 and 4 percent of GDP in the coming years. The debt pile will continue to be huge but at least we will be able to meet our annual repayments.

Of course, with such a high public debt Greece will continue to sit on the razor’s edge for the next few years. It will be vulnerable to any sudden changes in the mood of investors. If this means that the Greek state will not be able to borrow so easily, maybe that will not be such a bad thing when one considers how it “invested” the money it borrowed in previous years. Unfortunately, local companies will experience higher borrowing costs due to the lack of trust in the Greek state.

The key question is how we will we stand before our partners, some of whom are poorer than us, and demand that they write off some of the money they have lent us? It would be unethical and politically damaging to pursue a Greek debt haircut.

The moment for this strategy was in 2010, before debt was moved from private hands onto the shoulders of euro-area taxpayers. We missed that chance because we did not have any allies who would support the idea of private creditors taking a hit and because the German and French governments were not willing to take on a second rescue of their banks after the support they provided in 2008.

The decision to transfer Greek debt from the private to the public sector was unethical but that is what eurozone leaders chose to do. It was not our decision, it was imposed on us.

So, rather than plead for a haircut, the best we can do is to ask for more European Union funding so we can modernize our infrastructure and improve the function of the Greek state in the hope that this will allow citizens to receive better services at a lower cost.

It would be even more useful for the sustainability of the country’s debt if we focused on the fundamental problems of Greek society, most significantly the troubled justice system.

We also need to improve education and our tax and pension systems, while confronting extremism, dogmatism (let’s not forget that Golden Dawn is third in the opinion polls), corruption and patron-client practices.

ekathimerini.com , Friday February 21, 2014 (18:19)  
Tension for tension’s sake?
Testing ground
Defusing a crisis
PM needs to step up
Venizelos slams Turkey for ´flagrant violation of international law´ off Cyprus
Foreign Minister and Deputy Prime Minister Evangelos Venizelos on Friday condemned Turkey for "the flagrant violation of international law," referring to the presence of a Turkish research v...
Cyprus president to be released from hospital on Friday following readmission
Cyprus President Nicos Anastasiades was on Friday expected to be discharged from a hospital in Brussels to which he was admitted after suffering nosebleeds caused by high blood pressure. Ana...
Inside News
ECB bank assessment to show 6-billion-euro capital gap, Citi says
The euro area’s biggest banks will show a 6 billion-euro ($7.6 billion) capital gap in the European Central Bank’s tests of the quality of their assets and ability to withstand economic shoc...
ECB vies for third time lucky in European stress tests
For the European Central Bank, success as the euro area’s financial supervisor may begin this weekend with a few failures. At noon in Frankfurt on October 26, investors will learn which of t...
Inside Business
SOCCER
Panathinaikos snatches point at Eindhoven
Panathinaikos offered its fans a glimpse of its glorious past in European competitions snatching a draw at PSV Eindhoven, on an otherwise bad night for Greek soccer in the Europa League, as ...
BASKETBALL
Greens succumb to first loss at Bayern
Panathinaikos’s unbeaten run in all competitions came an end on Thursday as the Greek champion lost 81-75 at Bayern Munich for the Euroleague. Bayern is a team that improves every year, and ...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. ECB bank assessment to show 6-billion-euro capital gap, Citi says
2. Venizelos slams Turkey for ´flagrant violation of international law´ off Cyprus
3. ECB vies for third time lucky in European stress tests
4. Cyprus president to be released from hospital on Friday following readmission
5. Cyprus GDP upgrade seen as boosting bailout exit plans
6. Clocks to go back 1 hour on Sunday
more news
Today
This Week
1. Woman killed in tram accident in Floisvo, south of Athens
2. Clocks to go back 1 hour on Sunday
3. Cyprus GDP upgrade seen as boosting bailout exit plans
4. Cyprus president to be released from hospital on Friday following readmission
5. ECB vies for third time lucky in European stress tests
6. ECB bank assessment to show 6-billion-euro capital gap, Citi says
Today
This Week
1. The past, present and future of the Greek debt crisis
2. Coalition shooting itself in the foot
3. Greece’s closed society is central to its current malaise
4. Greece must stick to reforms, says Schaeuble
5. At least 11 banks to fail European stress tests, three in Greece, report says
6. Cyprus to block Turkey's EU talks after EEZ violation
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.