Restructuring? It’s child’s play
Anyone who is a parent or has looked after a small child will be familiar with the dreaded moment when a toddler tells you, ?I didn?t do anything.? Once you hear these words, it?s a sure bet that you will find food on the floor, toys smashed to pieces or crayon scrawls on the wall. But it?s not just kids that employ these naively transparent methods, politicians are pretty adept at using them too.
It was, therefore, pretty easy to see through the government?s spin doctors this week as they insisted that the issue of debt restructuring did not come up at all during a meeting in Athens between Prime Minister George Papandreou and renowned financier George Soros. Visiting George did not mention the subject even once, government sources told journalists.
The claims sounded absurd and appeared even more so when it was revealed that Soros had discussed exactly this issue in an interview with Kathimerini. For what it?s worth, the financial guru said that if Greece needs to restructure its debt, it should do so in a much milder form than just asking its investors to accept a ?haircut,? or a reduction on their returns. Instead, he proposed that the principal should remain unchanged and that the government should negotiate a lower interest rate and an extension to the notes? maturities.
Soros?s opinions are among a host that have been heard on the issue of debt restructuring this week. The Greek government, the European Commission and the International Monetary Fund have all being trying to put out the fires that have been lit by reports, particularly in the German media, quoting unnamed sources who claim that talks have already begun behind the scenes about how Athens can ease its debt burden by asking investors to take a hit.
?We support the Greek government in its decision not to restructure its debt,? said IMF Managing Director Dominique Strauss-Kahn in response to an article in German magazine Der Spiegel. It is noticeable that Strauss-Kahn?s response does not rule out the possibility of debt restructuring but simply expresses support for the official line of the Greek government, which is that the issue is not up for discussion at all.
However, with Greek debt expected to hit 153 percent of gross domestic product — or 345 billion euros — by the end of the year, the numbers appear to betray the belief that the restructuring bullet can be dodged. ?Given the slow progress of reforms, default seems inevitable,? Dimitri Vayanos, a professor of finance at the London School of Economics, told Kathimerini English Edition. ?So some form of debt restructuring will have to take place sooner or later.
?Restructuring should be orderly, negotiated in close collaboration with the EU and the IMF and accompanied by a commitment by Greece for further reforms,? he added. ?Ideally, restructuring should be done in a couple of years, once public finances have improved and the Greek economy can better stand on its feet. But if reforms continue at their disappointingly slow pace, the EU-IMF support might cease, and Greece might be forced into an early restructuring.?
Debt restructuring as soon as possible is what some people would like to see and what some experts are advising. The respected Brussels-based think tank Bruegel is one of those that has already advised that Greece should cut its losses and organize an orderly retreat. A paper it produced in February recommended that restructuring happen ?sooner rather than later.?
Bruegel argues that any hopes of avoiding restructuring are pie in the sky. Its calculations point to an annual primary surplus of 8.4 percent of GDP being needed so that Greece can reduce its public debt to 60 percent of GDP, as agreed in the terms of its eurozone membership, by 2034. Since the fall of the military dictatorship in 1974, Greece has only produced a continuous primary surplus between 1994 and 2002 and even then the highest rate was just 4.3 percent of GDP.
In Bruegel?s view, a delay in restructuring would mean bondholders would have to accept a bigger haircut in the future and that Greece would be unable to return to the markets in 2013 as investors would be pricing in the cost a default. ?It would be a very sad end to the first decade of the euro area, but if something is not sustainable and you try to muddle through then the outcome could be worse for everyone involved, including the Greek government, the Greek people, Greek banks and creditors,? Zsolt Darvas, one of the report?s authors, told Kathimerini English Edition in February.
Bruegel believes that the spillover on other European countries and financial institutions of an organized haircut would have ?a manageable impact on banks in the rest of the euro area.? Eurozone banks hold about 50 billion euros in Greek debt but domestic lenders are far more exposed to the potential side effects of restructuring as they possess about 70 billion euros. This is why restructuring has to be properly thought through and planned.
?Some Greek banks hold significant quantities of Greek government bonds, partly because of political pressure, and hence are vulnerable to a restructuring,? said Vayanos. ?Careful consideration should be given to these banks? solvency, and some external funds (EU/IMF) might need to be used to preserve the health of the banking system.
?The bigger issue, however, is to maintain the long-term health of the banking system, and this requires reducing political interference in banks,? he added. ?The current moves of appointing a government representative in each bank go precisely in the wrong direction. Banks need regulation, but not in the form of covert political interference.?
It seems that the frantic debate over restructuring is overshadowing a number of big issues, as Strauss-Kahn suggested earlier this week. ?Debt restructuring would not solve the key problem Greece faces, which is its lack of competitiveness,? he said. ?Greece cannot escape the fact that it needs to become more competitive.?
The view among many economists is that while restructuring could set Greece on the path to recovery, it will not be enough on its own to lead the country on its journey. ?Strauss-Kahn is absolutely right,? said Vayanos. ?Greece?s economy is dysfunctional because of its poor management and lack of reform over the past 30 years. The high level of debt is one manifestation of dysfunctionality, but not the cause.
?The cause is a lack of market-friendly reforms that can make the economy competitive. Such reforms should aim at providing a stable institutional framework that promotes competition, investment and entrepreneurship. This requires abolishing many existing regulations and enforcing more vigorously the few that matter. Additionally, competitiveness requires long-term investment in education and infrastructure, which can be productive only if performance is evaluated and rewarded.?
It is clear that much more onerous tasks await the government than organizing a debt restructuring. However, the discussion about these reforms will have to wait. In the meantime, we are going to have to endure the government?s attempt to manage the media debate over whether haircuts are on the way. But for most of us it is obvious that it is just empty talk, that the options have run out. The toddler is pleading his innocence but the writing is already on the wall.
