For the time being, we can expect some minor changes, but as time goes on, a more permanent solution will be seeked. In general, EMU needs deeper integration and a restructuring may be part of that integration process. Yet, it is hard to forecast political developments.
You and other economists say that it was not the banks that caused the crisis in Greece, as had been the case in the USA in 2008. It was the result of a government policy, which affected the financial sector. My question is, why were banks buying Greek government bonds for years while the foreign debt was growing and approaching unsustainable levels?
Greek banks did not hold so many government bonds as, say, Italian banks held Italian government bonds. The majority of Greek government bonds were outside Greece. Banks hold government bonds as part of their diversification strategy. When the crisis began, domestic banks had an additional moral obligation to help the State with its liquidity problem. Of course, this "help" proved fatal due to the PSI, which forced the banks to write off almost all their capital.
Ten months after the restructuring of the Greek debt, the PSI (Private Sector Involvement) could you make some assessment of the advantages and disadvantages of the process?
As an economist, and before the implementation of the PSI, I was saying that debt restructuring should have been implemented in a different way. In my opinion, it should have been undertaken in a way that would not affect the banks so much. Until then, banks were still a healthy sector of the Greek economy. The alternative of the so-called Brady bonds had been tested in the past and proved effective in other countries in Latin America. The Brady bonds involve a swap of 100 face value of old bonds for 100 face value of new bonds, but at an almost zero interest rate and with lengthened maturities. The state might not reduce the debt so much on paper, but it would be easier for it to finance it because it benefits from the zeroing of the high interest rate over the coming years. If the debt had been recorded in the accounting books of the banks with its face value, not with the current market value of the bonds (which can easily be decided at European level), banks might not have recorded such large losses. Currently, the four major banks in Greece are registering losses of approximately 24 billion euro as a result of the debt haircut. If Brady bonds had been used, recapitalization of major banks could have been avoided. Furthermore, because the restructuring reduced the capital of Greek banks, the Greek state has to borrow from the Troika in order to recapitalise them, reducing the net benefit of the haircut on the size of national debt.
What prevented the debt restructuring from being implemented in this way?
The government of Lucas Papademos, in which I was running its Economic Office, undertook to implement a plan that had been already adopted. The previous government had agreed on how the PSI would take place. We managed the implementation of the earlier political decisions. Our problem was re-establishing credibility for the country. We could not afford going back to square one and waste time on reneging on earlier agreements. Had we followed that treacherous path, Greece would be out of EMU and perhaps out of EU today. The Papademos government saved the country from a complete collapse, from a catastrophe that would have taken us back 50 years. Papademos single-handedly tried to negotiate the terms of the PSI. His government negotiated the terms of the new economic programme as well. That programme became more flexible and acknowledged the possibility of larger negative multipliers originating from the fiscal consolidation. It also pushed hard and jump-started the stagnating reform effort. The government implemented the PSI in a friendly manner, which was, at an international level, a new innovative process regarding the restructuring of public debt. All legal practitioners in the industry have recognized this and it is considered a major achievement despite the fact that we, as economists, wanted the restructuring to take place in a different way.
Do you think that the recovery programme would yield better results if Papademos’ government had remained in power? In other words, were the extraordinary parliamentary elections in the spring and summer of 2012 a mistake?
Greece lost nearly six months due to the elections, not only because of the elections themselves, but also because of the protracted negotiations with the International Monetary Fund, the European Central Bank and the European Commission on the economic programme and the measures that it would include. Those protracted negotiations achieved almost zero. Yes, a 2-year extension was achieved, but this was already incorporated in the EMU the Papademos government had signed. The protracted negotiations released domestic political pressure but delayed the arrival of cash. During this period, the economy was going down and down, with sentiment dipping and fear settling in. If the previous government had continued its activities, the economic downturn would not have been so great and the date of future recovery would be more visible. But this is how politics works. It was a political decision and there was nothing that could be done about it by the technocrats.
According to Greek media, twenty thousand people will lose their jobs after the consolidation of the banking sector in Greece. Is this figure real?
RSS
Facebook
Twitter
YouTube
