From day one, immense challenges faced the coalition of international institutions that opted for a liquidity approach to address Greece’s debt solvency problems. Now that this coalition is stumbling and bickering publicly, the outlook for Greece has taken a significant turn for the worse. Even as George Papandreou, the Greek prime minister, prepares to reshuffle his cabinet, he must know his nation’s predicament is now extremely hard to reverse.
It is now commonly accepted that Greece’s predicament is due to two inter-related problems: the economy is unable to grow, and the debt burden is enormous. Yet neither has influenced sufficiently the approach that has been adopted by the crisis management coalition, consisting of the Greek government, its European creditors (namely other eurozone governments, the European Commission and the European Central Bank) and the International Monetary Fund.
Instead, the focus has been on dramatic austerity for Greece and massive loans from the official creditors. Not surprisingly, every economic, financial and social indicator for the Greek economy has deteriorated. This has happened both in absolutes term and, more alarmingly, relative to the coalition’s already grim expectations. Such failure naturally encourages a blame game, and sadly that is exactly what is now happening.
Judging from other crisis management episodes around the world, it is normal for both the Greek government and its people to feel let down by European neighbours who they feel under-appreciate the sacrifices made by its population, especially since these same creditors refused to lower interest rate on new loans. Equally, it is normal for the creditors to complain that it is Greece that is not doing enough to counter what is, after all, a home-grown problem.
In principle, these gaps need not be fatal. Yet the current attempts to bridge them are nowhere near enough. They would do little beyond, at best, prolonging for a few months an already unsustainable situation. More likely, they would be undermined rapidly by two recent developments that suggest that the current approach to crisis management in Greece is coming to its end.
First, and most importantly, the Greek government is losing control of the streets. As protests turn increasingly ugly, the pursuit of a national political consensus becomes even more elusive. This is especially true if all Mr Papandreou, or another leader, can offer is a step back to a discredited approach that involves sacrifices with no evidence of lasting benefits.
Second, even if Greece can deliver, European creditors fundamentally disagree among themselves as to how best to support the country — other than to push the IMF to lend more. Some, led by Germany, want fairer burden-sharing with the private sector, rather than to continue to fund both the needs of the Greek economy and full repayments to private lenders that are now exiting the country. But the ECB strongly opposes this, especially now that its balance sheet is contaminated by large holdings of Greek bonds.
Responding properly to all this is an engineering nightmare and a political headache. Critically, it now requires giving up on at least one, and more likely at least two, of the three principles that have underpinned the coalition’s approach to Greece: avoiding a debt restructuring, a currency devaluation and a change in the fiscal set up of the eurozone.
Europe faces a moment of truth. The sooner this is recognised, the greater the chance of shifting to a “plan B”. If not the prospects are stark: the already-difficult outlook facing the three bail-out countries (Greece, Ireland and Portugal) will surely be compounded by a decade of internal economic implosion. The task must now be to limit fundamental contagion to countries that are yet to be bailed out (notably Spain), and to maintain the integrity of the Euro. But the time for action is fast running out.
The writer is Chief Executive and co-CIO of Pimco, the world’s leading bond manager.
Argentina v. Greece : 5-nil?
Almost all independent observers of Greece have stressed from the beginning that Greece was facing a solvency, not a liquidity problem. This was also the case 10 years ago with Argentina; a country that had achieved financial stability by entering into a “quasi” monetary union using the US dollar and which had privatised every available public asset.
But the country during the late 1990s then ran a succession of twin deficits, both fiscal and external current account. When foreign creditors started to doubt the ability of the country to service the debt it had thus accumulated, the international community responded with very large financial support packages financed both by the International Monetary Fund and Spain because Argentina was supposed to face only a liquidity problem.
However, even a succession of three packages, of rapidly growing size, could not avert default because investors were not convinced, and the resistance of the population grew, along with the austerity efforts of the government.
How should one assess the chances of Greece avoiding an Argentine scenario today? A quick look at the fundamentals (Greece today versus Argentina before the default) is not encouraging:
Debt level (% of GDP): GR: 150% v. ARG: 50 %
Fiscal deficit (% of GDP): GR: 12% v. ARG: 5 %
Current account deficit (% of GDP): GR: 10% v. ARG: 2 %
Growth (real GDP): GR: -3% v. ARG: -2 %
Deposit flight (% change in bank deposits): GR: -10% v. ARG: -7 %
On these five fundamental indicators of an impending crisis it is thus five to nil for Argentina.
So where are we heading? As in Argentina in 2001 the population of Greece seems determined today to push the country towards the worst of all options: a disorderly default without having implemented first the structural reforms which would allow the country to emerge leaner and stronger from this “catharsis”. There is very little Europe can do to avoid this outcome.
The writer is the director of the Centre for European Policy Studies, a Brussels-based think-tank.