By Matt O’Brien Washington Post
WASHINGTON • A specter is haunting Europe: the specter of Greek debt.
For a long time, the fact that Greece was basically bankrupt was the truth that dared not speak its name. But now it’s become the truth that can speak its name as long as it does nothing else. Even German Finance Minister Wolfgang Schäuble admitted that “Greek debt sustainability is not achievable without a haircut”, before concluding unhelpfully that “there can be no haircut” because it’s against the rules. And that seemed to be it – until Tuesday evening.
That’s when the International Monetary Fund became perhaps the most unlikely revolutionary ever with its demand that Greece get debt relief as part of any bailout it does. part. The vague promises that Europe has and continues to make are not enough. The IMF will no longer play this game of give-you-money-to-get-back-so-we-both-could-pretend-you-could -refund me. We’ve already seen how this one ends – with Greece defaulting, as it did last week. The IMF therefore does not want to reduce Greece’s debt because it hurts Greece. She wants to reduce Greece’s debt because she wants to be repaid by Greece.
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The simple story is that Greece’s debt might have been manageable before, but it is no longer. Over the past six months, the Greek government has borrowed more than it was supposed to, and the Greek economy hasn’t grown as it should – it’s actually shrunk, and probably much more now than its banks have been forced to close – so Athens not only has more to pay, but is also less able to pay. This is why the IMF now estimates that Greece’s debt-to-gross domestic product ratio will rise from 177% today to 200% in the next two years. And that’s also with some pretty aggressive assumptions. The IMF expects Greece to run budget surpluses, excluding interest payments, of 3.5% of GDP “for the next few decades”, although it acknowledges that “few countries have managed to do so ” in the past. And he thinks that Greece “will go from the lowest to one of the highest in terms of productivity growth and activity rates in the euro zone”. In other words, Greece’s debt is unsustainable even if you assume it runs surpluses for an almost impossible length of time and its economy grows a lot.
So if Greece cannot deleverage and deleverage more and more, its only option is to deleverage by default. There are more or less painful ways to do it. The least of them is that both parties work together, so that both can continue to receive at least some money from the other. It’s a lack of politeness, or a restructuring. And the IMF has suggested three ways that might work. Europe can either give money to Greece every year; give Greece a pass on some of what she owes; or give Greece much more time to pay what it owes, with a 30-year grace period initially. But in any case, Europe will indeed have to give – notice how this word keeps coming back – money to Greece. It just depends on how they want to do it.
If history is any guide, the answer is in the least transparent way possible. That rules out cutting a check to Greece every year or reducing the amount it owes. Instead, today’s 20-year bonds that she doesn’t need to pay for 10 years could become tomorrow’s 60-year bonds that she doesn’t need to pay for 30 years. . And the interest rate on them could even be reduced by 0.5-0.2%. Obligations like that would be so negligible that there is a good chance in the distant future, if there really is a United States of Europe, that they will become entirely negligible, i.e. forgiven. This is, after all, the process that Europe began in 2012, when it turned much of Greece’s debt into an imaginary variety by postponing payments, cutting interest payments and lengthening Payment period. The IMF just wants Europe to make it even more imaginary now. And Europe probably will, because the alternatives are much worse: either have to pay more for a bailout that doesn’t include the IMF, or see the bailout collapse and Greece leave the euro.
But it won’t be long before Greece is back here. It should be emphasized, however, that just because 177% of GDP in debt is not in itself unsustainable. It doesn’t, or at least it doesn’t have to. Countries with a good financial reputation that borrow in a currency they control – like post-war Britain – can and have carried even higher debt loads. No, it’s that 177% of the GDP of the debt is unsustainable in the euro zone. These countries cannot make up for budget cuts with lower interest rates to stimulate lending or cheaper currency to make workers and exports more competitive, so budget cuts that suck money from the savings can do more harm than any savings that are used to pay down debt. This is, after all, a pretty good description of what happened in Greece between 2009 and 2014. Its total debt only increased by 6% during this period – partly due to its depreciation in 2012 – but its debt burden (or debt-to-GDP ratio) has increased by 40%. Austerity, in other words, was doomed to fail, and that is unlikely to change. So even if Greece does everything right, chances are its debt to GDP ratio will continue to rise even if its debt doesn’t, in which case Europe will blame it for needing another restructuring.
The euro is a triumph of politics over economics, but each is short-lived. This means that having one central bank set a single interest rate for 18 different countries will inevitably end in tears for some of them. Europe has managed to make up for this, however, by appealing to the will to do whatever it needs to do at all times to keep the common currency together. But the problem is that each bailout makes the politics of the next one harder at the same time that the economy doesn’t get much easier. That’s enough to keep the euro from collapsing, but not enough to fix it.
And that’s the best way to think about the IMF’s plans for Greek debt. Two of them (a haircut or a restructuring) would solve the crisis for now, and the other (annual transfers) would solve it for good. But Europe will probably only be able to bring itself to do the one that will help it the least, because the voters do not want it to do more than that. And it’s hard to see how that would change. Well, unless bailout fatigue sets in and people want even less than the minimum.
Then the workers of Europe, let alone the world, would not unite, and they could really lose their euro chains.
O’Brien is a reporter for Wonkblog and covers economic affairs. He was previously associate editor at The Atlantic.