The International Monetary Fund (IMF) has performed a valuable public service by publishing a detailed “Debt Sustainability Analysis” for Greece on July 2. While this document is written in typically dry “bureaucratese,” it lays bare the failure of the strategy of “kicking the can down the road” that the other Euro Zone countries have been using with Greece for the past five years.
Dr. Carl Weinberg is Chief Economist at High Frequency Economics and a veteran of the mostly successful Brady Plan debt restructuring program of 1989-1992. Those negotiations took debt loads that were impossible and restructured them, in a manner similar to the way failing corporations are restructured in the US. Brady Plan deals were worked out for Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico (the first one in 1989-1990), Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.
Dr. Weinberg suggests that the €323 billion ($358.3 billion) Greek debt be restructured into bonds with a maturity of 100 years, a coupon (interest) rate of 5.0 percent and a 25-year grace period before the first payment is due. This would give Greece “breathing room” and would keep all its creditors (primarily the European Central Bank (ECB), the European Financial Stability Facility (EFSF) and the IMF) from having to take a “haircut” on their holdings of Greek debt.
Not very surprisingly, the IMF analysis does not go this far. However, it rather drily suggests that extending the grace period to 20 years and the amortization period to 40 years (an effective doubling of each) together with new financing, would barely be adequate.
Greek voters went to the polls on July 5 in a hastily arranged referendum to vote “yes” or “no” on accepting terms from the creditors that were withdrawn on June 30. Thus, it’s not really clear what they were voting on. The wording in the ballot was also very confusing. It read: “Should the draft agreement submitted by the EC, ECB, IMF to the eurogroup on June 25, which consists of two parts that make up their full proposals, be accepted? The first document is titled, ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis.’”
Despite that convoluted wording (it can’t possibly be any clearer in Greek), the 62.5 percent of voters who turned out gave a victory by a 61.3-38.7 percent margin to all those wishful thinking people who believe that reality won’t triumph. Greece is being kept afloat by the ECB. If they stop doing that, the banks will all be bankrupt. No one knows where this disaster will go.
Now the creditors need to follow the IMF recommendations, which include another €60 billion ($66.5 billion) of new money through 2018. This is in addition to the restructuring of all the existing debt.
Like so many economic problems in the world, the Greek mess will be finally resolved when there are no other options. If Greece were to leave the Euro Zone (a terribly complicated exercise), it would be hit with horrendous inflation and an even bigger collapse of the economy that the 25.0 percent decline it has already experienced since 2009.
Greece needs debt relief. It also needs to reform its ridiculous pension system to conform to those of the rest of the Euro Zone and figure out ways to collect taxes that are owed.
The Greek economy is about $200 billion a year in real GDP. That’s close to Alabama ($199.4 billion in 2014) or Oregon ($215.7 billion). Both are 1.2 percent of the US total.
A failure to follow something like the prescriptions of the IMF or Dr. Weinberg will condemn the Euro Zone to remain mired in a recession that began in the first quarter of 2008. Some people would argue that a recession lasting that long ought better be called a depression.
Either way, whatever happens to Greece is mainly a problem for the Euro Zone. It is simply too small an economy to have a major impact on the US. Most of whatever impact there might be would come through damage done to overall Euro Zone growth, rather than directly from Greece itself.
Dr. James F. Smith, Chief Economist.