Coulda woulda shoulda
“We knew at the fund from the very beginning that this program was impossible to be implemented because we didn’t have any — any — successful example. The argument that is used usually by the troika in order to criticize Greece — and to ignore their mistakes — is that the deep recession is because of the non implementation of the structural reforms”.
It is this statement in the New York Times last Tuesday from Panagiotis Roumeliotis, who until last January was Greece’s representative at the IMF, that rekindled the public debate in Greece about those momentous days of spring 2010. Considering the ferocity of the impact that the two ‘bailout’ programs had on the Greek economy and people’s livelihoods, for many in Greece the period between March and May of 2010 is very sensitive and critical. The events that led to the signing of the first Memorandum of Understanding are seen as shaping the country’s future for many years to come. There is a question that remains unanswered in everyone’s mind, could Greece have gotten a better deal?
As much as Greece’s political establishment was completely unprepared to deal with the biggest economic crisis in the country’s modern history, Europe and its institutions equally did not demonstrate any signs of urgency. Sticking with the nonchalant style that allowed Greece to reach an almost bankrupt state, Europeans underestimated the fundamental problems of Greek finances and believed that the issue would resolve itself if Athens simply followed a stricter budget policy that would appease markets. Greece’s obvious solvency problem was seen as a confidence issue, a diagnosis that could not have been further from the truth – as confirmed by the current extent of the crisis. Characteristic of the lack of importance that Germany attached to the Greek issue is the obvious prioritisation of the North Rhine-Westphalia state elections in May 2010. This was the most pressing matter on Chancellor Angela Merkel’s political agenda, rather than finding a way to address the Greek – and imminent euro – crisis.
When the crisis hit home and Greece’s yields were climbing towards 7% in March 2010, Europe was completely unprepared to deal with the situation, let alone a debt restructuring. As such, the program agreed was designed to buy time, put the necessary mechanisms in place to deal with the issue at hand while at the same time attempting to contain the problem and reduce any exposure. According to data from the Bank of International Settlements, euro area banks at the end of the second quarter of 2010 had a combined exposure to the Greek state of approximately 50 billion euros. Just between German and French banks the exposure was approximately 34 billion euros, 19 billion and 15 billion euros respectively (table below).
At the end of the first quarter of 2010, Greece’s government debt stood at 309.7 billion euros (134% of 2009 GDP) held by the private sector and majority of it in bonds denominated in euros and governed by Greek law. A decisive Greek debt restructuring, in similar terms to the PSI that concluded early this year, would have relieved Greece of a significant portion of its debt burden. But the relief for Greece would have provided European countries with a new problem, given the exposure of their banks to the Greek state at the time.
As such, instead of dealing with the issue of Greek solvency and the health of the balance sheets of their domestic banking systems following a Greek debt restructuring, they dealt with the Greek problem as one of liquidity. They sought to provide for 2.5 years financing that would fund the Greek budget deficit and ensure the uninterrupted servicing of the debt burden, thereby safeguarding euro area banks, on the assumption that Greece would be able to return to the markets in the first quarter of 2012 (Table below) – an assumption that in itself illustrates the misdiagnosis of the problem.
By the time the decision to restructure Greek debt was made in October 2011, the country’s burden had significantly increased as a result of the troika’s financing line. It stood at 355.6 billion euros in the end of 2011 or 165% of GDP and a large portion of it was held by the ECB as a product of the purchases under the Securities Market Programme. Subsequently, only an amount of just over 200 billion euros, compared to 309.7 billion euros before the ‘bailouts’, that was privately held was in scope of the PSI, as troika loans and ECB holdings were excluded from the exchange, significantly reducing the amount of debt that was lifted off Greece’s shoulders.
An immediate debt restructuring in 2010 would have facilitated Greece’s fiscal efforts as it would have significantly reduced the servicing costs and would have pushed back maturities, reducing the financing needs in the medium term. More favourable terms in the official sector loans, that were initially set at 400 basis points over the three-month Euribor, would not have added to Greece’s interest costs, which shot up to 15 billion euros in 2011 from 11.9 billion in 2009. A longer period of fiscal adjustment would have had a less severe impact on the economy.
There is little doubt that Greece did not get the best possible deal in 2010 and did not take advantage of probably its strongest negotiating position during the crisis. The program was not designed to assist a partner at a time of need. It intended to buy time, limit the damage and at the same time send a clear message by making the costs and terms so punitive that no one else would even think of asking for official sector support. That Ireland and Portugal followed the same path within a year of Greece’s first bailout is also an indication of the misreading of the problem by Europe’s political elite.
However, in the domestic public debate surrounding the days of spring 2010, there should be no illusions that there was a magical solution to resolve an issue that was the product of years of dismal management of the public finances and the public administration.
Even if a debt restructuring had taken place back in the spring of 2010, Greece was running a primary deficit in the region of 24 billion euros in 2009. The government’s excessive deficit would still need to be addressed and somehow financed. Greece would also need additional funds to recapitalise its own banks, following the recent PSI recapitalisation needs are close to 50 billion euros. With Greece most probably locked out of the markets after a debt exchange, the financing gap would have to come from the official sector for an amount similar to the one of the first program.
The spring of 2010 was the time of reckoning for Greece’s political establishment.