Obama joins the Greek cho­rus

Financial Mirror (Cyprus) - - FRONT PAGE -

US Pres­i­dent Barack Obama’s re­cent call to ease the aus­ter­ity im­posed on Greece is re­mark­able – and not only for his en­dorse­ment of the newly elected Greek gov­ern­ment’s ne­go­ti­at­ing po­si­tion in the face of its of­fi­cial cred­i­tors. Obama’s com­ments rep­re­sent a break with the long­stand­ing tra­di­tion of of­fi­cial Amer­i­can si­lence on Euro­pean mon­e­tary af­fairs. While schol­ars in the United States have fre­quently de­nounced the poli­cies of Europe’s mon­e­tary union, their gov­ern­ment has looked the other way.

Those who crit­i­cise the euro or how it is man­aged have long run the risk of be­ing dis­missed as An­glo-Sax­ons or, worse, an­tiEuro­peans. Bri­tish Prime Min­is­ter Mar­garet Thatcher ac­cu­rately fore­saw the folly of a Euro­pean mon­e­tary union. Gor­don Brown, as Chan­cel­lor of the Ex­che­quer, fol­lowed in her foot­steps. When his staff pre­sented care­fully re­searched rea­sons for not join­ing the euro, many Euro­peans sneered.

And that is why Obama’s state­ment was such a breath of fresh air. It came a day af­ter Ger­man Chan­cel­lor An­gela Merkel said that Greece should not ex­pect more debt re­lief and must main­tain aus­ter­ity. Mean­while, af­ter days of not-so-veiled threats, the Euro­pean Cen­tral Bank is on the verge of cut­ting fund­ing to Greek banks. The guardians of fi­nan­cial sta­bil­ity are am­pli­fy­ing a desta­bil­is­ing bank run.

Obama’s breach of Europe’s in­tel­lec­tual in­su­lar­ity is all the more re­mark­able be­cause even the In­ter­na­tional Mon­e­tary Fund has ac­qui­esced in Ger­man-im­posed or­tho­doxy. As IMF Man­ag­ing Direc­tor Christine La­garde told the Ir­ish Times: “A debt is a debt, and it is a con­tract. De­fault­ing, re­struc­tur­ing, chang­ing the terms has con­se­quences.”

The Fund stood by in the 1990s when the eu­ro­zone mis­ad­ven­ture was con­cocted. In 2002, the direc­tor of the IMF’s Euro­pean Depart­ment de­scribed the fis­cal rules that in­sti­tu­tion­alised the cul­ture of per­sis­tent aus­ter­ity as a “sound frame­work.” And, in May 2010, the IMF en­dorsed the Euro­pean au­thor­i­ties’ de­ci­sion not to im­pose losses on Greece’s pri­vate cred­i­tors – a move that was reversed only af­ter un­prece­dented fis­cal belt­tight­en­ing sent the Greek econ­omy into a tail­spin.

The de­lays and er­rors in man­ag­ing the Greek cri­sis started early. In July 2010, La­garde, who was France’s fi­nance min­is­ter at the time, recog­nised the dam­age in­curred by those ini­tial de­lays, “If we had been able to ad­dress [Greece’s debt] right from the start, say in Fe­bru­ary, I think we would have been able to pre­vent it from snow­balling the way that it did.” Even the IMF ac­knowl­edged that it had been a mis­take not to im­pose losses on pri­vate cred­i­tors pre­emp­tively; it fi­nally did so only in June 2013, when the dam­age had al­ready been done.

There is plenty of blame to go around. For­mer US Trea­sury Sec­re­tary Ti­mothy Gei­th­ner cham­pi­oned a hard­line stance against debt re­struc­tur­ing dur­ing a cri­sis. As a re­sult, de­spite warn­ings by sev­eral IMF Di­rec­tors in May 2010 that re­struc­tur­ing was in­evitable, the US sup­ported the Euro­pean po­si­tion that pri­vate cred­i­tors needed to be paid in full.

Lee Buchheit, a lead­ing sovereign-debt at­tor­ney and the man who man­aged the even­tual Greek debt re­struc­tur­ing in 2012, was harshly crit­i­cal of the au­thor­i­ties’ fail­ure to face up to re­al­ity. As he put it, “I find it hard to imag­ine they will now man up to the propo­si­tion that they de­layed – at ap­palling cost to Greece, its cred­i­tors, and its of­fi­cial­sec­tor spon­sors – an es­sen­tial debt re­struc­tur­ing.” Obama may have ar­rived late to the right con­clu­sion, but he ex­pressed what should be an ob­vi­ous truth: “You can­not keep on squeez­ing coun­tries that are in the midst of de­pres­sion.”

If Obama’s words are to count, he must con­tinue to push for the kind of deal Greece needs – one that errs on the side of too much debt for­give­ness, rather than too lit­tle. Re­cent anal­y­sis shows that for­give­ness of Greece’s of­fi­cial debt is un­am­bigu­ously de­sir­able, as an­other bo­gus deal will keep the Greek econ­omy de­pressed, en­sur­ing that the prob­lem soon re­curs. If Euro­pean sen­si­tiv­i­ties must be as­suaged, Greece’s debt re­pay­ment could be drawn out over 100 years.

At the end of the day, debt for­give­ness benefits cred­i­tors as much as it helps debtors. Cred­i­tors have known this since at least the six­teenth cen­tury, when Spain’s King Philip II be­came the world’s first known se­rial sovereign de­faulter. As Je­sus put it, “It is more blessed to give than to re­ceive.”

Euro­pean au­thor­i­ties must come to un­der­stand that the next act of the Greek tragedy will not be con­fined to Greece. If re­lief fails to ma­te­ri­alise, po­lit­i­cal dis­con­tent will spread, ex­trem­ist forces will gain strength, and the sur­vival of the Euro­pean Union it­self could be en­dan­gered.

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