The Gre­cian for­mula

The Washington Times Weekly - - Editorials -

Greece will find out soon whether an­other $157 bil­lion gift is headed its way to cover the gov­ern­ment’s obli­ga­tions for next year. While the Euro­pean Union would be on the hook for most of this sec­ond bailout, the In­ter­na­tional Mon­e­tary Fund (IMF) also would con­trib­ute — and that means Amer­i­can tax­pay­ers would foot some part of the bill.

The $157 bil­lion in cash from the first Greek bailout is still flow­ing. The next 12 bil­lion euro tranche will be re­leased soon to pay for bonds ma­tur­ing next month, and much of the money is com­ing from the IMF cof­fers. With a 17 per­cent stake, the United States is the sin­gle largest share­holder in the IMF. Be­cause of the com­plex for­mula used to cal­cu­late obli­ga­tions, the Amer­i­can li­a­bil­ity for the Greek pay­out could be sub­stan­tially higher and will amount to bil­lions.

On­go­ing talks in Lux­em­bourg are tak­ing place as vi­o­lent protests con­tinue in Athens over the pos­si­bil­ity of fur­ther aus­ter­ity mea­sures, a 20 per­cent re­duc­tion in the pub­lic-sec­tor work force and pri­va­ti­za­tion of state-owned as­sets. This is very much a stan­dard IMF pack­age for an in­debted coun­try, and its ef­fec­tive­ness is ques­tion­able. This is the same pre­scrip­tion that the IMF of­fered af­ter Ar­gentina de­faulted on its debt in 2002. Ar­gentina even­tu­ally re­cov­ered, but sig­nif­i­cant dif­fer­ences be­tween the two coun­tries mean swal­low­ing the IMF pill will not work for Greece.

As a mem­ber of the EU, Greece traded in its drach­mas for eu­ros. With no in­de­pen­dent mon­e­tary pol­icy, Greece can­not de­value its cur­rency. Ar­gentina had the free­dom to break the peg be­tween the peso and the dol­lar and let its cur­rency float, en­abling its ex­ports to be­come more com­pet­i­tive. The Greek debt bur­den is an as­tound­ing 158 per­cent of gross do­mes­tic prod­uct; Ar­gentina’s at the time of its de­fault was 62 per­cent of GDP. If pen­sions and other en­ti­tle­ments were in­cluded, the Greek debt fig­ure would be even higher.

Aus­ter­ity mea­sures and half-hearted pri­va­ti­za­tion — par­tic­u­larly in the face of over­whelm­ing pub­lic protests — isn’t go­ing to be enough to get Greece out of this debt trap. One pos­si­ble so­lu­tion would be for Greece to leave the eu­ro­zone, ei­ther tem­po­rar­ily or per­ma­nently, so it can re­turn to the drachma and let it float to find a re­al­is­tic value, en­hanc­ing its com­pet­i­tive­ness in the world econ­omy. The Euro­pean Union’s gov­ern­ing doc­u­ments do not pro­vide for this con­tin­gency, and Greece’s exit could ef­fec­tively spell the end of the eu­ro­zone.

A more hon­est op­tion would be an or­derly re­struc­tur­ing of the debt. It would be far bet­ter to work for a so­lu­tion that rec­og­nizes the re­al­ity that the cur­rent debt can­not be paid in full. The rat­ings agen­cies might treat this as an ef­fec­tive de­fault, but with Greece’s rat­ing dropped to CCC, this isn’t that ex­pen­sive a trade-off.

The one les­son to take way from the Ar­gen­tine cri­sis is to avoid drag­ging out the process. The IMF, by bail­ing out Ar­gentina through the 1990s, cre­ated a moral-haz­ard prob­lem in which banks were will­ing to make in­creas­ingly risky loans to Ar­gentina, con­fi­dent that the IMF would cover the loan. The same thing is hap­pen­ing in Greece, and the banks ex­pect Ger­many and the IMF — and its largest share­holder, the United States — to in­sure their risk. Greece is in­sol­vent. The cred­i­tors took the risk.

Tax­pay­ers shouldn’t have to pay for it. Re­struc­tur­ing the debt puts the cost where it be­longs — on the cred­i­tors and the Greek gov­ern­ment.

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