The Grecian formula
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.