BAILOUT DEAL A HARSH CURE
Hard to argue against the bitter pill Greece government must swallow
If there were a prize for the most over-the-top reaction to Monday’s deal between Greece and its creditors in the eurozone, led by Germany and its redoubtable finance minister, Wolfgang Schäuble, I suppose it would go to the Greek newspaper Demokratia. “Greece in Auschwitz,” its headline read. “Schäuble seeking a holocaust in Europe.”
But, as I say, this was only the most extreme response. The theme of most commentary, inside Greece and out, was that Germany had just done something quite monstrous to Greece. If it was not actually guilty of genocide this time out, certainly it had humiliated Greece’s Prime Minister, Alexis Tsipras, imposing upon him and the country terms more severe than those Greek voters had just rejected, at his urging, in the recent referendum.
Not only was this, in the conventional telling, more of the same austerity medicine that had already done such harm to Greece over the past several years, but in the length and detail of its prescriptions intruded upon Greek sovereignty to a quite unprecedented extent. #Thisisacoup read the inevitable Twitter hashtag. New York Times columnist Paul Krugman, even more spittleflecked than usual, attacked not only Germany for demanding such terms but Greece for accepting them. The agreement was, said others, “indecent,” a “bad joke,” even “insane.”
You’d never know from all this that Germany and the other creditors had just provisionally agreed to lend Greece another $100 billion US or so, the third such bailout in the past five years; that they had opened the door, if not to actual debt reduction, than to stretched-out repayment schedules at lower interest rates, which amounts to the same thing; that another $40 billion would be provided through various EU programs; to say nothing of the continuing issuance of tens of billions in liquidity to the Greek banking system through the European Central Bank.
Much has been made, including in this space, of the eurozone’s reluctance to yield to Greek demands for easier terms, for fear of inciting other of its debtor countries to make the same demands. But as much or more is explained by concern for how another bailout would influence Greece’s behaviour, based on much past experience, not only with the colossally inept and apparently delusional Syriza regime, but with previous governments.
Bailouts, haircuts, call them what you will: in whatever form, they are really investments. Presented with a borrower who in present circumstances simply can’t pay its debts, you calculate how much of a writeoff will be rewarded with how much repayment. Taking partial or delayed payment may be worthwhile if the alternative is no payment at all. But you have to have some assurance that the investment will in fact pay dividends; that current leniency won’t simply translate into demands for future leniency.
That’s what all that talk of “trust” was about. Having already poured hundreds of billions down the Greek well to no apparent result, its creditors were understandably leery of doing so again — not without some assurance that Greece would make the kinds of fiscal and economic reforms needed to return it to creditworthy state. Most of the reforms extracted from Tsipras are of a kind that any sane government in Greece’s circumstances would have enacted on its own long ago. Can we really still be discussing whether Greece’s pension system, which eats up 16 per cent of its GDP, needs to be overhauled? Is it so terribly controversial to insist that the independence of ELSTAT, Greece’s statistical agency, be preserved, given the known history of governments misrepresenting the true state of Greece’s books?
Indeed, many of the reforms Greece’s creditors are now demanding are reforms Greece had said it would make in return for the two previous bailouts. If past governments, who were at least nominally committed to these reforms, could not deliver, how much more difficult is it to trust Syriza, which came to power on the strength of its opposition to most of them, reversed several that were already underway, and now accepts them only, as it were, at the point of a gun?
It is true that previous governments had gone a long way to improve Greece’s finances, taking the country from a structural budget deficit on the order of 18 per cent of GDP in 2009 to a structural surplus of more than two per cent of GDP in 2013. But the Syriza storyline, that this was a counter-productive failure that only succeeded in grinding the country ever further into penury, is a Krugmanite fantasy. By 2014, the economy was growing again, unemployment was falling, the debt-to-GDP ratio had stabilized.
Then Syriza was elected, and all was thrown into chaos, culminating in the farce of last month’s snap referendum, whose chief effect was to cause a run on the Greek banking system, stopping the economy in its tracks and plunging the government still further into debt.
It is the debt, of course, that remains the chief impediment to Greece’s recovery, as it has been throughout. But mere debt forgiveness, unaccompanied by more substantive reforms, is unlikely to be the remedy. It is understandable that the Keynesians who prescribe more debt as the cure for every ill should demand that Greece be spared the side effects of which their critics have long warned, but it doesn’t make their prescription any less lethal.
I don’t doubt that deficits financed, not by borrowing, but from other governments’ munificence, would be less ambiguous in their effects. But I hardly think that’s what Lord Keynes had in mind.
It is the debt, of course, that remains the chief impediment to Greece’s recovery, as it has been throughout. But mere debt forgiveness, unaccompanied by more substantive reforms, is unlikely to be the remedy. Andrew Coyne Bailouts, haircuts, call them what you will: in whatever form, they are really investments.