With unusual clarity, Germany's finance minister, Wolfgang Schäuble, recently made clear that Greece needs much more public support and that private creditors will also need to make an effort. The taboo of rescheduling, which had been painfully and unconvincingly maintained in official circles, is now broken. This is an important step forward.
|Greece needs at least two things. First, more time — and second, lower interest payments.|
Politically, this stance by Schäuble is of the utmost importance. Among European decisionmakers, there is great uncertainty about the proper course of action and a great heterogeneity of interests. Markets react badly to such uncertainties.
It had been expected of Germany to provide leadership, but the Germans are not experienced in doing that and are ill at ease. The Schäuble signal, surely approved by Chancellor Merkel, is therefore important.
In Greece, meanwhile, the popular protest against drastic reforms turned against Germany — as if Germany had caused the problem. The Greek complaint about the German unwillingness to solve the problem on Greece’s behalf is based on the fallacious idea that a country that runs an export surplus is benefiting from the dire state of the deficit country.
This misses the important point that only a country with an export surplus can actually be a net creditor. Hence one cannot ask the Germans both to extend more credit and to reduce their export surplus.
Germany was also criticized in Greece for only providing help to bail out its own banks. This is factually an exaggeration because banks outside Greece have not wasted time and reduced their exposure to Greece very substantially. But it is an important step to bring in the private sector to reduce the burden of the debt on Greece.
The economic logic for a rescheduling is compelling. Even if the Greek government managed to reduce the fiscal deficit to zero — hence by much more than what is feasible in the real world and much more than asked for by the IMF and European Union — at going rates of interest, Greece's outstanding debt is still going to explode.
|As a rescheduling is unavoidable, it is important to have a soft rescheduling rather than a catastrophe-driven one.|
There is no way the Greek economy will return to high growth with a declining deficit and astronomical interest rates. Nor can Greece inflate its debt away within the eurozone. With roughly zero nominal income growth and an average interest rate of about 6% (reminder: ten-year Greek government bonds fetch over 14%, but most of the outstanding debt has short maturities), the debt increases by 6% of the outstanding amount. Since the debt is approaching 150% of GDP, that means interest payments will total 9% of GDP.
Public money from the IMF and the EU takes pressure off Greece’s refinancing needs and the interest rate it is charged — and hence lowers the average interest cost of the debt. As such, it is extremely useful and necessary. As long as Greece is paying back — and it needs to be recalled that public money has senior debt status and, in case of partial default, is therefore paid back before debt to private creditors — taxpayers are not paying for Greece.
Only if there is a default would taxpayers of other countries foot the bill. But the purpose of the public intervention is precisely to avoid such a default.
Mr. Schäuble’s statement is important for increasing the chance to avoid default. The growth prospects of Greece are so dire, and the size of the public debt and the share of the Greek debt held by foreigners are so high, that even substantially more official money is not enough.
Greece needs at least two things. First, more time — and second, lower interest payments. More time is needed to carry through the much-needed structural reforms and the privatization of public assets. This is not a task for a year or two but for five to ten years, and this needs to be recognized.
|One cannot ask the Germans both to extend more credit and to reduce their export surplus.|
To avoid an explosion of the public debt, interest payments need to be reduced. And there is a logic for that. The combination of more public money, a lengthening of existing maturities by five to ten years and a reduction of the interest rates: all these measures contribute to a reduction of the default risk.
Creditors should be content, despite longer maturities and a lower interest rate, as the risk premium has fallen. And in their books, they would not have to make loss adjustments so that banks, in particular, would not be weakened thereby.
As a rescheduling is unavoidable, it is important to have a soft rescheduling rather than a catastrophe-driven one. Policymakers could very substantially contribute to that goal and make rescheduling acceptable to private creditors.
Taking inspiration from the experience with Brady bonds, Europe, instead of making more public loans available, could issue a repayment guarantee for rescheduled bonds. Then, the new interest rates could be as low as the German ones.
That would immediately knock 5-7% off of Greece’s fiscal deficit, and the maturity lengthening would take pressure off of currently high refinancing needs.