http://www.ft.com/intl/cms/s/2/5dbf8de0-24af-11e5-bd83-71cb60e8f08c.html?segid=0100320#axzz3fDMF8Ylv
July 7, 2015 4:42 pm
Greece debt crisis: Readers’ questions answered
Martin Sandbu
After Greek voters on Sunday rejected the bailout terms proposed by international creditors, the FT’s social media audience has been asking a lot of questions about Greece’s debt crisis. Our economics writer Martin Sandbu answers some of them.
Do you think a solution can be found to save the face of both positions?
For the creditors, they need to be able to justify a debt restructuring to their voters. I think they can, if they emphasise two things. The first is that the Greeks will not get “new money” — it is only a question of giving them more time to pay back. This requires the debt restructuring to eschew nominal “haircuts” and focus on very long repayment extensions at very low interest rates. The second is that the International Monetary Fund now explicitly demands a restructuring. So the eurozone creditors can “blame” the IMF and explain to voters that they needed to compromise with the fund.
Could this be done in a face-saving way? I think so. For Greek prime minister Alexis Tsipras, the landslide in the referendum has brought political capital he can afford to spend. Firing Yanis Varoufakis as finance minister is a step in that direction. If Mr Tsipras gets the sort of agreement I outlined in a previous post, he can wave the debt relief in front of his voters and say their defiance paid off and that he can recommend this honourable compromise in the spirit of constructive collaboration with the creditors.
Would a Grexit cause a domino effect and would other countries exit the eurozone?
In the short run, a domino effect can be staved off. It is clearly the intention of leaders of other euro countries to quarantine Greece and to protect other vulnerable members from immediate market contagion.
The greater danger is in the long run. If one country has left the euro, it will be forever impossible to claim that an exit cannot happen. Markets will always price in a possible euro exit — and with a higher probability than before over the long run. So financing costs for the periphery will go up, in the best-case scenario.
The worst case is a return of the self-fulfilling runs on countries that we saw in 2010-12. It is worth remembering that these were not just about the risk of sovereign defaults, but about the risk of countries leaving the euro.
Can Greece ever balance its budget — ie bring in enough taxes to cover domestic expenditure?
Greece’s primary government budget balance has been in (small) surplus since late 2013. The discussion is all about getting more taxes in, or cutting spending, to service the debts.
If there is no bailout deal would we see hungry riots in the streets of Greek cities?
It is quite hard to predict what happens without a bailout deal as it depends on what is done next. In particular, does the European Central Bank continue to limit liquidity in the Greek banks? If so, and if the banking system is not restructured to start working again (like in Cyprus), then the government will probably choose to restore a national currency in some form.
Global Insight
IMF could help save Greece from the abyss
It may be time for fund to look at rule book and consider following its own advice
That does not have to be a catastrophe — countries change currency regimes from time to time — but it would be a huge disruption to the economy. But so is having to live without functioning banks.
The better option, which can be pursued even if the government is in default, is to restructure the banking system and for the ECB to give it access to liquidity again. Even if that means people suffer a haircut or “bail-in” of parts of their deposits, it would allow economic activity to resume.
Is Greece better off going it alone? Won’t they have cheaper exports in long run out of euro?
They may or may not have cheaper exports: a new currency will probably be highly inflationary, so it is an open question how much prices will fall when measured in international currency.
Also note that selling your exports more cheaply only makes you better off if you can expand your sales enough to make up for the lower price — otherwise you are only impoverishing yourself. And as it happens, Greece has undergone a strong “internal devaluation” already, with prices and especially wages falling significantly even if the exchange rate to the rest of Europe is by definition fixed. But this has not boosted exports.
That suggests the Greek problem is not so much one of price competitiveness but one of markets that are slow to adjust to whatever price changes do take place — exporters have not expanded even if their costs are lower. It is not clear why leaving the euro would, by itself, change that.
If there is no bailout deal, how should the Greek government restore its financial system and restart the economy?
What happens when the money runs out?
How long can Greece’s banks survive the current political turmoil?
The best solution would be to reach an understanding with the ECB and what it would take for the central bank to let liquidity flow freely again. The ECB restricts liquidity to Greek banks on the basis that it is risky to lend to them (but as I argued in my post “ECB, enemy of the euro?”, the ECB’s actions are part of why Greek banks are shaky).
There should be a way to restructure the Greek banking system, and splitting their assets and liabilities into “bad banks” and “good banks”, so the ECB would be prepared to give the good banks whatever liquidity they need. Then sound and functioning banks could open and economic activity could restart.
Is there a similarity between the financial crises in Greece and Puerto Rico?
Yes, there is, but the differences are very instructive. Both crises come from the combination of borrowing too much with the inability/unwillingness to write them down when growth falters.
In depth
Greece debt crisis
The anti-austerity government in Athens scored a victory as voters backed its call to reject a compromise with international creditors, but this has raised serious doubts about the country’s ability to remain inside the eurozone
Further reading
In the Greek case, having the euro means you cannot write down debt through a devaluation, and neither Athens nor the rest of the eurozone nor the IMF had the stomach from an explicit writedown in 2010.
In Puerto Rico, devaluation is also not an option and the legal system does not give it the kind of sovereignty which would permit a unilateral writedown.
But here is the difference: there is no clampdown on banking services in Puerto Rico. That is because the Federal Deposit Insurance Corporation takes over insolvent banks, restructures them and reopens them swiftly. The eurozone has not done the same in Greece. I recommend a column by Daniel Gros on this.
July 7, 2015 4:42 pm
Greece debt crisis: Readers’ questions answered
Martin Sandbu
After Greek voters on Sunday rejected the bailout terms proposed by international creditors, the FT’s social media audience has been asking a lot of questions about Greece’s debt crisis. Our economics writer Martin Sandbu answers some of them.
Do you think a solution can be found to save the face of both positions?
For the creditors, they need to be able to justify a debt restructuring to their voters. I think they can, if they emphasise two things. The first is that the Greeks will not get “new money” — it is only a question of giving them more time to pay back. This requires the debt restructuring to eschew nominal “haircuts” and focus on very long repayment extensions at very low interest rates. The second is that the International Monetary Fund now explicitly demands a restructuring. So the eurozone creditors can “blame” the IMF and explain to voters that they needed to compromise with the fund.
Could this be done in a face-saving way? I think so. For Greek prime minister Alexis Tsipras, the landslide in the referendum has brought political capital he can afford to spend. Firing Yanis Varoufakis as finance minister is a step in that direction. If Mr Tsipras gets the sort of agreement I outlined in a previous post, he can wave the debt relief in front of his voters and say their defiance paid off and that he can recommend this honourable compromise in the spirit of constructive collaboration with the creditors.
Would a Grexit cause a domino effect and would other countries exit the eurozone?
In the short run, a domino effect can be staved off. It is clearly the intention of leaders of other euro countries to quarantine Greece and to protect other vulnerable members from immediate market contagion.
The greater danger is in the long run. If one country has left the euro, it will be forever impossible to claim that an exit cannot happen. Markets will always price in a possible euro exit — and with a higher probability than before over the long run. So financing costs for the periphery will go up, in the best-case scenario.
The worst case is a return of the self-fulfilling runs on countries that we saw in 2010-12. It is worth remembering that these were not just about the risk of sovereign defaults, but about the risk of countries leaving the euro.
Can Greece ever balance its budget — ie bring in enough taxes to cover domestic expenditure?
Greece’s primary government budget balance has been in (small) surplus since late 2013. The discussion is all about getting more taxes in, or cutting spending, to service the debts.
If there is no bailout deal would we see hungry riots in the streets of Greek cities?
It is quite hard to predict what happens without a bailout deal as it depends on what is done next. In particular, does the European Central Bank continue to limit liquidity in the Greek banks? If so, and if the banking system is not restructured to start working again (like in Cyprus), then the government will probably choose to restore a national currency in some form.
Global Insight
IMF could help save Greece from the abyss
It may be time for fund to look at rule book and consider following its own advice
That does not have to be a catastrophe — countries change currency regimes from time to time — but it would be a huge disruption to the economy. But so is having to live without functioning banks.
The better option, which can be pursued even if the government is in default, is to restructure the banking system and for the ECB to give it access to liquidity again. Even if that means people suffer a haircut or “bail-in” of parts of their deposits, it would allow economic activity to resume.
Is Greece better off going it alone? Won’t they have cheaper exports in long run out of euro?
They may or may not have cheaper exports: a new currency will probably be highly inflationary, so it is an open question how much prices will fall when measured in international currency.
Also note that selling your exports more cheaply only makes you better off if you can expand your sales enough to make up for the lower price — otherwise you are only impoverishing yourself. And as it happens, Greece has undergone a strong “internal devaluation” already, with prices and especially wages falling significantly even if the exchange rate to the rest of Europe is by definition fixed. But this has not boosted exports.
That suggests the Greek problem is not so much one of price competitiveness but one of markets that are slow to adjust to whatever price changes do take place — exporters have not expanded even if their costs are lower. It is not clear why leaving the euro would, by itself, change that.
If there is no bailout deal, how should the Greek government restore its financial system and restart the economy?
What happens when the money runs out?
How long can Greece’s banks survive the current political turmoil?
The best solution would be to reach an understanding with the ECB and what it would take for the central bank to let liquidity flow freely again. The ECB restricts liquidity to Greek banks on the basis that it is risky to lend to them (but as I argued in my post “ECB, enemy of the euro?”, the ECB’s actions are part of why Greek banks are shaky).
There should be a way to restructure the Greek banking system, and splitting their assets and liabilities into “bad banks” and “good banks”, so the ECB would be prepared to give the good banks whatever liquidity they need. Then sound and functioning banks could open and economic activity could restart.
Is there a similarity between the financial crises in Greece and Puerto Rico?
Yes, there is, but the differences are very instructive. Both crises come from the combination of borrowing too much with the inability/unwillingness to write them down when growth falters.
In depth
Greece debt crisis
The anti-austerity government in Athens scored a victory as voters backed its call to reject a compromise with international creditors, but this has raised serious doubts about the country’s ability to remain inside the eurozone
Further reading
In the Greek case, having the euro means you cannot write down debt through a devaluation, and neither Athens nor the rest of the eurozone nor the IMF had the stomach from an explicit writedown in 2010.
In Puerto Rico, devaluation is also not an option and the legal system does not give it the kind of sovereignty which would permit a unilateral writedown.
But here is the difference: there is no clampdown on banking services in Puerto Rico. That is because the Federal Deposit Insurance Corporation takes over insolvent banks, restructures them and reopens them swiftly. The eurozone has not done the same in Greece. I recommend a column by Daniel Gros on this.
No comments:
Post a Comment