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SPARE a thought for Greek Prime Minister George Papandreou. He has to find consensus with opposition parties on reforms before he can unlock further funding from the European Union (EU) and the International Monetary Fund (IMF) for his cash-strapped government.
The opposition parties are reacting to the Greek fiscal crisis just as one would have expected them to – by playing the populist card and saying that the reforms are a step too far. But are these parties being populist, or are they being realistic? Can Greece stave off default?
Some European politicians, apparently led by Germany, have been pushing for an orderly restructuring or rescheduling of Greece's debt. However, ratings agencies and the European Central Bank (ECB) have said this would be viewed in the same light as default. Bloomberg reported ECB governing council member Christian Noyer ruled out a restructuring of Greece's debt, calling it a "horror story" that would leave the nation shut out of financing for years.
But strong European nations, such as France and Germany, have taxpayers that are getting tired of bailing out ailing periphery nations like Greece, Portugal and Ireland. The idea of a "soft restructuring" – that is, a not very aggressive move to lengthen maturities of Greece's debt – therefore gained momentum.
In a section on the sovereign debt crisis, SA's own Monetary Policy Review (MPR) stated the main problems facing these countries is one of solvency rather than liquidity, and that there is a view that the only way they can solve their current cash flow problems is by writing off some of their debt.
The MPR says political groups suggest that the sooner these countries' fiscal positions are put on a sustainable footing, the sooner households and companies can start spending and investing again, thereby enabling sustainable economic growth.
There is also concern that the longer this decision is delayed, the more peripheral country debt burdens are shifted onto wider eurozone taxpayers, either directly via bailout packages, or indirectly via liquidity programmes.
However, the MPR says the following factors are concerns about a debt restructuring (effectively a default):
First, restructuring any eurozone member's debts while the country is still running a primary deficit – that is, its deficit excluding interest payments – would effectively defeat the purpose of the restructuring.
'Haircut' hassles
Second, given their substantial holdings of peripheral euro area sovereign debt, some European banks aren't yet strong enough to absorb the losses from a "haircut" on government bonds, and the turmoil in bond markets associated with haircuts could lead to another financial crisis. A "haircut" is a loss.
Third, the outstanding stock of debt wouldn't be reduced significantly with a voluntary restructuring via extending maturities or cutting interest payments, and premature debt restructuring would ease the pressure on peripheral countries to push ahead with required structural reforms.
The reforms Papandreou would like opposition parties to back include a stalled privatisation programme and further spending cuts and tax hikes. The EU and IMF - which have to release €12bn in finance to stave off a funding crunch in June - are demanding political consensus before releasing further funds.
The key issue for eurozone countries like Germany and France, which have been pushing for a behind-the-scenes restructuring, is that their banks are probably not strong enough yet to handle the losses. This could trigger a wider financial crisis.
The Wall Street Journal reported this week that Germany was considering dropping its push for an early rescheduling of Greek bonds to facilitate a new package of aid loans for Greece. Berlin's concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece's funding needs before the indebted country runs out of cash. The report is credited with helping the euro to strengthen a full US cent.
The newspaper reported that some officials in Berlin hope a short-term fix can be found that would allow a full deal, including a bond rescheduling later this year.
Eurozone banking fragility and the need to keep the pressure on Greece is the reason why a restructuring can't be allowed to happen now. But other commentators, such as former IMF official Desmond Lachman of the American Enterprise Institute, have argued that Greece should default and exit the eurozone because it won't be able to grow its economy within the straitjacket of the euro currency. Greece, argues Lachman, requires its own currency which it can devalue to boost exports.
However, it's doubtful that the Greek economy has the export capacity to boost exports immediately upon a devaluation. Inflation would become a problem, as the new currency would sink like a stone. That's certainly not a realistic option for Greece.
In the short term, Greece must stave off default. The country's only hope is for the IMF and EU to release the funds they've promised. To do that, it needs to implement radical reforms. But there's a limit to what it can do.
At some point a default – called a restructuring or rescheduling – will become inevitable. Hopefully Europe's banks are strong enough when the time comes.
- Fin24
The opposition parties are reacting to the Greek fiscal crisis just as one would have expected them to – by playing the populist card and saying that the reforms are a step too far. But are these parties being populist, or are they being realistic? Can Greece stave off default?
Some European politicians, apparently led by Germany, have been pushing for an orderly restructuring or rescheduling of Greece's debt. However, ratings agencies and the European Central Bank (ECB) have said this would be viewed in the same light as default. Bloomberg reported ECB governing council member Christian Noyer ruled out a restructuring of Greece's debt, calling it a "horror story" that would leave the nation shut out of financing for years.
But strong European nations, such as France and Germany, have taxpayers that are getting tired of bailing out ailing periphery nations like Greece, Portugal and Ireland. The idea of a "soft restructuring" – that is, a not very aggressive move to lengthen maturities of Greece's debt – therefore gained momentum.
In a section on the sovereign debt crisis, SA's own Monetary Policy Review (MPR) stated the main problems facing these countries is one of solvency rather than liquidity, and that there is a view that the only way they can solve their current cash flow problems is by writing off some of their debt.
The MPR says political groups suggest that the sooner these countries' fiscal positions are put on a sustainable footing, the sooner households and companies can start spending and investing again, thereby enabling sustainable economic growth.
There is also concern that the longer this decision is delayed, the more peripheral country debt burdens are shifted onto wider eurozone taxpayers, either directly via bailout packages, or indirectly via liquidity programmes.
However, the MPR says the following factors are concerns about a debt restructuring (effectively a default):
First, restructuring any eurozone member's debts while the country is still running a primary deficit – that is, its deficit excluding interest payments – would effectively defeat the purpose of the restructuring.
'Haircut' hassles
Second, given their substantial holdings of peripheral euro area sovereign debt, some European banks aren't yet strong enough to absorb the losses from a "haircut" on government bonds, and the turmoil in bond markets associated with haircuts could lead to another financial crisis. A "haircut" is a loss.
Third, the outstanding stock of debt wouldn't be reduced significantly with a voluntary restructuring via extending maturities or cutting interest payments, and premature debt restructuring would ease the pressure on peripheral countries to push ahead with required structural reforms.
The reforms Papandreou would like opposition parties to back include a stalled privatisation programme and further spending cuts and tax hikes. The EU and IMF - which have to release €12bn in finance to stave off a funding crunch in June - are demanding political consensus before releasing further funds.
The key issue for eurozone countries like Germany and France, which have been pushing for a behind-the-scenes restructuring, is that their banks are probably not strong enough yet to handle the losses. This could trigger a wider financial crisis.
The Wall Street Journal reported this week that Germany was considering dropping its push for an early rescheduling of Greek bonds to facilitate a new package of aid loans for Greece. Berlin's concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece's funding needs before the indebted country runs out of cash. The report is credited with helping the euro to strengthen a full US cent.
The newspaper reported that some officials in Berlin hope a short-term fix can be found that would allow a full deal, including a bond rescheduling later this year.
Eurozone banking fragility and the need to keep the pressure on Greece is the reason why a restructuring can't be allowed to happen now. But other commentators, such as former IMF official Desmond Lachman of the American Enterprise Institute, have argued that Greece should default and exit the eurozone because it won't be able to grow its economy within the straitjacket of the euro currency. Greece, argues Lachman, requires its own currency which it can devalue to boost exports.
However, it's doubtful that the Greek economy has the export capacity to boost exports immediately upon a devaluation. Inflation would become a problem, as the new currency would sink like a stone. That's certainly not a realistic option for Greece.
In the short term, Greece must stave off default. The country's only hope is for the IMF and EU to release the funds they've promised. To do that, it needs to implement radical reforms. But there's a limit to what it can do.
At some point a default – called a restructuring or rescheduling – will become inevitable. Hopefully Europe's banks are strong enough when the time comes.
- Fin24
