Chronicles of a death foretold, or how, despite everything, the eurozone can survive with Greeceby Avinash D Persaud / June 28, 2011 / Leave a comment
Austerity measures in Greece may have provoked protests—but tough cuts is just one part of the solution to the Greek crisis. Image: Joanna
The newspapers are writing the obituary of the euro or the excommunication of Greece or both, often with unseemly pleasure. But it is not so inevitable. There is a simple way to resolve the Greek problem that will strengthen the euro, not undermine it, that will lead German and other tax payers to recover the $145 billion they have pledged, not lose it, and that will not require ambitious institution building in Europe at a time when the electorate is euro-fatigued.
The solution requires three critical ingredients. So far we have seen much of the first two: an onerous Greek stabilisation package that triggers protests on the streets and the commitment to a substantial package of fiscal support to Greece by European countries and the IMF. But doubling and redoubling these will not shock and awe markets into submission if the third ingredient remains missing. No amount of additional flour will make the bread rise if there is no yeast. The missing ingredient is a debt swap that lowers Greece’s interest payments to affordable levels, frees up resources critical to support economic activity and reintroduces market discipline into fiscal policy.
This sounds like a debt default, and in essence it is not very different from a partial default—but if it is “voluntary” it is not a technical default. And the more misery there is on the streets of Greece and the more wrangling there is in Brussels and Berlin, the more likely it is to be voluntary. Today, the price of Greek bonds has fallen to a level which suggests that the market feels there is a near 50 per cent probability of a default within two years. On a mark-to-market basis, creditors to the Greek government have already lost more than the $145 billion support package. So, creditors may be willing to swap old Greek bonds for new bonds whose payments are backed by a European and IMF support package. The value of the bonds will be the same, but the rates of return paid on them will be considerably lower and the maturities twice as long. This would change Greece’s annual interest burden from intolerable to bearable.
The debt swap is not an alternative to the domestic retrenchment and international support; it is a necessary accompaniment. The precise price…