Any decision on restructuring or default will have to secure their approval first, but cannot be ruled out
By Dimitris Kontogiannis
It looks increasingly likely that the so-called comprehensive solution to the eurozone?s sovereign crisis may not be what Greece has hoped for, which, coupled with a steady deterioration in the real economy and the obvious divisions in the government?s ranks, may bring forward the restructuring of public debt.
It is clear though, that Greece cannot proceed unilaterally to any such decision without first getting the green light from the International Monetary Fund, the European Union and the European Central Bank.
Theoretically speaking, a heavily indebted country such as Greece is in a better position to negotiate a deal with its creditors to reduce its debt burden when it runs a primary budget surplus, that is, when its revenues exceed expenditures without including interest payments on its debt.
According to the economic program approved by the EU and the IMF, the country will be in a position to do so in 2012 and therefore this is the best time to ask its creditors to make some concessions. However, we all ignore sometimes that Greece still gets a lot of money from the EU in the form of social and structural funds.
It is estimated the country received more than 2.7 billion euro from the European Social Fund and the European Regional Development and Cohesion funds in 2010, and is projected to receive some 3.35 billion euro this year, 3.73 billion in 2012 and 3.89 billion in 2013.
This is a lot of money at a time when external support to the economy is of utmost importance and may be endangered if Greece decides to act unilaterally without first consulting with the IMF and the EU.
It is, therefore, safe to say that even if the country wanted to default it would not be possible without obtaining the prior consent of its official creditors.
Of course, one may argue that the leaders of the main political parties in the country entertain the idea of going back to the drachma. Even this is not easy as some think according to a conference held in Rome in early February.
The conference, which was attended by well-known economists, academics, lawyers and bankers in Rome, and titled ?The Eurozone Financial Crisis: What?s Ahead?? arranged by law firm Cleary Gottlieb Steen & Hamilton LLP looked at the legal issues of a country leaving the eurozone.
One of the conclusions reached was that media speculation of a eurozone member abandoning the euro area ignored complex legal issues.
One of the key points was that a state cannot legally leave the eurozone and still remain in the European Union without a revision or a breach of the existing treaties. Likewise, there is no provision for the expulsion of a member state either from the eurozone or the EU as a whole. Another point was that a eurozone country could leave the euroland, breaking the treaty, but the euro would continue to exist.
In other words, politicians who think Greece can leave the eurozone and still remain in the European Union have it all wrong.
At this point, it looks increasingly likely that some of the factors that could trigger the restructuring of the Greek public debt, such as the government?s unwillingness to implement the economic and structural measures agreed in the MoU with the troika, the possible missing the fiscal targets and social unrest down the road, may fall in place.
Therefore, Greece and its official creditors may have to work something out after they hopefully know the framework of the European comprehensive solution to the sovereign crisis.
At this point, it is likely that Germany and the others will approve the extension of the 110-billion-euro bailout loan from three to seven years to be compatible with Ireland?s and may agree to charging a lower interest rate in exchange for additional measures.
But it is not likely that they are going to okay the plan for debt buyback either by the EFSF (European Financial Stability Fund) or by the indebted countries directly via low interest rate loans provided by the EFSF to them.
Moreover, it has become clear to everybody that heavily indebted countries cannot go on implementing austerity programs to put the trajectory of the debt-to-GDP ratio on a sustainable path without cutting their stock of public debt.
Since asset sales take time and cannot really produce the kind of proceeds hoped for in a reasonable period of time, the only other option is to plan a restructuring.
Since the chances of successfully implementing the three-year IMF program look increasingly grim, the EU and the IMF may start thinking whether the bailout money will be put to a better use after allowing for a restructuring, therefore duplicating what happened in the Latin America debt crisis in the 1980s. It is noted that Greece and Ireland have received bailout money to avoid a debt restructuring.
All-in-all, it is up to the country?s official creditors to judge whether the initial plan can work in what appears to be a more adverse economic and political environment in Greece in the months ahead.
A decision to restructure Greece?s debt should not be ruled out despite its initial negative impact on the local banking sector to the extent that the contamination effect to other EU countries is under control.
The paradigm of the Latin America debt crisis in the 1980s is still there.
No comments:
Post a Comment