The Wall Street Journal
The International Monetary Fund's annual meeting kicks off in Washington on Friday, and while America's budget standoff will top the agenda, Greece's won't be too far down. At stake now, three and half years after Athens was made to accept its first bailout, is whether Greece will have to endure decades as a ward of its euro-zone neighbors.
That's not the story you hear in Brussels, Berlin and Frankfurt. In their tale, Greece's fiscal adjustment is on track and its economy is bottoming out. Greek banks have been recapitalized with private money, and Athens's budget is approaching an annual surplus—excluding debt service—for the first time since 2002.
None of this is false, but it obscures certain unpleasant facts. The Greek government's small budget surplus this year is partly the result of delaying tax refunds and the payment of bills to private contractors and suppliers. Kathimerini reported this week that the Greek labor ministry is considering expropriating private companies' assets to collect on unpaid social-security contributions. Possible asset confiscations may be one reason the Greek finance ministry predicts higher revenues next year due to an increase in "tax compliance."
Meanwhile, the real stain on the country's future is government debt expected to hit 175.5% of GDP this year. The discussion continues over whether to write down a portion of European governments' loans to Greece, but it is vague and unconstructive. The IMF demands that European institutions forgive a chunk of what Greece owes them, but for self-serving reasons: It wants the EU to take a haircut so the IMF can be repaid in full.
The German government thinks Greece's debt load can be made bearable by lowering the debt's average interest rate and extending its average maturity. Last year's debt buyback means most of the EU's loans to Greece already carry an average maturity of 15-30 years and an average interest rate of around 3.5%. Greece's third bailout, due next year, will involve more loans that will be repaid in a trickle over decades. There is even talk of swapping some euro-zone bilateral loans to Greece for 50-year bonds.
Yet once Greece starts looking at 50 years of repayments, why not 100 years, or 200? Extend-and-pretend is a strategy with long standing in the history of sovereign-debt crises. But it would be a terrible way for economic historians to remember the first several decades of Europe's great monetary experiment, assuming it lasts that long.
Greece's creditors are already taking an economic loss as the interest rate on their loans approaches zero and the maturity approaches infinity, even if they don't have to book an accounting loss. But an outright haircut is the more transparent and democratic solution. The euro zone's taxpayers deserve to know the consequences of their governments' decision not to let Greece default in the spring of 2010. Drastically reducing Greece's debt overhang would also improve Athens's chances of borrowing again in private markets.
German officials have several objections to a haircut. Under German law, Berlin isn't allowed to lend further to any borrower that defaults on a German-government loan commitment or guarantee. This means debt restructuring is a lever that can be pulled only if it's clear Greece will never need new rescue money again. That's far from obvious for at least the next few years. But once Athens starts consistently running small budget surpluses, Berlin and Brussels might be more comfortable turning off the bailout tap for good and accepting default.
Another objection is that a writedown will take the pressure off Athens to reform the Greek economy. This fear is well-founded. Yet if Greece's government isn't willing to fulfill its euro obligations even after bailouts, then the real issue is whether Greece belongs in the currency union. Better to face that now than put Athens on a 50-year bailout IV drip.
One compromise could be to do away with the charade of constantly rolling over bailout loans and simply swap all of Greece's existing borrowing for 200-year, zero-coupon bonds at 1% interest. This would be an admission of the bailout's failure while possibly avoiding the legal difficulties of an immediate haircut. The clarity would make private creditors more willing to start lending again to Athens in small quantities to cover financing needs.
The tragedy is that Europe's politicians prefer the status quo of eternal, rolling bailouts because it serves their purposes. They never have to present their taxpayers with a bill for the Greek rescue. And while Greece's economy never really recovers, it might avoid any new crisis. The political bet is that the follies of the last five years will slowly be forgotten.
It could even work, assuming there's no new recession—and unless you're a Greek young person looking for a better economic future.
