“Let’s do something but just as much as absolutely necessary at this time!” – That kind of sums up what happened on Monday.
Interest rate reduction – absolutely the right strategy but, again, half measures. Instead of saying ‘we’ll stay interest for the next 10 years on official debt’, they have have said ‘we’ll stay some of the interest on some of the official debt’.
Debt buy-back – perhaps it works, perhaps it doesn’t. Let’s believe it when we see it. But why make something whose outcome is uncertain a major pillar of a so-called new deal? The authorities may already have secured commitments from enough sellers at the price of 30% of nominal. We don’t know. But if they haven’t and if the whole success of the new deal is dependent on private bond holder’s selling at 30% when the chances have risen that they will eventually get 100%, well, then the debt buy-back is a fairly chancy proposition.
Lending countries try to jerk tears by wailing how much the interest rate reduction and foregoing of ECB-profits will cost them. Well, the interest rate reduction is not going to cost anyone a thing. All it means is that lending countries have to make less new loans in order to pay themselves interest. And regarding the lesser pay-out of ECB-profits (to national Central Banks who would then pay out more to their governments): are governments of the lending countries really trying to suggest that the stability of their budgets depends on the collection of fictive gambling profits on the part of the ECB?
What would have been much nicer to see?
I would have preferred to see an interest rate reduction to zero on a specified amount of official debt for 10 years. That would have been a signal! What ‘specified amount’? Well, I would have tied the interest expense of Greece to Greece’s primary government expenditures. The latest calculation I made suggested that 6% of primary government expenditures should be allocated to interest expense (variable basis). That would have definitely assured the payment of interest to private creditors and those private creditors better be kept at bay after what we are presently witnessing with Argentina. Perhaps some money would be left to pay interest to official creditors. All other interest should have been stayed for 10 years. And the same should have been done with debt maturities coming up in the next 10 years.
That way, the Greek budget would have been relieved of much of the debt service during the next 10 years (except for the debt service due to private creditors).
And then I would have hung out a huge carrot for Greece in the form of a promise that, in ten years from now, a final reckoning would be made. The entire debt would be reduced to a ‘sustainable level’ (and I am thinking more like the 60% of Maastricht than the 120% of the IMF) with the rest to be forgiven. All of this against Greece’s commitment to achieve a well-functioning economy by then. This huge carrot would have had to be coupled with a huge stick: if Greece did not achieve a well-functioning economy by 2022, all bets would be off and previous commitments would be rolled back.
The debt buy-back I would have titled as a ‘try’ to see what it brings. No more.
The return of ECB-profits I would have restricted for a specific purpose. At the lower end of Greek society, there are extreme hardships by now. True European solidarity would call for a fund to be structured in such a way that those hardships can be dealt with outside the Greek budget. The ECB-profits would have been a good source for funding such a fund.
Finally, the most important point: growth measures for the Greek private sector. If there were any included in the latest deal, I certainly didn’t see them. Without such growth measures, it is hard to get the feeling that the EU really wants to help Greece.
From the beginning of this blog, I have made these two arguments: (a) Greece is entirely responsible for the mess which it got itself in until about 2009/10; and (b) the EU is entirely responsible for the mess by which they have turned the Greek mess into a European mess. For over two years now, both sides seem to have been competing with each other as to who can make the mess worse: the EU by pursuing a policy of denial, and Greece by dancing around Troika-measures.
Of late, I would say that Greece has earned the benefit of an “earnest boker”. The EU has lost it (if it ever had it).