by Charles Wyplosz
Professor of International Economics, Graduate Institute, Geneva; Director, International Centre for Money and Banking Studies; CEPR Research Fell
www.voxeu.org/article/coming-defaults-greece
er kommt zu dem Schluss,dass die EZB handeln muss und klarstellen dass sie bereit ist zu helfen,da die Regierungen auf stur geschaltet haben und das sollte sofort passieren
When thinking about Greece’s dilemma, two facts from Reinhart and Rogoff (2009) research are highly relevant:
Defaults on public debts are pretty mundane events; and
Greece is historically the world’s leading serious defaulter.
What makes the coming event interesting is that it will be the first time that a default occurs within a monetary union.
The crucial observation is that there is no automatic link between a default and monetary-union membership. As we know from previous experiments of government default within the dollar monetary union – the defaults of Orange County in California and Detroit in Michigan – a sub-central government can default and keep the currency. The unique characteristics of such events are that: 1) an exchange-rate depreciation cannot help shift expenditure to the defaulting region’s production; and 2) there is no local central bank to provide liquidity to both the government and commercial banks during the hard phase of the default.
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The key questions are:
Will Greece be able to finally establish on its own fiscal discipline and will its central bank deliver high-quality monetary policy?
Will the Eurozone draw all the lessons from a Grexit and amend its policies and governance?
In the short run, after a first default, even a partial one, the Greek government will have to balance its books because no one will lend anything any more. ‘Balancing the books’ can mean different things, however.
One option is to run an overall balanced budget, thus continuing to service the debt after the initial wave of defaults.
The latest European Commission forecasts for 2015 are for a surplus of 1.1% of GDP, after a deficit of 2.5% last year. This might be optimistic as tax receipts seem to have slowed down
Another option is to balance the primary budget, which means no servicing of the debt.
The primary budget was just about balanced in 2014. With growth returning to the Eurozone in 2015 and with the end of the fiscal contraction of recent years, this is within reach if the government refrains from many of its electoral promises.
A balanced primary budget would shield the government from external pressure but the size of defaults will grow. It is argued that various debt restructurings have lengthened the average maturity to more than 15 years and provide a ten-year grace period on capital repayment, and even interest service to the European Financial Stability Facility (Darvas 2015). Yet, debt service remains non-negligible, especially for the rest of the year, with a debt service estimated at some $20 billion (8.5% of GDP). It will decline somewhat over the next few years, but not significantly.
Somehow, a debt restructuring, long overdue, will have to follow. There is nothing new here. More novel is how a sovereign default can be handled within the Eurozone.....
A default would likely trigger a full-blown run on already enfeebled Greek banks.
There is not much debate on how to deal with a bank run.
First, short of declaring a crippling long-lasting bank holiday, bank withdrawals must be limited, which may, or may not, require controls on capital outflows.
Second, the authorities must move to urgently stabilise the banking system.
This may involve urgent large-scale lending to solvent banks, and the takeover of insolvent banks.
In such a situation, determining bank solvency is more art than science, so value judgement is unavoidable. But who are the authorities? The defaulting government and the central bank. Either the government receives emergency funding, which is likely to be ruled out, or the central bank must foot the bill entirely on its own. That effectively means the ECB. As De Grauwe (2011) convincingly argued, the sovereign debt crisis only occurred because the euro was a foreign currency to Eurozone member countries.
If, in the face of a bank run, the ECB does not act as lender of last resort, the Greek government will have no choice but to leave the euro under the most unfavourable of all circumstances.
Since the onset of the slow-motion bank run, the ECB has dithered. Its instrument, the Emergency Liquidity Assistance facility, leaves quite some discretion in the hands of the central bank. It has a ceiling, which it has raised repeatedly. It must list what is acceptable collateral, and the list has been repeatedly expanded. Since much of the collateral of Greek banks is soon-to-be-defaulted-upon Greek government debt, it is understandable that the ECB proceeds with caution.
Once, following a default, a bank run is under way, in principle Greek bonds will not be acceptable to ECB; with no central bank able to act as lender of last resort, the Grexit prophecy will have become reality.
What this all means is that, if the aim is to avoid a Grexit, it is not possible to wait for a default to happen.
The vicious cycle that underpins the self-fulfilling prophecy must be broken now. That means ruling out either the first or the last step of the cycle.
The way to avoid the first step, default, is to announce an agreement in principle to reduce the public debt of the Greek government.
The way to avoid the last step, Grexit, is to announce that resources to thwart a bank run are available.
These announcements must be unconditional – independent of an agreement on the assistance programme – because it seems that such an agreement is beyond reach.
The problem is that European authorities are bound to find it politically impossible to give in, ditch the pre-existing agreement and abandon conditionality. Economically, they also face a conflict of interest. About 80% of the Greek debt is now owed to officials, the European authorities and the IMF. The official rhetoric is that “we have done enough for Greece”.
So far, however, the Europeans have not made any present to Greece,2 only loans, initially on harsh financial conditions, then sweetened. A default would turn the loans into presents. Making it possible for Greece to comfortably default does not seem appealing at all.
National governments are elected by their citizens so they are most unlikely to act to prevent a Grexit. One more time, we have to turn to the ECB, whose essential mandate is to uphold the Eurozone.It may be unfair, but the ECB’s duty is to announce very soon that it will do whatever it takes to keep the Eurozone whole.
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