10 May 2011

Greece Needs To Take Responsibility for Its Own Fate

With all the heated debates going on around Greece and its problems at current times, I tend to think that at the end Greece has to take the decision on solving its debt issues on its own. And sure enough, the quicker the decision is made the better for Greece. It’s going to get ridiculous how everyone just seems to be discussing the matter without any tangible outcome. It’s also strange that a developed country cannot (or is not enabled to) take the responsibility for its own fate.

Let’s first look at Greece’s financial reality (data and forecasts are taken from IMF’s April 2011 Global Financial Stability Report):
* Gross general government debt 2011: 152% of GDP
* Financing needs, incl. gross general government debt maturing plus budget deficit: 24.0% of GDP in 2011 and 26.0% of GDP in 2012
* Government debt held abroad: 61.5% of 2010 gross general government debt
* Domestic depository institutions’ claims on general government: 12.2% of the depository institutions’ consolidated assets
* Average government funding cost in 2010: 4.9%; yield on five-year government bond as of March 31, 2011: 14.4%; average government funding cost expected to increase to the level of 7.9% by 2015, that is more than 30% of the forecasted government’s total revenues (up from the interval 10-20% as of now)
* Sovereign credit default swap spread: 1,200-1,300 basis points
* Nonfinancial corporates debt over equity: 218% (that is more than twice as high as in euro area in total)
* Total economy net external liabilities (calculated from assets and liabilities reported in the international investment position): 99% of GDP (that compares to 13% in euro area in total)
* Bank debt yields: around 12%
* Banks’ low asset quality and high loss rates

What these numbers and realities clearly point is that first of all government’s debt is unsustainably large, interest payments for sovereign debt too high and government revenues for servicing the debt too low. Furthermore, the country has fallen into the vicious circle where perceived risks and price of money increase which worsens the situation even further and leads to the self-fulfilling expectations. Given the high leverage of nonfinancial companies, banks’ low asset quality and high loss rates there is also not much room for the music to start playing again (I’m referring to the logic of money creation, compound interest and loan growth, and the game of musical chairs) unless sudden and unimaginable progress is made in real economy.

The interest of the decision makers in euro area is in certain extent linked to the Greece’s high proportion of external liabilities, and the exposure of their banks and investors to Greece. However, I’m increasingly thinking that countries like France and Germany but also UK and possibly the other so-called developed economies are willing to keep Greece (and Ireland and Portugal if needed) on limelight and prolong the country’s agony as long as possible, so that their very own sovereign debts and the weaknesses in their financial systems (such as slow progress in raising quantity and quality of the capital, high dependence on wholesale funding, uncertainties about the quality of banks’ assets etc.) would remain into the relative shadow. Overall, Greece’s problems still look small enough to be broadly acknowledged.

From Greece’s point of view prolonged agony means just that – a prolonged agony, and much tougher circumstances for the years to come. Europe is not going to solve the situation for Greece; IMF is not going to do that. At best the key decision makers in Europe or in IMF are going to do that for themselves.

So Greece needs to take the responsibility which among others means:
* honest assessment of its own current situation and possible options, incl. negotiations with creditors and investors about interest rates, maturities and reasonable possibilities for write downs of parts of loan principals
* clear and open communication with the public that would end speculations and considerably decrease the prevailing uncertainties
* taking long term view in developing country’s economy and managing its finances

European public should require that sense of responsibility without offering any “plan B-s”. European leaders should not waste time and energy on discussing how Greece’s debt restructuring could be postponed or how to intrude otherwise; instead they need to prepare for whatever decision Greece may take with regard to its sovereign debt as well as focus on long term solutions for eurozone. It’s not the easy way but it’s the only one.

No comments:

Post a Comment