By Stephen Fidler
THREE of the main actors in Greece’s deepening debt crisis have talked themselves into a stand-off.
Faced with having to take action to plug a gap in Greece’s finances, the European Central Bank, the International Monetary Fund and the German government are proposing incompatible solutions.
“It’s the most irresponsible public dispute that you could have thought of,” said Sony Kapoor, founder and head of Re-Define, a Brussels-based finance think tank.
The showdown comes ahead of an assessment of Greece’s finances by the so-called troika –officials from the IMF, ECB and the European Commission — that will be concluded next week. It must judge that Greece’s finances are sustainable before another slug of bailout money can be released on June 29.
In the short term, all would be well if German, Finnish and Dutch taxpayers were happy to dig deeper to help Greece fill its financing shortfall, amounting to an estimated 60 billion euros ($79.8bn) in 2012 and 2013. But they are not.
The German government has been seeking ways to fill the gap another way. Its solution: ask holders of Greek bonds maturing soon to agree to postpone their repayments.
There are many doubts about whether such a voluntary rescheduling — sometimes called a reprofiling or soft restructuring — would help much. If it is truly voluntary, it’s hard to gauge why investors, many of whom believe a real restructuring involving bondholder losses is just a matter of time, would agree to it.
But it could provide some political cover in Germany and Finland.
This approach has, however, been vociferously opposed by the ECB, which has threatened to reject restructured bonds as collateral for its loans to banks. This is a devastating threat: rejecting Greek bonds as ECB collateral would cut off a lifeline of central-bank liquidity from Greek banks and pose problems for others in the euro zone. That could bring on another phase of the banking crisis in Europe and accelerate the current slow deposit flight from Greek banks.
Oddly, these are similar concerns to the ones expressed by ECB officials about restructuring. Jens Weidmann, Bundesbank president and ECB policymaker, said in an interview with the Frankfurter Allgemeine Zeitung this week that the ECB fears even a soft restructuring in Greece could spread contagion to other euro-zone economies.
Mr Weidmann made plain that the ECB, which already has stretched the rules for Greece to buy government bonds and relax its collateral rules for Greek banks, doesn’t want to be left taking on the consequences of Greece’s financial woes.
“Generally speaking…it is not acceptable to shift the consequences of fiscal policy mistakes to central banks. That would eventually lead to a monetisation of government debt,” he said.
“The danger of a soft restructuring is that it lessens the pressure for economic adjustment in the debtor countries. That would send the wrong signal and further undermine confidence in the solidity of the currency bloc’s finances.”
But it’s not only the ECB that has stuck its neck out for Greece. The IMF has too, by claiming, until now, that Greece’s debt burden is sustainable — even as its forecasts suggest it will rise to a monstrous 160 per cent of gross domestic product.
European officials said they had expected an ultimatum from the IMF even before Dominique Strauss-Kahn made his unexpected exit from the institution.
The IMF message was made public last night by Luxembourg Prime Minister Jean-Claude Juncker: unless Greece secures enough financial backing to tide it over for the next 12 months, the IMF won’t disburse its loan payout on June 29. If the IMF doesn’t make the payment, the other members of the euro zone will be expected to find the money.
This, he noted, might cause problems in Finland and Germany. How is the standoff to be resolved? Analysts and officials say a political fudge likely will be worked out that won’t leave the euro zone hanging on a precipice of June 29 — though this won’t resolve the fundamental problems around Greece’s debt. Many believe if something gives, it will be the ECB.
“One of the sides will have to give way. I believe that the ECB’s threat of leaving Greek bonds out…is not something it will actually carry through. I don’t think it’s a credible threat because it’s a nuclear option,” Mr Re-Define’s Kapoor said.
But it’s also worth asking whether a Greek restructuring would really be so disastrous for the euro zone, particularly if its banks are in good shape.
There aren’t many precedents for debt restructurings by countries using a common currency, but there are some. An IMF working paper, as yet unpublished, examines them.
According to two people who have read the paper, it shows that orderly debt restructurings — for example by Ivory Coast, which uses the West African CFA franc, and Grenada and Dominica, users of the East Caribbean dollar — haven’t affected the viability of their respective currency unions. The IMF didn’t respond to an inquiry regarding the paper.
**** From: The Wall Street Journal, May 27, 2011