The spectre of restructuring and whether Greece should resort to a ‘haircut’ were a common thread in addresses given on Wednesday at the Economist's 15th Roundtable with the government of Greece, held at Athens seaside resort, with strong opinions for and against expressed by the various speakers.
Feelings on the issue ran high, as shown by European Central Bank executive board member Jürgen Stark who, when asked why the ECB opposed restructuring, sharply referred to a “recipe for catastrophe”, while also citing “vested interests” and a “discussion triggered in London and New York”.
Stark was one of the strongest proponents of the view that Greece should “tough it out” and stick to painful efforts for structural reforms, asserting that this would ultimately “deliver the goods” in terms of regained competitiveness and upside growth.
He also repeatedly insisted on the need for fiscal discipline in order to ensure the smooth functioning of economic and monetary union, especially for the EU periphery countries like Greece, Ireland and Portugal, which had run up a high public debt and deficit, stressing that “a loss of sovereignty was part of the reality of sharing in the benefits of a common currency.”
He warned, in response to questions, that any restructuring or rescheduling of the Greek debt, even on a voluntary basis, will undermine the collateral adequacy of Greek bonds and make continuation of liquidity provision to Greek banks by the ECB impossible.
International Monetary Fund (IMF) Deputy Director Poul Thomsen addressed the question of whether the government’s adjustment programme was working, concluding that the answer was ‘yes’, but with a question mark over how long.
“I think that the programme largely achieved what it set out to do but it will not remain on track without significant invigoration,” he stressed.
According to the high-ranking IMF official, the Greek government has achieved an impressive 7 percent adjustment and the economy was showing encouraging signs, such as lower inflation at constant tax rates, rising exports and lower unit labour costs.
On the down side, he warned that from this point on there were “no more low-hanging fruit, only difficult structural reforms ahead.” Pointing out that there were no more margins for “quick-fix” measures, like slashing wages or raising taxes, Thomsen stressed that structural reforms were lagging behind schedule and that they had to be reinvigorated or there would be no recovery.
Replying to questions, Thomsen deflected criticism that the policies imposed as part of the EC-ECB-IMF programme had “killed” the market, emphasising that it was impossible to deal with a 15-percent public deficit without triggering a recession.
He admitted that the IMF had miscalculated concerning the market’s response to the programme, but he attributed this mainly to “external factors” such as continued doubts about the mechanism for periphery countries rather than problems with the Memorandum in itself.
On the prospects of the closely watched Greek government privatisation programme, Thomsen took the view that it would generate a substantial change to Greece’s debt sustainability if it succeeded.
Criticism was also leveled against the Greek government on the level of implementing reforms and the credibility of its ambitious privatisation programme.
Economist editor for western Europe Megan Greene described the Greek government as “long on legislation but not implementation”, while she predicted that Greece will continue to miss public deficit targets.
Painting a bleak picture of Greece’s key economic figures, which she said was not offset by the small upturn in GDP growth during the first quarter of 2011, Greene seemed dubious about whether the country would actually achieve a 7.5-percent deficit reduction predicted by the IMF.
She was equally uncertain about the feasibility of raising 50 billion euros through privatisations by 2015.
In response to questions, she said the prospect was “not at all credible” and questioned whether it would be a “game-changer” in returning the country to solvency even if it was successful.
Greene ruled out the prospect of a return to markets before the EU-IMF assistance package runs out, predicting that the most likely outcome would be a new bailout package, since restructuring before 2013 is unlikely and an exit from the euro would be a ‘disaster’ for Greece, as she reiterated.
Main opposition New Democracy party’s alternate head of the economy, Notis Mitarachis, levelled criticism against the government programme, which he said has failed to address the true sources of wasteful public spending. He stressed that ND was not opposed to the memorandum in principle and had supported more than half the measures the government had brought to Parliament but insisted that it had made the ‘wrong cuts’ rather than solving the problems.
Asked whether ND would be prepared to consider a ‘consensus pact’ with the government along the lines of that achieved in Portugal, he answered that Greece was a democracy and that the main opposition party has a defined role within this while, noting that the real problem of consensus lay within the government itself.
Among the most effective proponents of the view supporting a haircut sooner rather than later was INSEAD associate professor of finance Harald Hau, who emphasised the moral hazard issue, while he accused EU governments of placing tax-payers “before the firing squad” in the place of banks. Moreover, he asserted that debt restructuring was both inevitable and would be more painful for private investors once an estimated 50 percent of Greek debt had been transferred to sovereign debtors.
The three-day conference took place at the Lagonissi resort southeast of Athens.