Greek Crisis: EU Leaders Reach Deal Over Debt
2:56pm UK, Thursday February 11, 2010
Hazel Tyldesley, Sky News Online
European leaders have reached a deal to help Greece with a crippling debt crisis that threatens to spread to other eurozone nations, the EU President has said.
Belgian politician Herman Van Rompuy announced that euro area member states would take "determined and co-ordinated action if needed to safeguard stability in the euro area".
He said they would back the Greek government's action plan to reduce its deficit and would suggest additional measures if needed, "drawing on the expertise of the International Monetary Fund".
Commenting on the development, Sky News' political correspondent Joey Jones said it would be seen more as a staging post than a solution.
"It is going to take more than this to convince the markets that this problem is going to be dealt with satisfactorily," he said.
Greece is on the brink of financial collapse and there has been speculation that a giant bail-out might be needed.
Earlier, the Chancellor said Britain had "no plans" to help bail out the struggling nation.
Greek PM George Papandreou arrives at the summit of European leaders in Brussels
Greek troubles have plunged the euro currency into its biggest crisis since it was launched 10 years ago and served as an example of how interconnected the global economy is.
In theory, the country could be forced to abandon the euro altogether and return to the drachma, but realistically its wealthier neighbours are likely to bail it out with a joint loan.
However, the Chancellor Alistair Darling has said Britain has "no proposal" to help provide such a cash injection and added that it was a eurozone problem.
"I think it's important that Greece sticks to what it promised, that it delivers on its programme," he said.
"The euro area countries have said they want to manage the situation and there are discussions taking place."
Greeks march in Athens over the handling of the crisis, with sign saying: 'I Do Not Pay'
Market analyst David Buik told Sky News it was "a serious situation" but said he did not expect euro area member states to hand out cash.
"It seems extremely unlikely that Europe will in the full sense of the word make loans. What I think it will do instead is give guarantees for loans," he said.
"I suspect the International Monetary Fund will have to come in."
Greece came under intense EU pressure to slash spending after it revealed a massive and previously undeclared budget shortfall last year. The shortfall continues to shake financial markets and the euro, which is shared by 16 EU members.
Greece's deficit spiralled to more than 12% of economic output in 2009, more than four times the eurozone limit.
Prime Minister George Papandreou's new government has announced sweeping spending cuts that will freeze salaries and cut bonuses, and increase the average retirement age by two years to 63.
The government also announced new taxes, which it insists will increase the burden on the rich but benefit the poor.
Widespread protests followed the revelation of the tough measures.
Meanwhile, Belgium's former prime minister told Sky News he believed Europe should have acted sooner to find a solution to Greece's financial crisis.
Guy Verhofstadt, who is the leader of the Alliance of Liberals and Democrats for Europe, told Jeff Randall Live: "The problems were there last December, but it was a mistake for the European Union not to come with a package of measures earlier," he said.
"We have an ECB (European Central Bank), a monetary union, so it's our obligation to sort out the problem."
2/18/2010
To fix the Greek crisis, deal with the eurozone’s imbalances
By Tony Barber*
Financial Times, Brussels Blog 1-2-2010
The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece. But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures. Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses. How will a tax collectors’ strike help matters?
That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves. If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth.
The truth is less pleasant: the Greek turmoil reflects a wider crisis of imbalances in the 16-nation eurozone, and everyone will have to make a contribution to bring this wider crisis under control. Specifically, Greece and a few other countries - notably, Portugal and Spain - have very big current account deficits, while Germany, Europe’s champion exporter and the the eurozone’s largest economy, tends to run big current account surpluses. The Greek deficit was a remarkable 12 per cent of gross domestic product in the third quarter of 2009, and Portugal’s stood at 10 per cent.
For sure, Greece and Portugal need to improve their competitiveness, but they would also benefit from stronger foreign demand for their products and services, especially in Germany. In order to overcome the eurozone’s crisis, it will be as necessary to raise demand in Germany and other surplus countries as to hold down wages and root out corruption in Greece.
This will be no easy task, for just as the mentality of German business is geared to the ruthless pursuit of international competitive advantage, so the mentality of German society is in many respects doggedly attached to the goal of amassing domestic savings. Yet in the long run it would be in Germany’s best interests to reduce the eurozone’s imbalances. The alternative - emergency financial support for Greece, arranged through gritted teeth and against the wishes of a disgruntled German public opinion - would surely be worse.
*Tony Barber is the FT's Brussels bureau chief since September 2007
By Tony Barber*
Financial Times, Brussels Blog 1-2-2010
The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece. But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures. Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses. How will a tax collectors’ strike help matters?
That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves. If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth.
The truth is less pleasant: the Greek turmoil reflects a wider crisis of imbalances in the 16-nation eurozone, and everyone will have to make a contribution to bring this wider crisis under control. Specifically, Greece and a few other countries - notably, Portugal and Spain - have very big current account deficits, while Germany, Europe’s champion exporter and the the eurozone’s largest economy, tends to run big current account surpluses. The Greek deficit was a remarkable 12 per cent of gross domestic product in the third quarter of 2009, and Portugal’s stood at 10 per cent.
For sure, Greece and Portugal need to improve their competitiveness, but they would also benefit from stronger foreign demand for their products and services, especially in Germany. In order to overcome the eurozone’s crisis, it will be as necessary to raise demand in Germany and other surplus countries as to hold down wages and root out corruption in Greece.
This will be no easy task, for just as the mentality of German business is geared to the ruthless pursuit of international competitive advantage, so the mentality of German society is in many respects doggedly attached to the goal of amassing domestic savings. Yet in the long run it would be in Germany’s best interests to reduce the eurozone’s imbalances. The alternative - emergency financial support for Greece, arranged through gritted teeth and against the wishes of a disgruntled German public opinion - would surely be worse.
*Tony Barber is the FT's Brussels bureau chief since September 2007
A Greek crisis is coming to America
By Niall Ferguson
Published: February 10 2010 20:15 | Last updated: February 10 2010 20:15
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.
There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.
That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.
Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.
What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.
Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.
Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.
But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.
The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.
Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”
On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.
The writer is a contributing editor of the FT and author of ‘The Ascent of Money: A Financial History of the World‘
More columns at www.ft.com/niallferguson
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
By Niall Ferguson
Published: February 10 2010 20:15 | Last updated: February 10 2010 20:15
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.
There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”, but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.
That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history – reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bail-out led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horse-trading before one can be reached.
Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.
What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.
Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.
Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.
But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.
The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.
Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”
On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.
The writer is a contributing editor of the FT and author of ‘The Ascent of Money: A Financial History of the World‘
More columns at www.ft.com/niallferguson
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
Greece: The start of a systemic crisis of the Eurozone?
Paul De Grauwe
Is the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? This column argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter
the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? This column argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter.
The Greek crisis has led to fears that this is only the beginning of a deeper sovereign debt crisis that could ultimately destabilise the Eurozone. Are these fears exaggerated? How to deal with these problems? These are some of the questions many observers have been asking themselves.
Origins of the present crisis
It is useful to start out with the origins of the present crisis. Figure 1 provides a useful way to organise our thoughts. It shows the average yearly changes (in percent of GDP) of private and public debt in the Eurozone.
The period 1999-2009 has been organised in periods of booms and busts: the boom years were 1999-2001 and 2005-07; the bust years were 2002-04 and 2008-09.
One observes a number of remarkable patterns.
•First, private debt increases much more than public debt throughout the whole period (compare the left hand axis with the right hand axis).
•Second, during boom years private debt increases spectacularly.
The latest boom period of 2005-07 stands out with yearly additions to private debt amounting on average to 35 percentage points of GDP.
•During these boom periods, public debt growth drops to 1 to 2 percentage points of GDP. The opposite occurs during bust years. Private debt growth slows down and public debt growth accelerates.
Again the last period of bust (2008-09) stands out. Public debt increases by 10 percentage points of GDP per year, mirroring the spectacular increase of private debt during the boom years (but note that the surge of public debt during the bust years of 2008-09 are dwarfed by the private debt surge during the preceding boom years).
The following picture emerges. During boom years the private sector adds a lot of debt. This was spectacularly so during the boom of 2005-07. Then the bust comes and the governments pick up the pieces. They do this in two ways.
•First, as the economy is driven into a recession, government revenues decline and social spending increases.
•Second as part of the private debt is implicitly guaranteed by the government (bank debt in particular) the government is forced to issue its own debt to rescue private institutions.
Thus the driving force of the cyclical behaviour of government debt is the boom and bust character of private debt. This feature is particularly pronounced during the last boom-bust cycle that led to unsustainable private debt growth forcing governments to add large amounts to its own debt.1
Is the public debt sustainable?
Financial markets now ask the question of whether the addition of government debt is sustainable. Clearly the rate of increase of the last two years is unsustainable. But with Eurozone government debt standing at 85% of GDP at the end of 2009, the Eurozone is miles away from a possible debt crisis.
Things are different in some individual countries, in Greece in particular, a country with a weak political system that has been adding government debt at a much higher rate than the rest of the Eurozone and that in addition has a debt level exceeding 100% of GDP. So, while the Eurozone as a whole is no closer to a debt crisis than is the US, some of its member states have been moving closer to such a crisis.
Is it conceivable that a debt crisis in one member country of the Eurozone triggers a more general crisis involving other Eurozone countries? My answer is that yes, it is conceivable, but that it can easily be avoided.2
A debt crisis is conceivable
Let’s start with the first part of the answer: It is conceivable. Financial markets are nervous and the most nervous actors in the financial markets are the rating agencies. One thing one can say about these institutions is that they systematically fail to see crises come. And after the crisis erupts, they systematically overreact thereby intensifying it.
This was the case two years ago when the rating agencies were completely caught off guard by the credit crisis. It was again the case during the last few weeks. Only after Dubai postponed the repayment of its bonds and we had all read about it in the FT, did the rating agencies realise there was a crisis and did they downgrade Dubai’s bonds.
Credit rating agencies playing catch-up
Having failed so miserably in forecasting a sovereign debt crisis, they went on a frantic search for possible other sovereign bond crises. They found Greece, and other Eurozone countries with high budget deficits, and started the process of downgrading. This in turn led to a significant increase in government bond rates in countries “visited” by the agencies.
Add to this that the ECB is still using the ratings produced by the same agencies to accept or refuse collateral presented by banks in the Eurozone, and one can see that all the elements are in place to transform a local crisis into a crisis for the system as a whole.
A systemic crisis can be avoided
It does not have to be that way, however. A systemic crisis can be avoided. Let’s start with Greece again. Although an outright default by the Greek government remains a remote possibility it is good to think through what the other Eurozone countries can and will do in that case. They can easily bail out Greece. It does not cost them that much. In the unlikely event that Greece defaults on the full amount of its outstanding debt, a bail-out by the other Eurozone governments would add about 3% to these governments’ debt – a small number compared to the amounts added to save the banks during the financial crisis.
A Eurozone bailout is likely
The other Eurozone governments are also very likely to bail out Greece out of pure self-interest. There are two reasons for this.
•First, a significant part of Greek bonds are held by financial institutions in Eurozone countries.
These institutions are likely to pressure their governments to come to their rescue.
•Second, and more importantly, a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone. Investors having lost a lot of money holding Greek bonds would likely dump government bonds of countries, like Spain, Ireland, Portugal, Belgium that they perceive to have similar budgetary problems.
The local sovereign debt crisis would trigger an avalanche of other sovereign debt crises. I conclude that the Eurozone governments are condemned to intervene and to rescue the government of a member country hit by a sovereign debt crisis.
Are bailouts illegal?
It is sometimes said that bail-outs in the Eurozone are illegal because the Treaty says so (see Wyplosz 2009 on this). But this is a misreading of the Treaty. The no-bail-out clause only says that the EU shall not be liable for the debt of governments, i.e. the governments of the Union cannot be forced to bail out a member state. But this does not exclude that the governments of the EU freely decide to provide financial assistance to one of the member states. In fact this is explicitly laid down in Article 100, section 2.3
Eurozone governments have the legal capacity to bail out other governments, and in my opinion they are very likely to do so in the Eurozone if the need arises.
Financial markets today do not seem to believe this conclusion. If they did, they would not price the risk of Greek government bonds 250 basis points higher than the risk of German government bonds. The scepticism of the financial markets has much to do with the poor communication by the EU-authorities that have given conflicting signals about their readiness to give financial support to Greece if a sovereign debt crisis were to erupt.
Conclusion
All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt.
References
Reinhart, C., and Rogoff, K., (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, 496pp.
Eichengreen, B., (2007), The euro: love it or leave it?, VoxEU.org, 19 November.
Wyplosz, C., (2009), Bailouts: the next step up?, VoxEU.org, 21 February.
--------------------------------------------------------------------------------
1 For a fascinating historic analysis of public and private debt see Reinhart and Rogoff(2009).
2 See also Eichengreen(2007) on this issue.
3 Here is the text: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned”.
Is the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? This column argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter
the Greek crisis the beginning of a deeper sovereign debt crisis that could destabilise the Eurozone? This column argues the Eurozone is no closer to a debt crisis than the US, but some members are getting close. EU governments could bailout Greece and, to avoid having to do so, they should clarify their stance on the matter.
The Greek crisis has led to fears that this is only the beginning of a deeper sovereign debt crisis that could ultimately destabilise the Eurozone. Are these fears exaggerated? How to deal with these problems? These are some of the questions many observers have been asking themselves.
Origins of the present crisis
It is useful to start out with the origins of the present crisis. Figure 1 provides a useful way to organise our thoughts. It shows the average yearly changes (in percent of GDP) of private and public debt in the Eurozone.
The period 1999-2009 has been organised in periods of booms and busts: the boom years were 1999-2001 and 2005-07; the bust years were 2002-04 and 2008-09.
One observes a number of remarkable patterns.
•First, private debt increases much more than public debt throughout the whole period (compare the left hand axis with the right hand axis).
•Second, during boom years private debt increases spectacularly.
The latest boom period of 2005-07 stands out with yearly additions to private debt amounting on average to 35 percentage points of GDP.
•During these boom periods, public debt growth drops to 1 to 2 percentage points of GDP. The opposite occurs during bust years. Private debt growth slows down and public debt growth accelerates.
Again the last period of bust (2008-09) stands out. Public debt increases by 10 percentage points of GDP per year, mirroring the spectacular increase of private debt during the boom years (but note that the surge of public debt during the bust years of 2008-09 are dwarfed by the private debt surge during the preceding boom years).
The following picture emerges. During boom years the private sector adds a lot of debt. This was spectacularly so during the boom of 2005-07. Then the bust comes and the governments pick up the pieces. They do this in two ways.
•First, as the economy is driven into a recession, government revenues decline and social spending increases.
•Second as part of the private debt is implicitly guaranteed by the government (bank debt in particular) the government is forced to issue its own debt to rescue private institutions.
Thus the driving force of the cyclical behaviour of government debt is the boom and bust character of private debt. This feature is particularly pronounced during the last boom-bust cycle that led to unsustainable private debt growth forcing governments to add large amounts to its own debt.1
Is the public debt sustainable?
Financial markets now ask the question of whether the addition of government debt is sustainable. Clearly the rate of increase of the last two years is unsustainable. But with Eurozone government debt standing at 85% of GDP at the end of 2009, the Eurozone is miles away from a possible debt crisis.
Things are different in some individual countries, in Greece in particular, a country with a weak political system that has been adding government debt at a much higher rate than the rest of the Eurozone and that in addition has a debt level exceeding 100% of GDP. So, while the Eurozone as a whole is no closer to a debt crisis than is the US, some of its member states have been moving closer to such a crisis.
Is it conceivable that a debt crisis in one member country of the Eurozone triggers a more general crisis involving other Eurozone countries? My answer is that yes, it is conceivable, but that it can easily be avoided.2
A debt crisis is conceivable
Let’s start with the first part of the answer: It is conceivable. Financial markets are nervous and the most nervous actors in the financial markets are the rating agencies. One thing one can say about these institutions is that they systematically fail to see crises come. And after the crisis erupts, they systematically overreact thereby intensifying it.
This was the case two years ago when the rating agencies were completely caught off guard by the credit crisis. It was again the case during the last few weeks. Only after Dubai postponed the repayment of its bonds and we had all read about it in the FT, did the rating agencies realise there was a crisis and did they downgrade Dubai’s bonds.
Credit rating agencies playing catch-up
Having failed so miserably in forecasting a sovereign debt crisis, they went on a frantic search for possible other sovereign bond crises. They found Greece, and other Eurozone countries with high budget deficits, and started the process of downgrading. This in turn led to a significant increase in government bond rates in countries “visited” by the agencies.
Add to this that the ECB is still using the ratings produced by the same agencies to accept or refuse collateral presented by banks in the Eurozone, and one can see that all the elements are in place to transform a local crisis into a crisis for the system as a whole.
A systemic crisis can be avoided
It does not have to be that way, however. A systemic crisis can be avoided. Let’s start with Greece again. Although an outright default by the Greek government remains a remote possibility it is good to think through what the other Eurozone countries can and will do in that case. They can easily bail out Greece. It does not cost them that much. In the unlikely event that Greece defaults on the full amount of its outstanding debt, a bail-out by the other Eurozone governments would add about 3% to these governments’ debt – a small number compared to the amounts added to save the banks during the financial crisis.
A Eurozone bailout is likely
The other Eurozone governments are also very likely to bail out Greece out of pure self-interest. There are two reasons for this.
•First, a significant part of Greek bonds are held by financial institutions in Eurozone countries.
These institutions are likely to pressure their governments to come to their rescue.
•Second, and more importantly, a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone. Investors having lost a lot of money holding Greek bonds would likely dump government bonds of countries, like Spain, Ireland, Portugal, Belgium that they perceive to have similar budgetary problems.
The local sovereign debt crisis would trigger an avalanche of other sovereign debt crises. I conclude that the Eurozone governments are condemned to intervene and to rescue the government of a member country hit by a sovereign debt crisis.
Are bailouts illegal?
It is sometimes said that bail-outs in the Eurozone are illegal because the Treaty says so (see Wyplosz 2009 on this). But this is a misreading of the Treaty. The no-bail-out clause only says that the EU shall not be liable for the debt of governments, i.e. the governments of the Union cannot be forced to bail out a member state. But this does not exclude that the governments of the EU freely decide to provide financial assistance to one of the member states. In fact this is explicitly laid down in Article 100, section 2.3
Eurozone governments have the legal capacity to bail out other governments, and in my opinion they are very likely to do so in the Eurozone if the need arises.
Financial markets today do not seem to believe this conclusion. If they did, they would not price the risk of Greek government bonds 250 basis points higher than the risk of German government bonds. The scepticism of the financial markets has much to do with the poor communication by the EU-authorities that have given conflicting signals about their readiness to give financial support to Greece if a sovereign debt crisis were to erupt.
Conclusion
All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt.
References
Reinhart, C., and Rogoff, K., (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, 496pp.
Eichengreen, B., (2007), The euro: love it or leave it?, VoxEU.org, 19 November.
Wyplosz, C., (2009), Bailouts: the next step up?, VoxEU.org, 21 February.
--------------------------------------------------------------------------------
1 For a fascinating historic analysis of public and private debt see Reinhart and Rogoff(2009).
2 See also Eichengreen(2007) on this issue.
3 Here is the text: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned”.
Βρήκαν στου Ψυρρή τις Ηρίες Πύλες
«Ηρία: αι πύλαι Αθήνησι διά το τους νεκρούς εκφέρεσθαι εκεί επί τα ηρία, ο εστί τους τάφους» σημείωνε ο Θεόφραστος. Το εσωτερικό των Ηρίων Πυλών εντόπισε τώρα η αρχαιολογική σκαπάνη, στην περιοχή του Κεραμεικού, που δεν παύει να μας δίνει σημαντικά ευρήματα. Σε οικόπεδο της οδού Λεωκορίου, στην περιοχή του Ψυρρή, αποκαλύφθηκαν κατάλοιπα των περίφημων πυλών, και το θέμα εισάγεται αύριο στο Κεντρικό Αρχαιολογικό Συμβoύλιο.
Ιχνη των εξωτερικών τμημάτων είχαν ανακαλυφθεί κατά τη διάρκεια παλαιών ανασκαφών, στο οδόστρωμα. Επίσης, σε παρακείμενες οικοδομές, όπως στο παράρτημα Ισλαμικής Τέχνης του Μουσείου Μπενάκη, έχουν εντοπισθεί τμήματα του τείχους της αρχαίας Αθήνας. Οι αρχαιολόγοι γνώριζαν πως οι Ηρίες πύλες τοποθετούνται στην περιοχή καθώς ο Ιωάννης Τραυλός ήδη από τη δεκαετία του ‘60 είχε σχετικές αναφορές, βασισμένες, πάντοτε, σε ανασκαφικά ευρήματα.
Τα κατάλοιπα βρέθηκαν σε στρώματα ελαφρώς διαταραγμένα, αυτό όμως δεν εμποδίζει τους αρχαιολόγους να βγάλουν κάποια πρώτα συμπεράσματα. Η ενδελεχής μελέτη θα δώσει λεπτομέρειες που θα είναι πολύτιμες για την Αθήνα και την επιστήμη. Βορειοδυτικά του περιβόλου του Κεραμεικού, του μεγαλύτερου νεκροταφείου της Αθήνας, βρίσκονταν οι Ηρίες Πύλες (ή Ηρία) το Δίπυλον και η Ιερά Πύλη. Ο αρχαίος δρόμος που περνούσε από την Ηρία κατευθυνόταν στον Ιππιο Κολωνό. Η ονομασία τους σημαίνει πύλες των τάφων (ο τάφος, ιδίως ο τύμβος, τόσο στον Ομηρο όσο και σε μεταγενέστερους, απαντάται συχνά ως ηρίον). Εξω από αυτές και προς τον Κολωνό έχουν ανασκαφεί πάρα πολλοί τάφοι, που επιβεβαίωναν την τοποθεσία των πυλών πριν από τον εντοπισμό τους.
«Οι Αθηναίοι και έξω από την πόλη, στους δήμους και στους δρόμους, έχουν ιερά θεών και ηρώων και τάφους ανθρώπων», γράφει ο αρχαίος περιηγητής Παυσανίας. Ο Παυσανίας είχε δει πολλούς τέτοιους τάφους στην περιοχή, μεταξύ των οποίων «οι τάφοι του Περικλή, του Χαβρία και του Φορμίωνα».
ΑΓΓΕΛΙΚΗ ΚΩΤΤΗ
akotti@pegasus.gr
Εθνος
«Ηρία: αι πύλαι Αθήνησι διά το τους νεκρούς εκφέρεσθαι εκεί επί τα ηρία, ο εστί τους τάφους» σημείωνε ο Θεόφραστος. Το εσωτερικό των Ηρίων Πυλών εντόπισε τώρα η αρχαιολογική σκαπάνη, στην περιοχή του Κεραμεικού, που δεν παύει να μας δίνει σημαντικά ευρήματα. Σε οικόπεδο της οδού Λεωκορίου, στην περιοχή του Ψυρρή, αποκαλύφθηκαν κατάλοιπα των περίφημων πυλών, και το θέμα εισάγεται αύριο στο Κεντρικό Αρχαιολογικό Συμβoύλιο.
Ιχνη των εξωτερικών τμημάτων είχαν ανακαλυφθεί κατά τη διάρκεια παλαιών ανασκαφών, στο οδόστρωμα. Επίσης, σε παρακείμενες οικοδομές, όπως στο παράρτημα Ισλαμικής Τέχνης του Μουσείου Μπενάκη, έχουν εντοπισθεί τμήματα του τείχους της αρχαίας Αθήνας. Οι αρχαιολόγοι γνώριζαν πως οι Ηρίες πύλες τοποθετούνται στην περιοχή καθώς ο Ιωάννης Τραυλός ήδη από τη δεκαετία του ‘60 είχε σχετικές αναφορές, βασισμένες, πάντοτε, σε ανασκαφικά ευρήματα.
Τα κατάλοιπα βρέθηκαν σε στρώματα ελαφρώς διαταραγμένα, αυτό όμως δεν εμποδίζει τους αρχαιολόγους να βγάλουν κάποια πρώτα συμπεράσματα. Η ενδελεχής μελέτη θα δώσει λεπτομέρειες που θα είναι πολύτιμες για την Αθήνα και την επιστήμη. Βορειοδυτικά του περιβόλου του Κεραμεικού, του μεγαλύτερου νεκροταφείου της Αθήνας, βρίσκονταν οι Ηρίες Πύλες (ή Ηρία) το Δίπυλον και η Ιερά Πύλη. Ο αρχαίος δρόμος που περνούσε από την Ηρία κατευθυνόταν στον Ιππιο Κολωνό. Η ονομασία τους σημαίνει πύλες των τάφων (ο τάφος, ιδίως ο τύμβος, τόσο στον Ομηρο όσο και σε μεταγενέστερους, απαντάται συχνά ως ηρίον). Εξω από αυτές και προς τον Κολωνό έχουν ανασκαφεί πάρα πολλοί τάφοι, που επιβεβαίωναν την τοποθεσία των πυλών πριν από τον εντοπισμό τους.
«Οι Αθηναίοι και έξω από την πόλη, στους δήμους και στους δρόμους, έχουν ιερά θεών και ηρώων και τάφους ανθρώπων», γράφει ο αρχαίος περιηγητής Παυσανίας. Ο Παυσανίας είχε δει πολλούς τέτοιους τάφους στην περιοχή, μεταξύ των οποίων «οι τάφοι του Περικλή, του Χαβρία και του Φορμίωνα».
ΑΓΓΕΛΙΚΗ ΚΩΤΤΗ
akotti@pegasus.gr
Εθνος
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