A French solution to a Greek problem may help Ireland
Published 30/06/2011 | 05:00
AS the clock ticked down to a decisive set of votes on Greek austerity plans, President Nicolas Sarkozy made a crucial proposal for the treatment of Greek debt by French banks that may become the model for private-sector involvement in resolving the crisis.
In addition to being dramatic and late, the French proposal was dressed up to be everything it is not: voluntary.
On top of this, it represents a complete climbdown from a hitherto non-negotiable position. In keeping with the best Greek tragedies, it was probably destined to be made in any event and is probably more significant than it appears, but might have come too late. Only in Europe!
The proposal has three elements that would apply to debt falling due in 2011-13: half of the repayments would simply be rolled over and delayed for 30 years; another 20pc of the debt would be converted into 30-year bonds to be repaid by a European fund; and the remaining 30pc of the debt would be paid as originally scheduled.
This would relieve Greece of the need to repay 70pc of the debt falling due to participating private institutions over the next few years and, at the same time, allow those institutions to get some cash and a more secure promise of future payoffs.
It will only make a difference if a sufficient number of creditors take part, and it is only voluntary in the sense that a contribution to a ransom payment might be considered charitable.
Some will say that the proposal only rolls the debt problem forward without resolving it but, in this case, the problem would be rolled so far forward as to make a real difference.
Consider, for example, that a payment representing 5pc of GDP in 2011 would, if annual economic growth averaged about 4pc, only amount to 1.5pc of (a much-larger) GDP in 2041.
Therefore, if any meaningful growth rate-including inflation can be secured, the debt will be far more manageable by the time it comes due.
And payments amounting to 5pc of GDP could be delayed in each year even if the scheme was to apply to just half of the outstanding sovereign debt. (Repayments of 14pc of GDP are due in each year and 70pc of half of this amount is close to 5pc).
This is significant. Moreover, it will be difficult to suddenly end the scheme in 2014 and to demand full repayment on debt from then on.
Instead, it is more likely that the scheme will form the basis of a more permanent debt reduction deal that would be agreed under the aegis of the European Stability Mechanism when it begins operation in 2013. At that stage, a final solution could be put in place.
The problem, however, is that all of this may not seem important to the people protesting on the streets of Athens right now.
With no apparent or immediate reduction in the size of the national debt, their situation may not appear to have improved at all.
Moreover, interest payments will still be due on most of the deferred debt and this will add to government deficits in the future and will further squeeze the country's minimal prospects for growth.
The economy may have been put on life support when it needed an immediate organ transplant and the Greek people could pull the plug at any time.
As for its implications for Ireland, the most important aspect to the proposed deal is that the private sector has finally been asked to share in the burden of debt resolution.
From now on, it will not be possible to reject the notion that the private sector -- for example, private bondholders -- should share in the pain of adjustment.
While the exact terms of the Greek deal would not be of particular interest to Ireland -- because our programme is on track for now and our scheduled debt repayments are further off -- the principle of an extended rollover of debt could be incorporated in a follow-up programme that would also be negotiated during 2013.
Both a former German finance minister and a former head of the Bundesbank called this week for recognition that debt relief is needed to resolve the euro crisis.
In the context of an extended rollover of debt, the interest rate on that debt will become more significant -- it will be applicable for 30 years. Therefore, it will become even more important to establish the principle that interest rates charged on financial recovery programmes should be based on reasonable terms. The negotiation of a debt extension would, thereafter, mean much more.
As for that interest rate, the other thing we learned this week is that the French government is capable of a complete volte face -- just so long as it gets to decide on the dramatic timing of the event and on the terminology to be used. And, of course, it must appear that it was a French idea all along.
C'est la vie!
Gary O'Callaghan is Professor of Economics at Dubrovnik International University. He was a member of the staff of the IMF and has advised numerous governments on macroeconomic policies.