Sunday 25 February 2018

Paul Sommerville: Now our best chance for debt deal

Paul Sommerville

Europe, while calm now, has big problems in its future. We must take bold action before we are forgotten about

When the first Greek restructuring was announced, it was clear to all that it was nowhere near enough. Yet it was hailed as a success. Similarly, the deal reached last week, while a step in the right direction, is also unlikely to be enough.

Greece's international lenders agreed on Monday on a package of measures to reduce Greek debt by €40bn, cutting it to 124 per cent of gross domestic product by 2020.

To reduce the debt pile, they agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral.

From the lender's perspective, it is feasible to keep Greece funded and extend the status quo for a long period of time. But from the borrower's perspective, the depth of the recession and its political repercussions create risks. To increase the likelihood that the Greek debt-to-GDP ratio approaches its 120 per cent by 2020 target under realistic assumptions, a much more drastic debt stock reduction, possibly more than €80bn in total, will be required.

This seems politically infeasible at present. Unfortunately, this uncertainty will hold back a Greek recovery relative to a more decisive write-off and postpone a resolution of the Greek debt issues.

But although the deal may allow Greece to carry on for now, it seems likely that it will continue missing the targets set by the troika, meaning a new funding gap will open and fear of a Greek exit will resurface before too long.

Greek debt at the time of the first bailout was just over €300bn, all held by private creditors – by the end of this year, it is set to be north of €340bn. Not only has Greece's debt continued to increase while Greek GDP has plummeted, but it has been handed over to innocent eurozone taxpayers. This also means there's very little private debt left to write down, setting official lenders up for major losses should Greece default again later.

It's hard not to conclude that simply writing down the debt comprehensively in the first place would have been a far superior course of action – much cheaper and more effective for everyone involved.

It is even more important that lessons are learnt. Eurozone leaders should keep Greece in mind when dealing with Spain and its banking sector.

The eurozone's economy is in crisis, carrying too much debt, unable to grow. Spain's economy has been shrinking for 15 months, with output slumping 0.3 per cent in the third quarter, and the recession is expected to last right through 2013. The OECD is forecasting Spain's gross domestic product will shrink 1.3 per cent in 2012 and decline by another 1.4 per cent in 2013, before a weak pick-up of 0.5 per cent in 2014.

Italy also is stagnating, with further contraction in 2013 (-1.2) and again in 2014 (-1.5), and near zero growth from then on. Portugal will contract 4.6 per cent next year. They will all need debt restructuring.

Eurozone unemployment has hit a new high of 11.7 per cent in October. 25.9 million people are now out of work across Europe, 18.7 million in the eurozone. The north-south divide is clear, and widening. Austria has unemployment of 4.3 per cent, Germany 5.4 per cent and the Netherlands 5.5 per cent. Meanwhile, Greece has a rate of 25.4 per cent and Spain 26.2 per cent.

Germany and other creditor nations refused to consider the simpler and more effective solution of writing off some of Greece's debt to official lenders, a move that would amount to an explicit fiscal transfer.

Instead, they agreed to reduce Greece's debt-service costs, extend its repayment period and lend it money to buy back bonds held by private investors. That's a fiscal transfer by sleight of hand, as is the 10-year extension of some debt maturities and a repayment holiday on loans.

When the time comes to craft the next plan, Europe's leaders would do well to move ahead with the Greek official debt writedown they have tried so hard to avoid. The upfront costs would be greater but so would the chances of success.

For Ireland, in Europe's changing tectonic plates lies our opportunity. Our policy of spineless appeasement has seen us squander many earlier chances but realisation is slowly dawning in Europe that much more radical measures will need to be taken.

Now is the time to press hard for a bold and radical plan on the banking debts. We must not wait. Europe has much bigger problems coming down the track and it is likely we could get forgotten when they emerge. The bond markets are calm, there is renewed optimism that Europe is tackling its problems (totally misplaced, in my view). There is no better time.

We all know that a comprehensive deal on our bank debt is not the panacea to all our woes but it is my belief that it can be the catalyst and the spark that would signal the start of the process of recovery.

The goal is gaping and we are staring into an empty net; surely even our hapless negotiators can't fail to score this time.

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