Seamus Coffey: The only reason bailout deal should be voted down is because it's not tough enough
GREEK prime minister, George Papandreou, has done a strange thing in the context of the ever-deteriorating eurozone debt crisis. He has decided to ask the Greek people if the package laid out in the early hours of last Wednesday should be accepted by them. In the light of the immediate reaction to the deal in Ireland it seems equally strange that Papandreou would even have to ask the question.
The response of many Irish commentators was “where is our haircut?” or “how come Greece, which is missing all its targets, is getting a debt write-down while Ireland gets a pat on the head and remains saddled with debt?”. If the agreement was such a boon for Greece surely a referendum would only be a rubber-stamping exercise and they would openly accept a €100bn write down on their €350bn of debt.
The passing of this referendum is not a foregone conclusion and the falls in stock markets and in the value of the euro are because of these doubts. If Greece rejects the latest bail out then the deal produced last week will unravel and we will be further than ever from a resolution of the crisis.
Why might the Greek population reject the deal? The first reason is of course the austerity that is attached to it. However, like Ireland, getting the public finances under control has to be achieved regardless of whether the overall debt level is unsustainable or not. The size of the debt burden means that the budget has to be brought into balance faster than might otherwise be the case but both countries simply have to do it.
In Ireland, the public deficit is being brought under control, albeit very slowly. Up to September 2010, the deficit on the Exchequer Current Account, the day-to-day receipts and expenditure of central government, was €10.5bn. For the same period in 2011 the current account deficit has been reduced to €8.8bn. There is still a long way to go but some progress is being made.
In Greece the state deficit was €19.2bn for the first nine months of 2011. For the equivalent period of 2010 the deficit was €16bn. In Greece the budgetary situation is getting worse so the benefit of the austerity medicine they are taking is harder to see. The Greek people may reject the deal on the basis of the perceived link between it and the austerity programme. This might be a reason for rejected the EU deal but they cannot avoid the structural reforms needed to stabilise their economy.
A second reason to reject the deal is that it just does not go far enough. After almost two years of denial it was finally accepted in official circles last week that the Greek level of debt is unsustainable and needs to be reduced. A 50pc write-down of some Greek debt was agreed. However, because this only applies to a portion of Greek debt the overall debt reduction is much less.
The write down will still leave the Greek debt ratio above Ireland’s. Greece is getting a write down on its debt but it will still be above the level of a country which has been in a bailout of its own for nearly a year now and where a return to markets is still viewed as being, at best, about two years away.
What benefit did Greece get from the write down if the 2020 target is now a debt to GDP ratio of 120pc as indicated by EC Commission President, Juan Manuel Barroso. The medium term forecasts of the official institutions have not performed well in the crisis and the optimistic manner in which they are made would mean that 120pc is a low as we can expect Greek debt to be. Given the size of the deficit and collapse of the economy a debt of level of 150% of more by 2020 is much more likely. That is where Greece is right now.
If it has now been accepted that Greek debt is unsustainable surely the next step is the introduce a write down that makes it sustainable. There is little to be gained from reducing the debt by an amount that will only mean the same problem that is being addressed now has to be faced again in four or five years time.
The Greek people may fell that if their debt should not be be partially written down but that the write down should apply to all of the debt. Some €150bn of Greek debt is held by the troika, either as bonds bought by the ECB or as loans forwarded by the EU/IMF. These debts are not subject to the current write down.
If all of the debt was written down by 50pc it would give some space to allow Greece to bring its deficit under control before tipping back in to an unsustainable debt spiral. There are some who would still view this as too small and that a total write down of up to 75pc is actually what is required to stabilise the Greek finances.
The deal could be rejected in the Greek referendum, not because it is the wrong thing to do but that it just does not go far enough in the right direction. If there is going to be a Greek default it may as well be a once-off event that offers real debt sustainability rather than the half measures of the current agreement.
Even if Greek debt was written down by 75pc they would still have to bring their burgeoning deficit under control. In this setting though the austerity would be viewed as the country doing something to avoid getting dragged into a debt spiral rather than being perceived as the result of an EU-led programme. It could also be done at a much slower pace.
So should the Greeks reject the deal on the basis that the austerity of too fast and/or the debt write-down is too low? This is where the mettle of opposition politicians will be tested. There have been constant attacks on the government with shouts that “austerity is bad” and that “the debt is too high”. These are echoed in the contributions of many to the debate in Ireland.
We have had a change in government but heretofore there has not been a change in policy. We are sticking to the terms of the EU/IMF programme and the elevation of a government that opposes this remain extremely remote. The majority of Papandreou is tiny and his government will fall if the referendum is defeated. The opposition need to provide a credible alternative to the current programme.
Opinion polls reveal that a majority of Greeks wants to stay in the euro and that a majority of Greeks oppose the current austerity programme. Up to now they have not been asked to choose one over the other. The Greek economy is in freefall and they have an annual deficit of €30 bn. That is being funded with money from the EU/IMF with another €8bn due to arrive next week.
Rejecting the current deal offers some benefits but the costs could be far greater. Unless alternative funding can be sourced they would need to bring the deficit to zero immediately. Unless they can avoid reneging on their debts to the ECB they would be forced to leave the eurozone.
This is the stark choice that has now been presented to the Greek people. In resolving the Greek debt crisis there is no best solution; it is simply a matter of trying to find the least worst solution from among a range of unpalatable options.
Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com