What answer would you recommend to Greece’s problems?
President Samaras has said that he feels disappointed at the Eurogroup’s plans. Right now, one step to take would be to accept a further haircut on Greek bonds, but lender countries to Greece seem unable to agree on this.
The reality is two years have passed without a clear and long-term solution. Recently, Citigroup announced it is closing 16 of its 37 branches in the country due to the recession and lack of improvement of its economy. Crédit Agricole and Société Générale will implement similar cuts. That foreign financial entities are fleeing Greece sends a loud signal that the programme for Greece is not working.
In my view, one possible solution would be a deal to re-introduce the drachma alongside the euro. After some ten years, Greece’s GDP could have recovered and the deficit would be lower, so a re-negotiation of its debt would be more favourable. It would take time, but I think it would be the right option. In the meanwhile, creditors would need to wait, debt payments frozen and interests only partially paid. It would be the same as when an individual or a company has not sufficient income in the short term to repay a bank loan.
Is it a reasonable plan just to give Greece more time so the government can pay?
I do not think so. This will make the problem to last for ever. And we must take into account that Germany is holding elections next year: a majority of Germans support Greece leaving the euro zone and they expect their government to push for that outcome.
Cutting down interests would trigger losses in some peripheral countries, like Spain, and it would be Germany filling the gap. Any solution for Greece implies risks for its creditors, and losses will be very hard to avoid. There will be no miraculous deal, no matter how much the Eurogroup awaits.
The IMF insists part of the official debt should be restructured so Greece can breath and become solvent again. Could this work?
It’s a viable proposal, and could be accompanied with the re-introduction of the drachma, a reduction of interest payments, a two-year pause to lower the deficit, and so on, until there’s GDP growth.
But we must bear in mind that Europe represents a good business opportunity for the IMF, which cannot rely on Latin America as a source of income any more. The IMF has received an important injection of capital from the US Federal Reserve and needs to do something with that money, and at a high interest.