The International Economy, April 17th, 2015, p. 10
It is time now for Greece’s public creditors to face the truth: the country is bankrupt.
In terms of extra credit from the Greek printing press, net purchases of Greek government bonds by other central banks, and fiscal rescue credits provided by other countries, the credit help Greece has received from its partners in the eurozone stood at €325 billion, or 182 percent of GDP, by the end of the first quarter of 2015. This sum was €262 billion larger than five years ago, when a possible Grexit was first vigorously debated in Europe, eventually leading to voluminous fiscal and monetary rescue operations. To put this sum in context, Greece has been supported with the equivalent of thirty-five Marshall Plans of the kind Germany received after the war, which, accumulated over the years, amounted to 5.2 percent of Germany’s 1952 GDP. About one-third of the money publicly lent to Greece has been used for financing the Greek current account deficit since 2008, another third was used to replace net foreign debt existing already before 2008, and the remaining third enabled capital flight by Greeks who sold their assets to the banks or borrowed the money to transfer it to other countries.
Despite all the help, the Greek economy is in a shambles. Manufacturing output is 26 percent below the pre-crisis level, while the unemployment rate hovers at 26 percent, more than twice what it was five years ago, when the fiscal rescue measures started. Youth unemployment exceeds 50 percent. Spreads and interest rates are at record levels. On April 16, the interest rate for Greek government bonds with a remaining time to maturity of two years yielded a nominal rate of return of 28 percent. Surprisingly, capital markets are not spooked by all this mess. The spreads of Italian, Spanish, Portuguese, or Irish government bonds relative to the German bunds are lower than ever. Market participants expect no particular turmoil should Greece default or exit the euro. The explanation is that practically all private financial investment in Greece has by now been replaced with public credit from the printing press or from the fiscal rescue operations.
It is time now for Greece’s public creditors to face the truth and accept that the country is bankrupt. Even Greek Finance Minister Yanis Varoufakis insinuated as much in a BBC interview. Whether they like it or not, it is better for the creditors to write off their claims than to throw good money after bad, because that way they would extend the drama and the amount of money being burnt. Relief should be given for government debt, for the Target debt resulting from excessive issuance of money, and for bank debt vis-à-vis the local central bank, as they are all interrelated. At the same time, the ECB should force Greece to impose capital controls, as was done in Cyprus, by stopping the extension of emergency liquidity assistance credit. ELA credit is refinancing credit that the Greek central bank provides to commercial banks purportedly at its own risk. In fact, however, the Greek central bank’s riskbearing capacity is limited by the size of its equity and its ownership share in the Eurosystem’s monetary base, which currently amounts to €44 billion. Given that ELA has already reached €74 billion, the admissible limit has been exceeded by €30 billion. This surplus may turn out to be a full gain in wealth for Greek citizens, since most of the money has been used to make their capital flight possible, forcing other central banks to credit Greek citizens’ foreign bank accounts in exchange for Target claims that in all likelihood will never be serviced.
But just writing off the debt and stopping capital flight is not enough, as the country must be made competitive in the sense that it must be able to return to high employment without resorting to current account deficits. The best measure to achieve this is a temporary exit from the eurozone, as the subsequent devaluation of the drachma would redirect Greek demand from foreign to domestic products, boost tourism, and, above all, make it attractive for investors to return to Greece to buy real assets at bargain prices and further invest in the country. Nearly all seventy or so state bankruptcies that the world has seen in recent decades that were coupled with devaluations turned into success stories, with the upswing coming within a year or two. The demonstration effect of such a measure would also be useful, as it would clearly signal that the Eurosystem is no fiscal union, but a currency union without debt mutualization and with rules that have to be obeyed. Keeping Greece in the euro and financing its lack of competitiveness with new public credit, as would undoubtedly be necessary to prevent political turmoil, would have dramatic political contagion effects for other crisis countries, blunting their reform efforts and making Europe sink in a morass of debt.