by Don Alexander, MBA
Associate, RSD Solutions Inc.
Jeffrey Frankel, in a recent Vox communiqué called “The ECB’s Three Mistakes in the Greek Crisis and How to Get Sovereign Debt Right in the Future”, reviews the failure of the European Central Bank (ECB) and policymakers to fully integrate Greece into the Euro and fulfill the necessary conditions for membership. .
The first mistake, by the ECB and the European Commission, was to allow Greece to join the Euro in 2000 when it failed to meet the economic criteria established by the Maastricht Treaty, particularly the 3% ceiling on the budget deficit expressed as a share of GDP. The second failure by European authorities, was to monitor budget deficits and debt levels that exceeded limits established by the Stability and Growth Pact, resulting in Greek borrowing costs similar to that of Germany. As a result, international investors grossly underestimated potential risks. The third mistake was not to send Greece to the IMF earlier. European policymakers looked at the events in Greece as a temporary liquidity crisis rather than outright insolvency. The result is a higher cost for a bailout.
There are two major lessons learned by policymakers from the Greek experience. The first is that when specific criteria are established, such as the Maastricht fiscal criteria and the No Bailout Clause (1991) and the Stability and Growth Pact (1997), someone has to take responsibility for monitoring and enforcing them. The second lesson is that European authorities are not equipped to impose policy conditionality in rescue loan packages; this is the IMF’s job. International politics is less likely to prevent the IMF from enforcing painful fiscal retrenchment and other difficult conditions. Europe is no different in this respect than Latin America or Asia.
The failure to price risk correctly is now resulting in European policymakers discussing the possibility of a “soft restructuring” of Greek debt. The term soft restructuring is used as a euphemism for extending the maturity of outstanding debt. European authorities are looking for further spending cuts and increased privatization by Greece. However, the failure to do the large-scale debt restructuring, increasingly demanded by investors, will increase the ultimate costs.
No comments:
Post a Comment