Chronicle of a foretold blackmail
Ralitsa Kovacheva, 13 May 2011
On May 6 German magazine Der Spiegel published an article under the title Greece Considers Exit from Eurozone. The magazine relies on government sources in Berlin and even cites a document taken directly out of Finance Minister Wolfgang Schäuble's briefcase. As a result, according to Der Spiegel, the Commission convened an emergency meeting in Luxembourg on 6 May (Friday). The meeting was buried under a deep secret, though obviously everyone knew about it. What is still unclear is what exactly was discussed. According to Der Spiegel, except a possible Greek withdrawal from the eurozone, also a possible restructuring of the Greek debt was discussed.
The rumours of a potential Greek restructuring have been spreading for months. In February the prestigious Brussels-based think-tank Bruegel wrote in a report that Greece was practically insolvent and that it needed emergency debt reduction. At the same time a group of influential economists (the Group of European Economic Advisers) directly concluded (with the note that they did not recommend Greece to leave the euro area) that a return to the drachma would save Athens.
And when even Germany started talking about a possible restructuring of the Greek debt in the face of its financial minister Wolfgang Schauble, media and markets had already begun to ask not whether, but when. Only the columnist of The Financial Times Wolfgang Munchau stubbornly claims that no one - neither Greece nor the euro area – would win from a debt restructuring at this stage, but his opinion remains largely isolated within the general chorus.
Against this background, when someone reports such a news like Der Spiegel did, the result is a foretold hysteria. The Greek Ministry of Finance immediately responded with a statement and defined the information as “not only completely untrue but also written with incomprehensible flippancy”. According to Athens “such articles are not only provocative but are also highly irresponsible as they undermine Greece’s efforts and those of the Eurozone and serve only the interests of speculators.” But the crisis PR does not work this way so such disclaimers only add fuel to the fire.
All official comments denied the secret meeting at Château de Senningen in Luxembourg: “I totally deny that there is a meeting” (spokesperson of Prime Minister of Luxembourg and Eurogroup President Jean-Claude Juncker), “We are not aware of such a meeting” (Commission spokesman Mark Gray), “This was not a 'crisis meeting on Greece” (Amadeu Altafaj Tadio, spokesman of EU Monetary Affairs Commissioner Olli Rehn). It was also unclear who participated in the meeting - certainly the European Commission and finance ministers from the core of the euro area.
Der Spiegel writes that Wolfgang Schäuble went to Luxembourg with a view to persuade Greece at any cost not to leave the euro area. The unofficial paper from his briefcase, which we mentioned above, contains the following arguments: “It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro”: 50%, as calculated by the German financial ministry. This in turn would lead to a significant increase of the Greek debt and deficit that would reach the sky-high level of 200% of GDP. And then debt restructuring would be inevitable.
It is curious that the same arguments, but with a very different conclusion, were used by the Group of European Economic Advisers (EEAG) in their report on Greece, which euinside wrote about. According to it, the main problem is the huge current account deficit. “To reduce its huge current account deficit, Greece will have to undergo a period of internal or external depreciation, which will lower the euro-value of Greek wages, prices and GDP.”
“Politically, the question of whether or not Greece will or should exit from the euro area will depend on which of these choices are made, but from an economic perspective it is a separate issue, as we have argued above. Greece should make this decision based on its judgement of whether or not an internal or external depreciation will bring about less hardship.” The other options are not so many - raising market funding in 2012 or continuing with the EU and IMF rescue programme.
And even more curious is that the same solution has been suggested by four German professors of economics (the same who “took the German government to the German constitutional court in 1998 over Germany’s entry into the euro”). In an article for The Financial Times from March 2011 they stated: “So the Greeks have no way out but through the exit door. Restoring the drachma at a lower exchange rate would help exports and lift revenues from tourism. It would also send a message to other countries that they have to take serious steps to avoid landing in a similar predicament. Loss of confidence in Greek economics imperils all of Europe. Removing Greece from the euro provides a way of preventing a drama from becoming a tragedy – and of ensuring the survival of monetary union”.
Before we make any conclusions, let's see the other opportunities, mentioned in the EEAG report - an attempt to raise market funding in 2012 or continuing the rescue program of the EU and IMF. According to The Financial Times, “Greece needs to raise €25bn-30bn next year to meet debt repayments that would not be covered by its current €110bn rescue loan from eurozone partners and the International Monetary Fund”. The prospect of this happening is minimal and discouraging. Spreads on Greek government bonds continue to grow, supported by reports that despite the draconian measures, Greece cannot meet its fiscal targets. And the markets “continue to be mistrustful of us”, as Greek Finance Minister Georgios Papaconstantinou has recognised.
It is therefore logical to consider the other option - extending the current rescue programme. According to The Financial Times, namely this was the subject of the meeting in Luxembourg. The newspaper quoted a Greek official, saying that Greece “hopes to sell bonds to the EFSF on the primary market , but the eurozone finance ministers also discussed the possibility of agreeing with investors on voluntary extension of debt that matures in 2012 and 2013”. According to the decisions adopted at the euro area summit in March, the EFSF has the right to buy debt on primary markets.
Eurogroup President Jean-Claude Juncker said that „Greece does need a further adjustment programme”- a hint that the country made no progress in terms of long-term structural reforms and probably will require additional financial assistance. British finance minister George Osborne believes that changes in the Greek rescue programme are “inevitable’. The official European position at this stage (according to Eurogroup President Jean-Claude Juncker, ECB President Jean-Claude Trichet and European Commissioner for Economic and Monetary Affairs Olli Rehn) states that the restructuring of the Greek debt is excluded because this will bring more problems than it would solve.
Business Insider summarised in an attractive way the possible losses from the Greek debt restructuring. According to the Bank for International Settlements data, German banks are most exposed to Greek debt with 26.3 billion dollars, followed by French banks - 19.8 billion dollars, other euro area countries - 15.7 billion dollars, British banks - 3.2 billion dollars, Italian banks - 2.6 billion dollars, US banks - 1.8 billion dollars, Spanish banks - 600 million dollars. Several large insurance companies can also take losses, including MapFre and Fortis. Bulgaria and Romania will be affected by a possible outflow of Greek credits because 45% of the loans for Bulgaria and 25% of those in Romania are from Greek banks, the publication states.
Another important note is that, according to the rules agreed for the permanent euro area rescue fund - the European Stability Mechanism that will be triggered in 2013 – financial assistance will be granted only after a debt sustainability analysis of the country concerned, and if needed - after debt restructuring. This means that if a new loan to Greece is needed, it should be granted under the new conditions or there should be found a way to reshape the current rescue programme.
Everything written so far indicates that at this stage Greece is under pressure from different sides to restructure its debt. And reports of possible Greek exit from the euro area are precisely part of this pressure, because we can assume what would the market reaction be to such a news - interest rates will continue to rise, while restructuring becomes really the only option left for action.
And to what extent the idea of Greece leaving the eurozone is realistic? Even according to the document quoted by Der Spiegel, such developments will “seriously damage faith in the functioning of the eurozone”, would destroy the Greek banking system and would cause large losses for foreign banks, including German banks and the European Central Bank. The social dimensions of such a catastrophe in Greece would also be disastrous. And all the losses will be incurred again jointly by the European taxpayers. This is a political risk that no one in the EU would take at this point. Not to mention the damage on the image of the euro as a symbol of European integration.
However, possible restructuring on a voluntary basis of the Greek debt, even if it doesn’t achieve significant relief in financial terms, would bring significant domestic political dividends in the eurozone core countries. Because public pressure against the rescue loans to the destitute peripheral economies is becoming stronger. This puts at risk not only a possible new loan to Greece, but also the programmes for Portugal and Ireland.
Portugal is awaiting approval of its economic programme in exchange to a 78 billion euros loan from the EU and IMF, as well as a decision on its interest rate. And Ireland is hoping to receive a reduction of 1% of its interest rate from the current 6%, as it has already been done for Greece. We expect more clarity on these matters after the Council of EU finance ministers on May 17 (Ecofin).
Until then the pressure on Greece will continue to mount, as well as the interest rates on its loans. And also the expectations the European leaders, of the national governments and of the European institutions, to come out and give all the answers, which are currently left in the lurch to the rumours and speculations. Because Europe is expected to be united, transparent and honest with its citizens every time and in all matters, not only when we are being congratulated on the occasion of May 9.