21 February 2012

Gregorz Kolodko: ECB must rescue Greece – or pay more later

Expecting the Greeks to tighten their belts again is unrealistic, writes Kolodko in the FT. One should not push people beyond the limit of their endurance. Such pressure is stupidity, not policy.

It is true that Greek macro-economic policy prior to the crisis was unaccountable – and that the Greek people must pay for it dearly. They already are. But is also true that foreign bankers did not show much intelligence and responsibility when they were lending to Greece. They too must pay for it dearly. So far they are not. It is also true that western leaders – especially Angela Merkel and Nicolas Sarkozy – have made a series of mistakes by postponing the decision to write down non-performing Greek debt and by trying to protect the interests of private investors. As for the debt reduction, it has been too little, too late. So some politicians and policymakers must also pay for their mistakes, and the forthcoming elections in France and Germany may prove to be a good occasion.

The only chance for a working solution is a comprehensive, rapidly executed (in weeks, not months) – plan to cut Greece’s external debt by 80 per cent and advance it a significant loan, provided by the EU, at zero interest rate. The easiest solution would be for the European Central Bank to buy new issues of Greek government bonds, but its hyper-liberal statutes and German ethos will not allow it to do so. The ECB has off-balance sheet resources of €3.3 trillion, equivalent to the current value of its seigniorage. If it is only used properly, the issue of eurozone sovereign debt can be resolved.

Otherwise a misguided policy will result in increasing a debt that is already unsustainable. It will lead to default and chaotic bankruptcy, and will be followed by serious – and unpredictable – consequences, not just for Greece, but for the eurozone and other partners from the EU and elsewhere, in south-east Europe, Turkey and beyond. My point is clear: let us help Greece and ourselves now, at a lower price, or it will cost us much more a little bit later.

After the latest meeting of eurozone finance ministers, resulting in the decision to grant Greece a second €130 billion bailout, one might keep saying that things are on the right track. But they are not. They are heading for a catastrophe that is already unfolding, albeit in slow motion. Cheating the public and miscalculating and misleading the market is neither a strategy, nor a policy. It is sheer stupidity.

Full article (FT subscription required)

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