The economic consequences of the ECB - "an unrepayable debt is an unrepayable debt"

Tom McDonnell19/05/2011

Tom McDonnell: It seems the war dogs of the ECB have threatened to cut off Greece’s access to liquidity if it defaults. Jean-Claude Trichet even attacked Jean-Claude Juncker for daring to say what everybody knows. Greece need to restructure yet the ECB continues to insist that the circus must go on.

Zsolt Darvas, Jean Pisani-Ferry and André Sapirrover at Voxeu have helpfully run the numbers on the Greek debt, and their findings uncategorically show that Greece cannot support its debts.
Even the following three measures:

1. a lowering of the interest rate on all official EU loans,
2. maturity extensions on EU and IMF loans, and
3. the repurchase by the European Financial Stability Facility (EFSF) of all sovereign bonds held by the ECB at market value and the retrocession of the corresponding haircut to the issuing country ...

...would not be sufficient to return Greece to solvency. Under their most optimistic scenario, bringing public debt down to 60% of GDP by 2034 would require the country to maintain a 6% primary surplus every year for 20 years. The more cautious scenario estimates a 10.9% primary surplus would be required. Finally, they find that the haircut on marketable public debt necessary to return Greece to solvency would be in the range of 30%.

And the Financial Time’s Alphaville column points to research from Barclays capital estimating that a 67% haircut must be made on Greek debt in 2012 to push Greece towards sustainability.

The Euro zone has badly mishandled this crisis from day one. Its policy of providing a loan facility in exchange for extreme austerity has failed. The design of its chosen panacea, the European Stabilization Mechanism, simply makes it less likely that the peripherals will be able to return to the market in the short-to-medium term. Greece will remain a ward of the official lenders for the foreseeable future unless it restructures. A change of policy is now needed.

Unfortunately what we are getting is ‘blame the victim’ rhetoric. Chancellor Merkel’s seems to be playing the ‘lazy southern Europeans’ angle -
“[There’s also an issue] that people in countries such as Greece, Spain and Portugal should not be able to retire earlier than Germans – rather, everyone should labour equally – that is important. [...] We cannot have one currency, while some people enjoy very lengthy holidays and others have very short holidays.”

Hopefully these threats and abuse are signs that the issue of the inevitable Greek restructuring is finally coming to a head.

Viable solutions will have to address the core problem, which is that the current architecture of the monetary union is dysfunctional and inherently unstable. Europe’s great currency project cannot survive without fundamental reform. As Paul De Grauwe puts it, “A monetary union can only function if there is a collective mechanism of mutual support and control.”

Posted in: Banking and financeEurope

Tagged with: ECBGreece

Dr Tom McDonnell

McDonnell, Tom

Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.

Tom obtained his PhD in economics from NUI Galway.


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