Greece will win battle against its creditors

Frances Coppola

Although many people think Greece is in a weak position vis-à-vis its creditors, I think it is in a strong position, both intellectually and politically. Not that I think it will suddenly get the support it deserves but that, in the end, the Greek government will be backed because it is in the self-interest of the creditors. (I will explain in a next post.)

My view is supported by Frances Coppola, who wrote recently the following in Forbes:

(...) The 2012 “private sector involvement” (PSI) restructuring wrote down up to 80% of the net present value of Greece’s private sector debts. But much of the debt had already been transferred to the public sector, not only as a result of the 2010 bailout but also through subsequent IMF and EU loans and ECB support of Greece’s banks. The PSI restructuring reduced Greece’s debt to just over 150% of its GDP. Everyone knew that this was inadequate. Everyone knew that the official sector would have to suffer a haircut as well, and the longer it was delayed, the more costly it would be. But the EU governments and institutions did not wish to accept a haircut, and the IMF didn’t want to force them to. So they played “extend and pretend”.
A Memorandum of Understanding was prepared, underpinned by a detailed IMF program. The structural “reforms” agreed between the EU, the IMF and the then Greek government were supposed to reduce Greece’s debt/GDP to 120% of GDP by 2020. Although this forecast was founded on hilariously unrealistic assumptions regarding growth, inflation and tax revenues, it was dubbed “sustainable”. On that basis – and despite further objections from emerging-market representatives — the IMF contributed new funds to the Greek bailout program.
The continuing depression in Greece has caused the debt burden to increase, not because nominal debt has increased much (Greece has managed to bring its budget into primary balance, more-or-less) but because GDP has collapsed. Debt is now around 175% of GDP and probably rising, which is where it was when the PSI was agreed. Greek debt is unsustainable. Everyone knows it is. The only question is when, and how, it will be restructured.
So the IMF is now in a difficult position. It cannot lend more to Greece, because to do so would be to admit that the EU’s measures to eliminate systemic risk have failed. But it can’t call for debt restructuring and relaxation of budget targets without raising the possibility that it may have to take a haircut itself. And the board members who originally opposed the deal are now vociferously saying “we told you so”. (...)