On Monday evening, I spoke with a KPMG executive at a reception following a panel discussion at DebtWire’s Asia-Pacific Distressed Debt Outlook meeting in New York. The executive had just returned from Athens and remarked about his encounters with protestors in Syntagma Square. He was not surprised the street protesters blamed the country’s strapped economy on foreign countries, foreign bankers, even local politicians. But he was impressed by an elderly merchant who, standing in front of his kiosk, shared a different view. “We have enjoyed ten years of good living which we had not experienced before joining the Euro. I guess we now have to pay the bill, but we can’t afford to pay it all at once.”
I lived four years in Athens during the presidency of Papandreou’s father, Andreas, and revisited the country numerous times. With their deep history, Athenian’s have reason to be a proud people. But their pride is also their Achilles’ heel. Too often, Athenians are quick to place blame on non-Greeks for their nation’s problems, or to justify their own ethnocentric market policies. Many in the local media reflexively point to external factors as frequent – if not easily understood – shadowy instigators of the country’s political and economic troubles. My view on how Greece’s sovereign debt crisis will play out is colored by these experiences.
I believe events in Athens will overtake the bail-out as scripted by the ECB and IMF. Why? The street protestors are not alone in their indignation about their plight and the remedies forced on them. In a survey published recently in the newspaper Kathimerini, 87% of the public said Papandreou’s government was taking the country in the wrong direction. It seems that Greeks broadly are not willing to accept full responsibility (and the consequences) for their economic situation.
Surely, this is not your ordinary country default situation. Greece’s debt level is over 1.5 times its annual GDP, a level that is unsustainable, and for which there are only bad options. The second round of emergency austerity measures required by the ECB in return for further debt relief will be more severe than the tough medicine agreed to last year. It will demand higher taxes, expedited privatization of state companies, immediate cuts in public employment and a swift curtailment of protectionist market practices.
The ECB fiscal measures are meant to generate revenues, improve business productivity and raise export receipts. These are fundamental changes for an economy where two-thirds of all employment is tied to the public sector. And while Greeks may agree in principle their economy needs to modernize, they will likely reject the scope of these changes as too radical and the time frame as too quick. Any economic recovery program cannot be successfully implemented without the support of the Greek people.
The Euro-zone (E-Z) authorities must by now realize they cannot afford to prop up all three troubled peripheral countries plus the likelihood of Spain and Italy also needing financial support. If Greeks pressure their legislators to reject the ECB’s conditions for additional debt relief, the ECB will be forced to confront the questions they have avoided discussing. Are all E-Z countries too big to fail? What circumstances make a Euro-zone economy too sick, too expensive and too dangerous to justify amputation in order to protect the rest of the E-Z body? Should we support E-Z free-riders who perpetrate fraud in order to gain E-Z membership? But there will be no need for an urgent answer since the Greek horse will have already bolted.
The capital markets should now prepare themselves for a classic debt rescheduling for Greece, to include a Paris Club to negotiate public sector debt terms and a London Club for private sector creditor terms. This approach will be the only avenue left open to Greek creditors.
The ECB now has little choice but to make a clear and realistic distinction between what is “sustainable” vs. “unsustainable” debt levels as a condition to continued E-Z membership.
They need to stop the politics and get real about the rules of the game.
DebtCapMkt 