No borrower solidarity

Greek Prime Minister, George Papandreou, on BBC 1’s The Andrew Marr Show

ANDREW MARR: It has been reported that you’d appealed to the Chinese and indeed possibly also to the Russians for financial support, that you wanted to sell bonds to those countries.
GEORGE PAPANDREOU: Well actually …
ANDREW MARR: Can you clear that up?
GEORGE PAPANDREOU: Yes. Well actually we haven’t, but we are of course open to diversify our portfolio.
ANDREW MARR: So you wouldn’t rule out Chinese or Russian …
GEORGE PAPANDREOU: I wouldn’t rule out different sovereign funds being interested in our bonds. Also we would like to diversify and will do so if that’s possible.

From the Abu Dhabi newspaper The National, quoting a person familiar with the Dubai World debt restructuring talks —

The Abu Dhabi Government intervened in the Dubai World situation last December with an injection of $10bn of bonds that enabled Nakheel to pay a $4.1bn bill for a sukuk Islamic bond. Some $4.9bn of that total sum has been spent, the person said, with the balance still available for the DFSF. “The $10bn will be enough because it has to be enough,” he said.

“It is akin to Greece. If the EU just bailed out Greece, it would be like throwing good money after bad.”

Two things to note.  The Greek PM did not restrict himself to Russia or China in the specification of possibly interested sovereign funds vis-a-vis Greek government debt.  Gulf funds would be an obvious alternative.  But The National’s probably well-connected source makes it sound like Abu Dhabi might be viewing Greece and Dubai as similar situations and thus sees its portfolio weight already as high as it wants for such circumstances.  And that’s despite their differences.  Dubai World is a state-owned but commercial company already in debt restucturing negotiations while Greece clearly has some fiscal restructuring to do, but not debt.  But still.  If they’re hoping to sell bonds in the Gulf, they may have some marketing to do first.

19 thoughts on “No borrower solidarity

  1. Mr. T. Barber, FT’s Brussels bureau chief, in his post quotes Mr. Otmar Issing’s remarks on German TV that Greeks enjoyed “one of the most luxurious pension systems in the world” (!!!) I would also like to comment on Mr. Issing’s claims in his article “Europe cannot afford to rescue Greece” (FT, 02/15/2010).

    With regards to Greek pensions, rather than go into lengthy theoretical arguments or statistical data comparisons, I will describe my personal example. As a Greek ex-CEO and professor of economics and management, I received at the age of 65 a monthly pension of about 700 euros from IKA , which is the Social Security Organization for employees of the private sector (though I admit that public employees receive somewhat higher pensions). It would be interesting to compare my pension with Mr. Issing’s, or with German or other northern European pensions…

    As to his previously mentioned article:

    Everything he denies in the first paragraph of his article (namely that other EU countries will follow if Greece collapses, that speculators, and I should add their collaborators, are doing their work and have identified the next candidates, -as Ms Lagarde and Mr Zapatero’s recent comments have confirmed-, that the EMU is at risk, and that solidarity is needed to rescue the Euro) are all now firmly established as facts in the minds of serious economists and policy makers.

    As to his claim that “a bail-out would violate EU treaties, I refer him to Article 122 of the Lisbon Treaty, or Art.119 of the EU Foundation Treaty.

    What he says in paragraph 4 of his article about the structural design flaw of establishing a monetary union without economic and political union, or “putting the cart before the horse”, as he says, and that what is now at stake is “the viability of the whole (EU) framework” contradicts his entire article. Indeed the Greek crisis is an opportunity for the EU to put the horse before the cart. And “solidarity” to Greece would be the first step. Anybody who is against solidarity is logically against the unification of Europe.

    The responsibilities of successive Greek governments have been amply reported in the media, and I will not deny many of the allegations, although there have been many other gross exaggerations, half-truths, omissions, or even inaccuracies, in addition to the ones I have already mentioned above. E.g. failure by many to focus on the responsibilities of Germany and other developed countries for the global and internal EU imbalances, the beggar-thy-neighbour currency and trade policies of major countries, the “deficit fetishism” of the EU commission and some EU governments, the strong-euro monetarist policies of the ECB, the fact that many countries have similar deficit and debt figures as Greece, the questionable record of the rating agencies and their role in all of this, that the EU will not bail out Greece because they love the Greeks but for their own self interest (over 200b. euros worth of Greek bonds and other receivables are held by EU banks and companies), the fact that the currency swap with Goldman-Sachs was arranged after Greece had joined the EMU, not before, and that it was then acceptable by Eurostat, and was used by many other EU countries, that there are still no clear, uniform and standard accounting rules for national budget preparation to be followed by all EU countries, or procedures to monitor them, and therefore budgets are not comparable, or “credible” for that matter, etc.

    With respect to the issues raised in Mr. Issing’s article and Mr. Barber’s post, and in support of my comments here, I do want to refer you all to some very important recent interventions by US economists, such as Rogoff, Stiglitz, Eichengreen, Feldstein and Krugman .

    In the Guardian (Jan. 25, 2010), Professor J. Stiglitz says that “A principled Europe would not leave Greece to bleed. Unless it is one rule for the big and powerful and another for the small, the EU must stand behind Athens’ new leadership”.

    Professor P. Krugman has also made useful contributions to the problem. (See “Anatomy of a Euromess” Feb. 8, 2010 in his NYT blog, and “The real reason for the euromess” in the Guardian Feb.15, 2010, with the subtitle “Greece and other European nations are in trouble because policy elites pushed the continent into adopting a single currency”.

    In Project-Syndicate (02/15/2010), Professor B. Eichengreen in his article “Europe’s Trojan Horse” says that “Germany is not innocent of responsibility for this crisis (and goes on to explain why.)“ (Germany) has benefited enormously from the creation of the Euro. It should repay the favor”. Also: Europe “will have to get over its past.” And Mr. Barber refers to “Greece’s horrific experiences under Nazi occupation” in WWII. Finally, it is true that in the Greek parliament, an MP has reminded the world that Germany has yet to pay the war reparations to Greece, which, I may add, would amount to about a quarter of the total Greek debt. As one whose father was among the 1390 civilians executed in Kalavryta in 1943, I think I am entitled to say: Yes. I agree that present-day Germans are not to blame for those atrocities. And, I also agree that we must get over our past, if only people like Mr. Issing will let us.

  2. “Anybody who is against solidarity is logically against the unification of Europe.”

    True. The German taxpayers have a limit. If you put them to a choice between paying after being lied to or refuse European unity, you might not like the result.
    Germans never liked the Euro, although they do like the EU. If you make an unbreakable link between the two, you run a very high risk.

    “the strong-euro monetarist policies of the ECB, the fact that many countries have similar deficit and debt figures as Greece”

    Those policies were announced before the introduction of the Euro. Everybody who joined knew that devaluation was no longer possible.

    “over 200b. euros worth of Greek bonds and other receivables are held by EU banks and companies”

    However, if Greece is forced into a depression for years, loans will go bad. It is not clear that preventing Greece from defaulting is cheaper in the long run. When would we stop paying and for whom would we pay? If anything, the experience in the Baltic Republics seems to show that you cannot do without a devaluation.

  3. It’s funny how we call this a “sovereign” debt crisis when in fact it’s nothing of the sort. The real crisis isn’t about what’s going to happen to the PIIGS, it’s about what happens to the bond holders!

    Because when those bonds go belly up, so do the banks that hold them en masse. I’m quite certain that Merkel is feeling THAT pressure more than anything else.

    Read the new 1984 meets Dan Brown:

  4. Forgive me if I’m wrong, but wouldn’t the issuance of common Eurozone bonds to help the PIIGS create a monstrous moral hazard? Effectively, that would tell eurozone members that they could finance any amount of deficit, leaving it to French, German and Dutch taxpayers to foot the bill.

    Of course common Eurozone bonds would come with ‘rules’, but those rules already exist in the form of the Stability and Growth Pact, and we all know how effective that is…

    Ottmar Issing again:

    Furthermore, I suspect a serious argument could be made in Germany that issuing common Eurozone bonds would violate the German constitution.

  5. According to the Royal Bank of Canada the expression PIGS should be changed to something more in the tune of FUKI(ng) PIGS. Apparently they have noticed that risk of sovereign debt goes in this order: 1)Ireland; 2) Greece; 3)Portugal; 4)UK; 5)Italy; 6)France; 7)Spain. Yes Spain is the 7th in their list.

    “The capital markets division of Royal Bank of Canada yesterday put out a ranking of sovereign risk – the risk that a country cannot repay its debts. Ireland and Greece came at the top, as you might expect, followed by Portugal and … yes, the UK. On that ranking we are more of a risk than Italy, France and Spain.”

  6. @Pkpetro
    Well, then either the Northern states are light years ahead of Greece in terms of wealth or you’re getting something wrong. Just looked up the statistics at Eurostat and it turns out that Greece spent more 10.7 % of its GDP in 2007 on old age pensions. And that’s above the Eurozone and EU27 average (which both stand at 10 %). Germany btw spends 10.2 %. So allow me to say one thing: there’s room to cut pensions, for example by drastically raising the pension age. There’s also more room to cut expenditure on all those unproductive people in government jobs. But no, you expect the North Europeans to pay for your pensions just like the billions of euros that were pumped into Greece via the EU year after year. But the Germans, Dutch are not going to raise their pension age to 69 just so the Greeks can suck out even more money out of them. It really makes you wonder what’s wrong with the Greeks’ attitude. They are running massive deficits, are threatened by bankruptcy and expect everyone else to pay their bills so that they can continue their corrupt life style. You’ve got to be kidding me! Get your act together before you can start demanding.

  7. @BaryonicLord
    Issuance of common Eurozone bonds would actually reduce moral hazard and systemic risks while developing an important market of bonds at lower spreads. Of course Stability Pact and deficit rules remain applicable. Each country will contribute pro-quota or simply collecting a financial transaction tax. The burden for countries like Germany would be lower than any other kind of bail out and advantageous particularly considering that German banks have Greek bonds in their portfolio…

  8. And what would be the mechanism to pay back those eurozone bonds? With sovereign debt is the government income which foots the bill but there isn’t any europe wide central tax system to provide income. Also, some countries have more debt and use more of their resources in honoring bonds. How would the calculation of how much each country assumes or is allowed to take from those bonds be made? Would it be for the whole debt? for part of it? in which proportion? related to GDP? to debt?

  9. @M.G. in progress:

    Pardon me, but this does not answer anything.

    Imagine ten people dining at a restaurant, each paying with his own credit card. And now imagine the same ten people paying with a common credit card.


    If a EU bond were issued, I’d expect the common debt soon to swell to U.S. federal debt dimensions.

  10. @M.G. in progress:

    I still don’t get it. If common Eurozone bonds (abbreviated C€Bs) are guaranteed jointly by eurozone countries treasuries, then some countries could run up massive deficits, secure in knowing that other countries have the obligation to repay.

    If, on the other hand, C€Bs were guaranteed by some sort of eurozone-wide tax (VAT or similar) there would be the issue where to spend the money raised from the C€Bs. Should all of it go to Greece? If, on the other hand, the money is disbursed per capita to member countries it seems that we would be much in the same situation as before…

  11. If we do pay, we still don’t fix the productivity gap. Indeed we’d sabotage the effort to do so.

    Were this only relevant to Greece, it wouldn’t really matter. But a divergent productivity and thence lack of competitiveness exist in many member states and we could never limit the subsidy to Greece alone.
    Doing so would be rather unethical. It could never be justified with respect to Spain or Ireland.

    Secondly, loans would not really help. If an austerity budget like the proposed budget is adopted, the Greek economy will shrink. In fact, it becomes worse if you consider that such measures will become necessary in many member states. It would take grants to make this work.

    Thirdly, Germany will be a moving target. To overcome the crisis, some German unions have agreed to stagnant nominal wages for this year.

  12. @BaryonicLord:

    Each country will have to contribute with a kind of pro-quota system to the interest rates to be paid and reimbursement of the capital. Cross-guaranteeing of the debt of participant Member States needs to be structured according to Member States’ commitments. A new own resource of a EU fund, which covers and guarantees the common issuance, like a financial transaction tax, would facilitate the set up of the common issuance system.

  13. Mr. Muir,

    Just a small (but quite significant) addition to your list of peoples who have immigrated to Greece in the last 10 years or so. An increasing number of them come from Africa, the Indian sub-continent, Iraq and Afghanistan.

    There are quite a few distinct differences between them and the immigrants from the former Communist countries.

    Three of them are
    a. That there’s no hope for these people to sometime acquire automatically the right of residence and work due to their country joining the EU

    b. That there’s very little opportunity or will on their side to return to their home countries at some point and

    c. There is even less opportunity for them to integrate than its is for immigrants from European countries.

    Let me also point out that Europe has demonstrated very little support to Greece in dealing with those waves of immigrants (I remind that Greece is a EU ‘border’ country and thus one of the main recipients of immigrants into the EU).

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