between Europe and Greece
We are in the middle of a deep crisis between Europe and Greece. The ongoing crisis was
triggered by the reduced ability of Greece to service its debt after a substantial contraction in its gross domestic product
in combination with the refusal of the European Central Bank (ECB), the European Stability Mechanism (ESM) and the International
Monetary Fund (IMF) to pay out tranches of the rescue package in face of non-compliance with loan conditions.
In this statement the European Shadow Financial Regulatory Committee (ESFRC) is advocating
a conditional relief of Greek’s government debt based on Greece meeting certain targets for structural economic reforms
in areas such as its labor market and pensions sector.
Greek banks and other private creditors
If a full-fledged European Banking Union were in existence, the Single Resolution Mechanism
for banks, which has not yet been implemented in Greece, would lay out principles for allocation of losses of failing banks
that cannot bear the losses on their holdings of Greek sovereign debt. A joint European deposit insurance system would have
protected depositors in Greek banks.
Greek banks are already in deep trouble due to general withdrawal of deposits triggered
by the heightened uncertainty concerning the future of emergency liquidity assistance by the ECB. They are not in a position
to take substantial losses without failing.
Private investors faced substantial reduction in the value of their holding
of Greek sovereign debt as a result of the debt restructuring in March 2012. The write-down facing the private creditors amounted
to about 100bn euros. In addition, interest rates were reduced and maturities were lengthened.
Debt relief and official creditors
Official sector creditors (ECB, ESM and IMF) are now by far the largest
holders of Greek government debt. Only they can provide for a substantial debt restructuring.
The largest creditor is the ESM
with 144bn euros. The IMF has lent 48bn euros to Greece but is not willing to forgive debt to a European country that is richer
than many other poorer countries with IMF loans. Thus, a European official authority would have to buy IMF’s claims.
The ECB cannot
offer unlimited support to Greek banks facing runs if there is uncertainty about the value of the collateral in the form of
Greek sovereign debt. Thus, the ESM backed by eurozone member states seem to be the last resort. The ESM should take over
Greek sovereign debt held by the IMF and the ECB. In order to retain the ESM’s credit rating the eurozone governments
would have to protect the ESM against substantial losses on its holdings of Greek debt.
In order for eurozone governments to accept
the idea of standing behind the ESM there must be a clear understanding that the losses will be minimized. This problem can
be addressed by conditional debt relief.
Conditional debt relief
would imply that Greece would have to agree to a list of specific short-run actions to be taken during the next few years
in order to improve economic growth. Examples could include a series of concrete reforms in the field of Greek’s labor
market and pensions system. Each year the ESM would monitor the progress made by Greece. Only, if certain pre-specified actions
have been taken, the ESM would grant Greece, ex post, the planned debt relief. This will provide the Greek government with
powerful incentives to implement structural reforms.
Our proposal is not one that grants Greece debt relief now. Only after having implemented
a set of concrete actions debt relief would be given. However, the perspective of a debt relief in the future should be included
as an integrated part of the rescue package that should be negotiated.