By Bevis Longstreth
The crisis over Greece’s sovereign debt deepens daily as the reality gap grows between the politically driven views of European Union (EU) leadership and the market-place views reflected in such things as interest yields on 2-year Greek notes and premiums payable on credit default swaps (CDS) covering Greek debt, both of which have soared in recent weeks to astronomical heights.
Market professionals the world around know Greece suffers from a condition of bankruptcy rather than a crisis of liquidity, and therefore cannot survive without very significant debt relief and restructuring combined with a complete overhaul of civil society, particularly the deeply conflicted and corrupt ways in which its government collects and expends tax proceeds and regulates economic affairs. Austerity alone won’t work, anymore than bleeding in the Dark Ages to treat a life-threatening anemia did.
Despite heroic efforts by the European Central Bank (ECB) and the International Monetary Fund (IMF), it remains highly unlikely that Greece can achieve the necessary reforms without the Greek people becoming convinced that those reforms will work and, therefore, be worth the pain that individuals and families would have to endure to achieve them. There is no reason, now, to suppose that Greece’s own leaders are capable of either inspiring the necessary confidence in their people or actually achieving the necessary reforms.
Therefore, to undertake this project with any prospect for success, the EU should offer a receivership to manage all matters affected by the public interest in Greece until a turnaround is achieved. The receivership would consist of a committee of highly respected Europeans whose professional qualifications and experience make them demonstrably well suited to the task. Obviously, such a move would run large political risks. However, the market-place is broadcasting through financial instruments the levels of risk it sees in the status quo and those levels are so frightening and unsustainable as to warrant taking on the political risks.
Short of action along these lines, which proved successful in the handling of New York City’s financial crisis of the early 1980s, the EU should invite Greece out of the union, where it can try through the use of a deflated currency and other reforms to achieve solvency. Doing so in orderly fashion would contribute importantly to the avoidance of a very disorderly default down the road and the danger of contagion.
Thanks for running this article. Nice to see some perspectives on matters that occur outside of Philipstown. The point on contagion and a threat to the EU / eurozone and beyond is a real concern. If the financial crisis that began 3+ years ago was one that started in the US housing market and infected the rest of the world, this sovereign debt crisis could be the boomerang that brings the crisis back to our shores just as we are (arguably)starting to recover.
Your point on a receivership type solution is an interesting one that should be explored. It would certainly be a tough sell to the Greek people – if they are against an austerity package pushed by their own government, would they be willing to submit to “outsiders” running their fiscal affairs? Would be interesting to see how this plays out, although you rightly point out that they can certainly choose to exit the union if they don’t want to submit to such a plan.
It also begs the question on whether this is a situation that we could be facing here at home at some point down the road if we don’t get our own fiscal house in order. And I say this from a non-partisan perspective – I haven’t seen anything out of either of our political parties that comes close to addressing the fundamental problems that drive our national debt and the crippling state and local budget issues we face. We are at the point where it is going to take a viable independent or third party movement (that is not tied to the political positions, donors or embdedded special interests of the two existing parties) to propose a meaningful plan to address this.
Anyway, thanks for publishing this. Appreciate the variety in perspectives that are published here.