The pitfalls of external dependence: Greece, 1829-2015

Πηγή: Brookings Institute
By Carmen M. Reinhart and Christoph Trebesch
5 Sept 2015

Abstract: Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors, and it was bailed out in each crisis. We show that cycles of external crises and dependence are a perennial theme of Greek modern history – with repeating patterns: prior to the default, there is a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans. Political interference from abroad mounts and a prolonged episode of debt overhang and financial autarky follows. At present, there is considerable evidence to suggest that a substantial haircut on external debt is needed to restore the economic viability of the country. Even with that, a policy priority for Greece is to reorient, to the extent possible, towards domestic sources of funding.

The pitfalls of external dependence: Greece, 1829-2015

Greece: Central government debt at US$372 billion at end of 2nd quarter 2012

Homeless people sleep outside Monastiraki metro station in Athens, on Tuesday, Jan. 24, 2012. 

Πηγή: CTVNews

By AP
August 17 2012

ATHENS -- Greece's Finance Ministry says the country's total central government debt stood at C303.5 billion (US$372.67 billion) at the end of July 2012, up from C280.2 billion at the end of the first three months of this year.

The country has been struggling with a severe financial crisis since late 2009, and is dependent on international rescue loans from the International Monetary Fund and other European countries that use the euro. In return for billions of euros in loans, Greece has imposed stringent austerity measures in an effort to make its debt sustainable and allow it to return to borrowing on the market, from which it has been barred by sky-high interest rates.

The finance ministry released the figures Friday, which also showed that government debt hit its highest level -- C367.9 billion -- in the fourth quarter of 2011.

For cash-strapped Cyprus, Russia is a comfortable ally

Πηγή: The National
By Michael Theodoulou
July 12 2012

LIMASSOL // Bronzed Russian tourists roast on the beaches of Limassol, a Cypriot resort where many wealthy compatriots running offshore businesses have pumped countless millions into prime real estate.

"Limassolgrad", as the city is dubbed, is home to Russian schools, restaurants, beauty parlours and a large Russian Orthodox church.

There are even fur coat boutiques doing brisk business despite the sweltering 35°C heat.

Long-standing economic and diplomatic ties bind Russia, a global power with a population of 141 million, and Cyprus, a small and divided but strategically located Mediterranean island of fewer than a million people.

That quirky relationship is now set to become even closer.

Moscow said last week that cash-strapped Cyprus had requested a €5 billion (Dh22bn) rescue loan, primarily to shore up its oversized banking sector that has been battered by heavy exposure to Greece's economic meltdown.

That request has caused unease in Brussels, raising questions over the allegiances of Cyprus, which assumed the European Union's rotating presidency this month.

Days earlier, Cyprus also solicited help from the EU's firewall funds.

Until now, Cyprus has not said how much it needs in total, but local media speculate the figure could be about €10bn, more than half its €17.3bn GDP.

President Demetris Christofias, the EU's only communist leader, insists there is nothing wrong in tapping Brussels and Moscow simultaneously for an economic lifeline.

"Let's hope we can manage both," he said last week. But Kremlin gold, he argued, will have no strings attached, while EU aid could come with "harsh" conditions, like the austerity measures foisted on Greece, Ireland and Portugal.

"The Russians, as good friends of Cyprus, want to take care of us," he proclaimed. "We are grateful to the Russian Federation for their ongoing and absolute support without anything in exchange."

Mr Christofias has also put out feelers to China for a loan.

A European diplomat quipped in response: "The only free cheese is to be found in a mousetrap."

Many Cypriots are also concerned. "Being viewed as Russia's satellite is a very high price to pay for avoiding unpopular [austerity] measures," the Cyprus Mail said in a recent editorial.

Cyprus's conservative opposition agrees with Brussels that Nicosia must reform its pension system and bloated public sector to make the country's predominantly capitalist and historically resilient economy competitive again.

Russia loaned Cyprus €2.5bn last year, with no EU-style demands for economic reform.

If Moscow follows through on the latest request, Cyprus will then be beholden to Russia for an amount equivalent to nearly half its GDP.

Mr Christofias, 65, studied in Soviet-era Moscow and once lightheartedly described himself as "the red sheep" of Europe.

He has played down concerns about any influence Moscow could gain by making such loans.

He assured his European partners last week "the Russia of today is not the Soviet Union of the past" and that Moscow has embraced capitalism.

There has been speculation that in return for financial support, Moscow could demand a stake in Cyprus's recently discovered offshore gasfields that Brussels hoped would help break Europe's energy dependence on Russia.

Cyprus insists a Russian loan will not influence the bidding process to develop its gas riches but Nicosia has not ruled out Russian participation in an €8 to €10bn natural gas terminal Cyprus is planning to build.

Others see a more immediate incentive for Russia to come to Cyprus's aid.

"Cyprus serves as a very useful tax haven for a considerable part of the Russian wealthy elite and they want to keep it that way," said Hubert Faustmann, a political analyst at the University of Nicosia.

At 10 per cent, Cyprus has the EU's lowest corporate tax rate, which Nicosia insists must survive any meddling by the bloc.

On paper, Cyprus is one of the largest investors in Russia worldwide, accounting for 20 per cent of its foreign direct investment last year, more than China.

Most of this money invested in Russia through Cyprus is Russian cash being repatriated.

Politically, Moscow has been a staunch ally. At the UN Security Council, where Russia is a permanent member, it has consistently supported the Greek Cypriots, who represent the island internationally.

Economic ties, meanwhile, date back decades to when Cyprus swapped wine in bulk with the Soviet Union in return for tractors.

In the early 1990s, large numbers of Russian businessmen arrived in Cyprus after the collapse of communism.

Russian tourists are big business. In 2010, an estimated 234,000 Russians visited.

That figure soared by 50 per cent the following year and even more are expected this year. Only Britain, the island's former colonial master, provides more holidaymakers. But Russian tourists spend more and, according to hospitality workers, are bigger tippers than the British and less fussy than Germans.

Bailout can make Greek debt sustainable, but risks remain: EU/IMF

 European Commission President Jose Manuel Barroso reads documents during a debate on the last EU summit at the European Parliament in Strasbourg, March 13, 2012.

Credit: Reuters/Vincent Kessler

Πηγή: Reuters
By Jan Strupczewski
March 2012

Greece's second bailout package can make its debt sustainable, but Athens will have to stick firmly to agreed policies until 2030 and may need more money after 2014, an updated debt sustainability analysis by international lenders shows.

The analysis, prepared by the European Commission, the European Central Bank and the International Monetary Fund for euro zone finance ministers and obtained exclusively by Reuters, shows that after the debt swap at the weekend, Greek debt could fall to 116.5 percent of GDP in 2020 and 88 percent in 2030.

"Results show that the program can place Greek debt on a sustainable trajectory," said the analysis, marked strictly confidential. However, it also warned that the debt trajectory was extremely sensitive and the program was "accident prone".

It said the restructuring of privately held Greek bonds would help to initially reduce debt, but that debt would spike up again to 164 percent of GDP in 2013 due to the shrinking economy and incomplete fiscal adjustment.

"Once the fiscal adjustment is complete, growth has been restored, and privatization receipts are accruing, steady reductions of the debt ratio commence. Greece would have to maintain good policies through 2030 to reduce the ratio below 100 percent of GDP," the report said.

The euro zone may also have to be prepared to lend even more money to Athens, the report said.

It said that when Greece tries to return to markets after 2014, it would first have to issue short-term debt and still pay high interest rates because its debt ratio would still be high, it would have senior debt to pay back first and it would need to establish a considerable track record with the market.

"This would initially discourage large issuances and imply continued reliance on official financing, as committed by Euro area member states on standard EFSF borrowing terms, provided Greece successfully implements its program," the report said.

LOTS OF RISKS

The road to sustainable debt will be long and fraught with risks, the authors said, underlining the delicate balance Greek politicians are going to have to make in the coming decades.

"The Greek authorities may not be able to implement reforms at the pace envisioned in the baseline," it said.

"Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays," it said.

It may take Greece much more time than assumed to identify and implement the necessary structural and fiscal reforms to improve the primary balance from -1 percent in 2012 to the required 4.5 percent of GDP, it said.

"Concerning assets sales, delays may arise due to market-related constraints, encumbrances on assets, or political hurdles. And of course a less favorable macro outcome would itself further hurt policy implementation prospects," it said.

In the less favorable scenario, the debt ratio would peak at 170 percent of GDP in 2014. Once growth recovers, fiscal policy achieves its target and privatization picks up, debt would begin to slowly decline. Debt to GDP would fall to around 145.5 percent of GDP by 2020.

The analysis forecasts that after another year of recession this year, the Greek economy will stabilize in 2013 and see a mild recovery in 2014-2017 and then growth at its potential rate of 2.5 percent annually.

Athens is expected to generate a primary surplus of 4.5 percent in 2014 from a 1 percent deficit this year -- a crucial factor because if the primary surplus is stuck below 1.5 percent of GDP, Greek debt would be on an ever increasing path.

Greece is expected to obtain 45 billion euros from privatization until 2020, although it is likely to get only 12 billion by 2014, the report said. If it gets on 10 billion euros by 2020, the debt ratio in that year would be 130 percent.

Japan, China to Help Europe Solve Crisis Via IMF, Azumi Says

Japanese Finance Minister Jun Azumi

Πηγή: Bloomberg
By Toru Fujioka
Feb 19 2012

Japanese Finance Minister Jun Azumi said his nation and China will work together to help Europe solve its debt crisis through the International Monetary Fund.

Europe needs a bigger so-called firewall of added funding to contain the crisis, even as Greece shows some improvement in solving its financial woes, Azumi told reporters in Beijing today after meeting Chinese Vice Premier Wang Qishan. Azumi, who met Chinese Finance Minister Xiu Xuren during his visit, also said he asked China to make its currency more flexible.

“We shared the view that Europe needs to make more efforts to create a bigger firewall,” Azumi said. “We also agreed to act together as the IMF will probably ask the U.S., Japan and China” to help boost its lending capacity.

The IMF proposed last month to boost its lending funds by as much as $500 billion to insulate the global economy against any deterioration of Europe’s sovereign crisis. That would be similar to a G-20 decision in April 2009 to triple the fund’s resources as part of plans to pull the world out of recession. At that time, the U.S. and Japan each contributed $100 billion, the EU $178 billion and China $50 billion.

“Showing China and Japan are united to support the debt crisis is good news for European markets,” Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo, said before today’s meeting. “It may still take some time for the two to decide specifics as Europe hasn’t reached agreement on a solution within the region.”

China Involved

China is willing to get “more deeply” involved in resolving Europe’s debt crisis, and the continent must send a clearer message to show how it’s working to strengthen its finances, Premier Wen Jiabao said at a joint press conference on Feb. 14 in Beijing with EU President Herman Van Rompuy.

China should expand the flexibility of the yuan now that investors are divided over the prospects for the currency’s appreciation, said Wu Xiaoling, a former deputy governor at the People’s Bank of China.

“The uncertainties in global financial markets present opportunities for the yuan’s exchange rate reform,” Wu said at a financial forum in Shanghai yesterday. “China should take the opportunity to make full use of the current trading band and improve flexibility in the yuan.”

Little Movement

While China allows its currency to trade 0.5 percent against the U.S. dollar on either side of the reference rate, the yuan hasn’t moved more than 0.15 percent from the fixing this month, data compiled by Bloomberg show.

Expectations for a fall in the Chinese currency’s value have reversed, with non-deliverable forward contracts now forecasting no change or some appreciation, the central bank said in its quarterly monetary policy report posted on its website on Feb. 15.

The meeting of world’s second- and third-largest economies follows China’s decision yesterday to cut the amount of cash that banks must set aside as reserves after Europe’s debt crisis and a cooling property market threaten economic growth. Euro- area finance chiefs are slated to meet tomorrow to consider a 130 billion-euro aid package for Greece.

Reins Loosen

China’s Reserve requirements will fall by 50 basis points effective Feb. 24, the People’s Bank of China said on its website last night. Before that move, the ratio for the nation’s largest lenders stood at 21 percent.

The yuan strengthened 0.04 percent to close last week at 6.2991 per dollar in Shanghai, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards rose 0.17 percent to 6.2845 in Hong Kong, a 0.2 percent premium to the spot rate.

China’s Wen and Japanese Prime Minister Yoshihiko Noda agreed in December to promote direct trading of yen and yuan without using dollars and to encourage the development of a market for the exchange, to cut costs for companies.

Japan has applied to buy about $10 billion of Chinese bonds, a Japanese finance ministry official said today in Beijing. Japan aims to begin buying the bonds soon, he said, speaking on condition of anonymity because of ministry policy.

The European Union wants Group of 20 nations to pledge more resources to the International Monetary Fund to fight the global financial crisis, according to a planning document prepared for a Feb. 25-26 meeting of G-20 finance chiefs and central bankers.

“Japan and China are prepared to support the IMF’s important role in addressing the European sovereign debt crisis, on the basis of further efforts by the EU and Euro area members and in cooperation with G20 and IMF members,” according to a statement issued by the Japanese finance ministry after Azumi and Wang met.

FEATURE-Curtain falling on Greece's ruling dynasts

Πηγή: Reuters
By Karolina TagarisDec 9 2011

* Greek politics a "closed profession"
* Three families dominate
* Culture of nepotism, patronage hard to break

ATHENS, Dec 9 (Reuters) - They have dominated Greek politics for decades, attending the same prestigious schools, sharing college dorms and mixing socially, but always fighting tooth and nail for political advantage.

Disillusioned by their leaders, many Greeks hope the debt crisis that has brought the country to its knees may finally break the stranglehold the ruling dynasts have on politics in the country.

But they could just be exchanging one set of elites for another, or the younger generation of the same.

Nepotism and patronage are so deeply rooted, and family and clan loyalties so strong, that change will not come quickly.

"Political culture doesn't change overnight and Greek politics is in many ways personalistic and polarised, where the name of the family is far more important than any other credentials," said Othon Anastasakis, director of Southeast European studies at Britain's Oxford University.

"It works as a closed profession and it's very difficult to accept new people, new blood with new ideas," said Anastasakis, a former Greek Foreign Ministry adviser.

The Karamanlis, Papandreou and Mitsotakis families have taken turns at governing Greece for the greater part of half a century, most recently under Papandreou scion George. Their names have traditionally been enough to secure a seat in parliament, if not a ministry.

But opinion polls show support for the main parties - socialist PASOK, a Papandreou fiefdom, and conservative New Democracy, founded by a Karamanlis - has dropped to a record low during an austerity-driven recession.

"I don't care who is in there as long as his name is not Papandreou, Karamanlis or Mitsotakis," said Alexandros Karabelas, a 41-year-old engineer, as he gestured towards the parliament building in central Athens.

"I want someone who can contribute more than a name, who has had a real job outside politics, who has proven himself first."

Papandreou, son and grandson of Greek premiers, was compelled to resign in disgrace in November over his handling of the debt crisis which is shaking faith in the euro itself.

A three-party coalition led by former central banker Prime Minister Lucas Papademos has taken over, charged with pushing through a bailout needed to avert bankruptcy.

However, although it is true the established players are expected to be absent when the country goes to elections pencilled in for Feb. 19, they will likely be replaced by individuals who are still very much part of the same crowd.

NOT SO NEW KIDS ON THE BLOCK

The new crowd is a mixture of members of other political families, younger generations of the existing ones and various members of the social elite.

It includes Antonis Samaras, current New Democracy leader and part of the same social set as Papandreou.

His great-grandfather founded Athens College, a prestigious private school Samaras and many other politicians attended. A fiery orator known for his refusal to budge on major issues, Samaras was a college roommate of George Papandreou in Boston.

Papandreou's predecessor as prime minister, fellow dynast Costas Karamanlis, lost the 2009 election amid corruption scandals and has kept a low profile since, appearing only during parliamentary votes. But his political career is not over and some analysts say he is deliberately staying on the sidelines until the right time comes to step in.

Also waiting in the wings are Dora Bakoyannis and her brother Kyriakos Mitsotakis, both children of Constantine Mitsotakis who served as prime minister in 1990-93.

Bakoyannis, a former Athens mayor and the country's first female foreign minister, broke ranks with New Democracy after losing a leadership battle to Samaras, an old rival of her father's. Her brother stayed in New Democracy.

Bakoyannis has her own centre-right party, Democratic Alliance, but polls show it is unlikely to win enough votes to enter parliament in the next election.

Neither PASOK nor New Democracy is expected to win an outright majority in the elections, analysts said, raising the prospect of further multi-party - and possibly short-lived - coalitions.

"One-party rule is near-impossible and all options are open," said Costas Panagopoulos, head of ALCO pollsters, who like many analysts believes the time seems ripe for new parties.

The system works against new entrants, however.

Existing parties receive substantial financing from the state and from banks - on average, annual state funding worked out to 10 euros per vote in the last election. New parties receive nothing and depend on raising money from donors but this is often complicated and not widespread.

"THERE WILL BE MORE COMING"

The European Union, which Greece joined in 1981, has inadvertently encouraged patronage and cronyism with generous development funds that the powerful political families have used to bolster their support, analysts said.

Private sector workers have long complained that public offices are filled with idle civil servants put there in return for votes and protected by the constitution from sacking.

The Greeks call it "rousfeti" and it is generally used to refer to the handing out of political favours.

"This unity government is a test for parties to cooperate under extreme circumstances but I wouldn't be optimistic about a change in culture," Oxford University's Anastasakis said.

"What we are seeing is democratic politics in Greece being dictated by the international markets, by external pressure, and change is happening primarily because of that. There is a life or death situation in a way."

The dynastic system inhibits progress, politicians said.

"I felt blocked most of the time when attempting to introduce changes that would affect the system," former finance minister Stefanos Manos told Reuters, citing opposition to his proposal to introduced fixed terms for party leaders as an example.

"The end of the dynasties remains to be proven. We just went through an unfortunate period during which bearers of the dynastic names turned out to be less than competent leaders," he said. "But there will be more coming."

For the first time in almost 40 years, both parties are likely to be led by newcomers by the time of the election and surveys show PASOK voters prefer Finance Minister Evangelos Venizelos to take the helm from George Papandreou.

But for the time being, the loyalty George's father Andreas continues to inspire some 15 years after his death is so strong that the PASOK party faithful are reluctant to oust the son.

"He is part of the Holy Trinity," said Yianis Varoufakis, an economics professor at Athens University who worked as George Papandreou's speech writer on economic policy before he took office in 2009.

"To this day, even those who agree this is an extremely critical time for the party, when it comes to the crunch, they say 'How can we do this to Andreas's son?'"

That is precisely the problem for many Greeks.

"Dynastic politics made people feel democracy is a game reserved for members of such families," Varoufakis said. "It was always part of a political cancer growth on Greece and the sooner they leave us the better."

Good for Greece, bad for Germany

Πηγή: The Globe and Mail
By ERIC REGULY

Nov 24 2011

When Athens erupted in demonstrations and fire bombs during a nationwide strike in October, I asked people fleeing the tear gas whether they would rather suffer 10 more years of recession brought on by the endless austerity programs, or a quick and nasty debt-crunching exercise that might risk Greece’s ongoing use of the euro. The typical response: Ditch the debt so we can get on with our lives, even if it means we’re ousted from the euro zone.

Many Greeks, perhaps the majority of them, consider the austerity programs to be a national suicide pact. Germany, Europe’s paymaster, prime sponsor of Greece’s back-to-back bailouts and enthusiastic critic of Greece’s corruption, tax evasion and penchant for luxuriously youthful retirement ages, wants the country’s crushing debt load to come down, big time, so Athens no longer has to be propped up by Europe’s wealthiest taxpayers.

But Germany’s dirty little secret has always been this: It knows that what is good for Greece—a massive debt-reduction exercise—is not necessarily good for Germany.

Greece is insolvent, its debt load unsustainable. In 2011, the country’s debt was worth about 160% of its annual gross domestic product, up from 22% in 1980. The ratio is expected to rise to an awe-inspiring 186% in 2012 as the recession persists, along with budget deficits equivalent to nearly 10% of GDP. Barring a miracle, repayment of a debt of that scale is impossible.

But didn’t Germany insist that the private sector take a big fat writedown on its Greek sovereign bonds? True, a 50% haircut on privately held bonds was agreed to in late October, up from the 21% bandied about in July. But the writedown is far less impressive than you might think. It doesn’t mean that Greece’s estimated €360-billion debt load would fall by that amount—not even close.

Only about two-thirds of Greece’s debt is held by the private sector. If you assume a 50% cut goes through—and remember that it’s voluntary—Greece’s overall debt would fall by only one-third (that is, half of the two-thirds held by the banks and other private investors). Add in the cost of boosting the capital of the Greek banks taking the loss on the bonds and the 50% haircut would reduce the Greek debt by a mere 22%, according to estimates by UBS.

Société Générale’s calculations are roughly similar. It figured that a 50% loss would cut Greece’s debt-to-GDP ratio to 147% in 2012 and 119% in 2020. That’s still outrageously high for a country that probably will not see any growth for years.

So why doesn’t Germany encourage a default that would eliminate half or more of Greece’s debt? With, say, an 80% debt-to-GDP ratio (similar to Canada’s), Greece just might have a fighting chance to repair its finances, lure back investors and get its economy rolling.

The answer is that a default of such magnitude would do no favours to Germany in either the psychological or financial sense. Germany would lose the barely disguised joy of disciplining a little country that had the nerve to gatecrash the wealthy countries’ party, Molotov cocktail in each hand. As long as Greece suffers, it and other countries that blew up their fiscal houses might think twice before engaging in such reckless behaviour again.

Financially, a massive default would, in effect, reward Greece for decades of epic economic mismanagement. If Greece were to be allowed off the debt hook, why not Portugal and Ireland as well? A cascade of defaults would wipe Europe’s banks off the map, triggering a global recession.

The European Central Bank is the other factor behind Germany’s apparent reluctance to trigger a monster Greek debt restructuring. Not only has the bank been providing liquidity to clapped-out Greek banks, it has been buying Greek sovereign bonds, and the bonds of Italy and other ailing countries, by the bucket-load. By October, the ECB had spent €170 billion on bond purchases. Many economists and policymakers argue that the ECB purchases are sustainable and non-inflationary. The bank also receives interest payments that fund its capital base. That’s not a bad deal for the ECB or for Germany.

So it appears that the plan is to keep Greece in the bailout and austerity lockbox for many, many years. (At the G20 summit in November, Germany and France essentially ordered Greece to scrap a referendum on euro zone membership.) Avoiding a large-scale Greek restructuring prevents me-too debt overhauls, teaches the Greeks and other profligate countries a lesson and parks a share of the Greek life-support burden with the ECB. This may be sensible for Germany, but it is unbelievably nasty for Greece because its debt load remains wholly unsustainable, haircut or not. Judging by the violence in the streets of Athens, the Greeks are beginning to realize that they, and probably their kids, are the new lost generations.

U.S. Pushes Europe to Act With Force on Debt Crisis

Πηγή: New York Times
By MARK LANDLER and BINYAMIN APPELBAUM

Sep. 23 2011

WASHINGTON — The Obama administration, increasingly alarmed by the spillover effects of Europe’s financial crisis, has begun an intensive lobbying campaign to persuade Chancellor Angela Merkel of Germany and other leaders to ramp up efforts to stem any contagion from the debt crisis in Greece.

In phone calls and meetings over the last week, President Obama urged Mrs. Merkel and President Nicolas Sarkozy of France to take coordinated measures — including spending billions in additional funds to bail out Greece and bolster European financial institutions — to prevent Greece’s debt woes from spreading to its neighbors.

The American pressure was on display again Friday and will be this weekend at a gathering of the world’s finance ministers in Washington.

Yet administration officials played down the likelihood of concerted action emerging from these meetings of the International Monetary Fund and the World Bank. At best, they said, the ministers might lay the groundwork for a bolder response in November, when leaders of the Group of 20 industrialized nations meet in Cannes, France.

Recognition is growing that Europe’s debt crisis is now perhaps the largest shadow hanging over the global economy. Although trade with Europe represents only a small share of the American economy, Europe’s problems have repeatedly rattled Wall Street over the last year and a half, eroding confidence and deepening fears of businesses and consumers.

“The biggest single risk to the United States today is that the European situation will spiral out of control,” said Edwin M. Truman, a former Treasury official who is now at the Peterson Institute for International Economics. “Europe is not going to save the U.S. economy, but it could be the straw that breaks it.”

Kenneth Rogoff, a Harvard economist who has written about the history of financial crises, puts Europe’s effect on the United States in blunt political terms. “The downside scenario is awful,” he said, “and if it happens before the U.S. election, it would turn a toss-up election into one in which the president is a huge underdog.

“The administration’s hope is that the Europeans will kick the can down the road far enough that it gets past the election,” said Mr. Rogoff, who has advised Mr. Obama and Republicans.

The administration has trained much of its attention on the figure who may have the greatest ability to influence the outcome in Europe: Mrs. Merkel, the German chancellor. Since he took office, Mr. Obama has met or spoken with Mrs. Merkel 28 times — a pace befitting someone who may have as much influence on his fortunes as his rivals in Washington.

In their most recent call, on Monday, Mr. Obama encouraged Mrs. Merkel to throw more financial firepower at the crisis. The conversation delved into technical details, as well as the risk of financial contagion, said a senior administration official who was not authorized to discuss the call and spoke on condition of anonymity.

Mrs. Merkel faces daunting political obstacles — which Mr. Obama fully recognizes, this official said — in persuading the German public to spend hundreds of billions of euros to bail out Greece and potentially other Mediterranean countries.

While the United States is offering lessons drawn from its own crisis in 2008, the Treasury secretary, Timothy F. Geithner, and other officials are treading carefully to avoid antagonizing Europeans who complain the United States has no business lecturing them. When Mr. Geithner attended a meeting of European finance ministers last week in Wroclaw, Poland, a handful of officials from smaller countries criticized him afterward, but American officials said the meeting was more productive behind closed doors.

The administration’s lobbying effort takes two main forms. One is to press the argument, supported by many economists, that Germany benefits enormously from preserving the euro in its current form rather than abandoning it or standing by as it collapses.

By combining its Deutschmark with the currencies of poorer countries, like Greece, Germany has been able to have a cheaper currency than it would on its own and to export far more than it otherwise might. And exports, which account for a larger share of the German economy than the American economy, have been the main engine of Germany’s recovery.

“There’s a growing narrative that this is a morality play, that this is all about fiscal profligacy in Southern Europe,” said Austan Goolsbee, a former top economic adviser to Mr. Obama, speaking on a panel discussion Thursday at the I.M.F. offices. “But if the Germans are saying, ‘We don’t like the spending by Southern Europe,’ they must also recognize that they’ve been the great beneficiaries.”


The second part of the American effort involves pushing European leaders to strengthen the institutions at the center of their response to the crisis: the European Financial Stability Facility, which is the Continent’s main bailout fund, and the European Central Bank.

There is widespread agreement among outside observers, including Americans like Mr. Goolsbee, that the current bailout fund of 440 billion euros ($600 billion) is not large enough. But there is also doubt about the political and financial ability of some countries to increase their contributions. Officials are focusing instead on ways to leverage its power.

In a communiqué issued by the Group of 20 in Washington on Thursday, finance ministers noted that European governments were taking actions to make the fund more flexible and “maximize its impact in order to address contagion.”

“We need the right firewall to prevent contagion,” François Baron, the French finance minister, said on Thursday. “We can discuss how to give it the necessary strength.”

One option for making the fund more flexible, suggested by American officials, is a program in which governments use their pooled resources to guarantee loans for investors who buy the debt of troubled countries. The loans would be made by the European Central Bank, but the finance facility would absorb any losses, leveraging its resources because it could guarantee bonds with an aggregate value many times larger than its available funds.

Such a program would be a variant on an American effort, the Term Asset-Backed Securities Loan Facility, or TALF, that was operated with mixed results by the Treasury and the Federal Reserve in the wake of the 2008 crisis.

American officials have also emphasized the Fed’s outsize role in responding to the financial crisis here and urged Europe to view the Fed as a model. It made trillions of dollars in loans so that investors remained able to buy and sell a wide range of financial products.

The Fed also has pressed down repeatedly on interest rates to reduce the cost of borrowing for businesses and consumers. The European Central Bank has been more cautious, actually raising interest rates earlier this year.

“The set of solutions and methods to address the situation is quite well known,” said Christine Lagarde, the managing director of the I.M.F., at the start of the meetings. The challenge, she added, was “pushing the leaders into the direction where they have to take much-needed, more action than what has already been done.”

German hotheads are close to destroying the euro

Πηγή: FT
By Jeffrey Sachs

Sep. 15 2011

German tabloids and much of European public opinion seem fixated on Greece as an object of scorn. The fact that the Greek government is pushing through the toughest of austerity measures in the face of mass demonstrations seems to be of no import. Yet this aggressive attitude is now putting the euro in imminent peril.

Despite chancellor Angela Merkel’s call for calm, shortsighted German politicians opine that Germany could actually benefit if Greece is forced into default, or even out of the euro. Nothing could be further from the truth. Germany now risks the destruction of its own and Europe’s prosperity if it continues to ignore the interdependence of all of Europe’s economies.

It is to her credit, therefore, that Ms Merkel this week pushed back against her hotheaded colleagues. Even so, Germany’s macroeconomic thinking remains blinkered. Greece is making a bold transformation, from a large primary budget deficit in 2009 to a primary surplus in 2012. The task is considerable. Yes, there has been modest slippage this year, but this reflects the steep recession now hitting the Greek economy.

The critics also seem wilfully to overlook that a European-wide financial panic has swept the credit lines and deposits from Greece’s banking system, and with them the ability of the banks to lend. The economy is thus buckling under an intense credit squeeze, only stoked by the recent talk of default.

Worse, German and European leaders have responded to this downward spiral only with demands for fresh austerity. Greece obliged once again last weekend, with more tightening. But we must now understand Greece is at the precipice of social instability. Further cuts will push it over the edge – ending the adjustment programme, and intensifying the financial squeeze and the drumbeat of those trying to push Greece out of the eurozone. It is utterly naive to believe that the downward spiral would stop there. Italy, Spain, Portugal, Ireland, and even France could quite possibly be next, with the risk of bank runs pulling the entire edifice of monetary co-operation into rubble.

If ever there were a time for European leadership, it is now. Perhaps we must just hold our breath until Mario Draghi replaces Jean-Claude Trichet, a spent force, at the helm of the European Central Bank. At least Jürgen Stark’s resignation from the ECB, though viewed negatively by the markets, now offers an opportunity for more realistic thinking in that institution.

The steps needed to avoid the abyss are clear. Greece needs working capital, backed by the ECB and the European Investment Bank, to prevent a panic-induced implosion. Not only must the ECB do its part but Greece and its partners must implement the deal agreed in July, under which the European financial stability facility will finance part of Greece’s needs, while private-sector holders of Greek bonds will exchange them for 30-year notes.

Delivering this deal, however, also demands a more proactive approach from Germany, not least to calm anxious markets. Ms Merkel will have her hands full keeping her colleagues quiet and persuading the German people to support the eurozone. But, in addition to this, she must push others in Europe to ratify the planned EFSF expansion, while encouraging both Brussels and the International Monetary Fund to develop realistic financing targets for 2012 – even if that means a few billion more euros for Greece in the face of the steep recession. It will also help if she encourages the ECB to behave like a central bank, not a commercial bank, by exercising its lender of last resort functions in the midst of a financial panic.

The deal agreed in July can give Greece the breathing space it needs, locking in low real interest rates and providing the financing to recapitalise the Greek banks. Of course, implementing it will not be easy, especially given that it must be approved by Europe’s national parliaments. Yet its leaders should now be working overtime to make this happen, not berating the Greeks for modest slippages. Greece, its creditors and the ECB need to show utmost responsibility, macroeconomic judgment and maturity. Greece is doing so, and the rest of Europe must as well. If they do not, the consequences for Europe and the global economy will be dreadful. This is an extremely dangerous moment. Europe must play for the long term.

(The writer is director of the Earth Institute at Columbia University)

US Senate drops Libya resolution to focus on national debt

US Senate Majority Leader Harry Reid has pulled a resolution to authorize the US military conflict in Libya from the Senate schedule

The US Senate hastily dropped plans to vote Tuesday on a symbolic resolution authorising the US role in Libya amid a Republican insurrection to demand action instead on the national debt.

Πηγή: The Telegraph 10:54PM BST 05 Jul 2011

Harry Reid, the Democratic Senate Majority leader, said: "We've agreed, notwithstanding the broad support for the Libyan resolution, the most important thing for us to focus on this week is the budget."

His comments came after several angry speeches from Republicans who complained that Libya was the wrong measure at the wrong time and noted Mr Reid had cancelled an annual week-long recess to make progress in stalled debt talks.