Merkel Changes Stance on Aid to Greece

  After talks with Nicolas Sarkozy, Chancellor Angela Merkel said banks could not be forced to participate in the bailout.

BERLIN — Chancellor Angela Merkel of Germany retreated Friday from demands that private financial institutions be pressured to participate in efforts to rescue the Greek economy, a compromise that seemed to offer some breathing space in Europe’s efforts to confront its potentially ruinous debt crisis.

TimesCast | The Greek Financial Crisis Evangelos Venizelos in Athens on Friday after being sworn in as the new Greek finance minister, part of a shakeup of the government as protests spread over the country's austerity measures.

Her critics in the European Central Bank and in many European capitals had argued that any requirement that private investors absorb some losses risked plunging Greece into a disorderly default on its enormous debt.

But after a two-hour meeting with President Nicolas Sarkozy of France, whose banks are among the most heavily exposed in the Greek debt crisis, Mrs. Merkel relented, saying, “We would like to have a participation of private creditors on a voluntary basis.” She acknowledged, too, that there was no legal way of forcing banks to participate.

“This should be worked out jointly with the E.C.B,” she added, referring to the European Central Bank. “There shouldn’t be any dispute with the E.C.B. on this.” It was her second major political reversal in a month and could compound her political woes at home.

Mrs. Merkel spoke shortly after the embattled Greek prime minister, George Papandreou, reshuffled his cabinet after days of turbulence on the streets of Athens and within the political elite. In the most prominent change, he named Evangelos Venizelos, the former defense minister, as finance minister in place of George Papaconstantinou, who has been the highly visible face of the austerity drive.

Critics dismissed the change as cosmetic. Yanis Varoufakis, a political economist at the University of Athens, told Skai television that “not even God almighty” as finance minister could redeem the situation. Nevertheless, the combination of the cabinet changes and the agreement between France and Germany on Friday calmed jittery markets.

Behind most calculations about the Greek crisis lies the much broader worry about whether financial woes in Athens will lead to a domino collapse of other weak euro zone economies, such as those of Portugal and Ireland, and create a “credit event” similar to the one that froze global markets after the Lehman Brothers bankruptcy. To stave off an imminent default, Greece needs the next $16.8 billion installment of a $155 billion loan package it received a year ago. But Greece is also likely to need another longer-term bailout — estimated at up to $84 billion — before it can get its budget deficit, currently at 7.5 percent of gross domestic product, into a surplus.

The potential for European chaos is immense. The European Central Bank itself holds billions of euros in shaky Greek debt and has firmly opposed anything that could set off what rating agencies call a “credit event,” or default.

Officials with the European Union and the International Monetary Fund have expressed confidence that an agreement to release the next loan installment could emerge from a meeting of euro zone finance ministers on Sunday in Luxembourg, while the question of the proposed second rescue package could be put off until July. Mrs. Merkel’s retreat was all the more significant because German voters have registered loud concerns that their tax money, levied on a country known for prudence and restraint, is being used to spare Greece from the results of its own mismanagement and profligacy. With the demand for private lenders to be brought into the rescue, Mrs. Merkel had hoped to show German voters that the banks would share their pain.

The German leader also reversed her energy policies this month, moving up the deadline for Germany to close down most of its nuclear power stations to 2022. While she said publicly that her change of mind was a result of the nuclear disaster in Japan, many analysts saw it as a desperate attempt to recover political ground after a series of defeats in local elections.

Mrs. Merkel’s junior coalition partners, the Free Democrats, are also weak, leaving her bereft of powerful allies. “This coalition, as everyone knows, is an alliance for ill, not good,” The Süddeutsche Zeitung of Munich said in an editorial on Friday.

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Greece Replaces Finance Minister

Evangelos Venizelos, the former defense minister, replaced Finance Minister George Papaconstantinou, who has been the highly visible face of the government’s austerity drive.

Mr. Venizelos, 54, said at an afternoon press conference that he was ready to undertake the “historic challenge” of helping Greece to overcome its debt crisis. “I am leaving defense to go where the real battle is,” he said. In a speech to his new cabinet, Mr. Papandreou tried to rein in dissent and make clear how much was at stake, warning that the country’s debt burden “threatens to destroy us and wreck the lives of millions of Greeks.”

“We have a lot of hard work to do as a government before we are assessed by citizens in elections in 2013,” he added, referring to the year that the Socialists’ four-year term is due to expire and thus a clear indication that he had decided against a snap election.

The government is under pressure to push through budget cuts and tax increases in order to secure the next installment of a $155 billion rescue package pledged by the European Union and the International Monetary Fund and to qualify for a second bailout believed to be necessary to keep the country solvent.

But critics said that the reshuffle was a cosmetic, not structural, change. Yanis Varoufakis, a political economist at the University of Athens, told Skai television that “not even God almighty” as finance minister could change the dire situation.

Greeks increasingly feel they are unfairly suffering for mistakes made by their leaders and banks and have staged labor strikes and three weeks of daily protests to express their outrage. This week, Mr. Papandreou has contended with two defections from within his own Socialist Party and growing dissent. After the reshuffle, a confidence vote in the new government was expected on Tuesday night.

Mr. Venizelos, a respected professor of constitutional law at Aristotle University of Thessaloniki, in northern Greece, now faces the task of pushing through the hugely unpopular austerity program. A rival of Mr. Papandreou, he has held other ministerial portfolios over the years including culture and development, and challenged Mr. Papandreou for the leadership of the Socialist Party, known as Pasok, in 2007. Though he lost the leadership race, Mr. Papandreou has continued to rely heavily on him.

The new cabinet was met with criticism from other political parties. The main conservative opposition, New Democracy, said the removal of Mr. Papaconstantinou as finance minister amounted to “an admission of the failure of the government’s economic policy.” A spokesman for New Democracy, Yiannis Michelakis, accused the government of “rustling up a new administration to enforce the same erroneous policies.” Syriza, a coalition of leftist parties, said nothing could prevent the collapse of Mr. Papandreou’s beleaguered administration, and the Communists described the new cabinet as “dangerous.”

Mr. Venizelos said the government would continue to work for consensus with the parties that have opposed its austerity program. “We are open to ideas and dialogue but will not diverge from our fiscal targets,” he said. “The country must be saved and will be saved but we must work together, all Greeks together,’ he said.

Speaking at the same press conference, Mr. Papaconstantinou said he was “extremely happy” to be handing over the task of reviving the economy to a colleague with “experience and dedication.” While he acknowledged making mistakes during his term as finance minister, Mr. Papaconstantinou said the government’s actions had helped to avert a worse fate.

“We had reached the brink of disaster, and we managed to keep the country on its feet, and put into motion a series of important economic reforms,” he said. As evidence, he cited a crackdown on tax evasion, which has seen limited success, as well as the launch of a drive to privatize state assets. Greece, he noted, managed to reduce its budget deficit last year by 5 percent of gross domestic product, an unprecedented achievement for a euro-zone country.

Elias Mossialos, a professor of health policy at the London School of Economics who was appointed as the new government spokesman, replacing George Petalotis, told Net television, a state channel, that the priority now was “to restore the stability of the Greek economy.” He also said that “negotiations were under way” with Greece’s creditors regarding the terms of the bailout, but did not state explicitly that the country would seek changes to the existing agreement.

The Finance Ministry was initially offered to Lucas Papademos, a Columbia-educated economist who served as vice president of the European Central Bank from 2002 to 2010, but he turned it down.

Mr. Venizelos will also become a second deputy prime minister. Mr. Papandreou already has another Socialist veteran, Theodoros Pangalos, 73, as his first deputy.

Mr. Papaconstantinou, 50, the chief architect of the Greek government’s austerity drive, was named environment minister, a clear demotion.

Other key moves include the ousting of Dimitris Droutsas, 43, as foreign minister. He was replaced by Stavros Lambrinidis, a Yale-educated lawyer. Mr. Droutsas is broadly regarded by observers as having fallen short of the demands of a difficult portfolio.

Another victim of the reshuffle was Labor Minister Louka Katseli, 59, one of the most controversial figures in Mr. Papandreou’s cabinet. The Princeton-educated economist had repeatedly clashed with Greece’s foreign creditors on several proposed economic reforms including amending labor contracts that protect the rights of workers in the private sector. She was replaced by her deputy, Yiannis Koutroumanis.

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Op-Ed Contributor: Why Greece Should Reject the Euro

 

SOMETIMES there is turmoil in the markets because a government threatens to do what is best for its citizens. This seemed to be the case in Europe last week, when the German magazine Der Spiegel reported that the Greek government was threatening to stop using the euro. The euro suffered its worst two-day plunge since December 2008.

Greek and European Union officials denied the report, but a threat by Greece to jettison the euro is long overdue, and it should be prepared to carry it out. As much as the move might cost Greece in the short term, it is very unlikely that such costs would be greater than the many years of recession, stagnation and high unemployment that the European authorities are offering.

The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. Its peso was pegged to the dollar, which is similar to Greece having the euro as its national currency. The Argentines took loans from the International Monetary Fund, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.

Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.

Within three years Argentina was back to its pre-recession level of output, despite losing more than twice as much of its gross domestic product as Greece has lost in its current recession. By contrast, in Greece, even if things go well, the I.M.F. projects that the economy will take eight years to reach its pre-crisis G.D.P. But this is likely optimistic — the I.M.F. has repeatedly lowered its near-term growth projections for Greece since the crisis began.

The main reason for Argentina’s rapid recovery was that it was finally freed from adhering to fiscal and monetary policies that stifled growth. The same would be true for Greece if it were to drop the euro. Greece would also get a boost from the devaluation’s effect on the trade balance (as Argentina did for the first six months of recovery), since its exports would be more competitive, and imports would be more expensive.

Press reports have also warned of a sharp increase in Greek debt from devaluation if it were to leave the euro zone. But the fact is that Greece would not pay this debt, as Argentina did not pay two-thirds of its foreign debt after its devaluation and default.

Portugal just concluded an agreement with the I.M.F. that projects two more years of recession. No government should accept this kind of punishment. A responsible leader would point out to the European authorities that they have the money to support Greece with countercyclical policies (like fiscal stimulus), though they are choosing not to.

From a creditors’ point of view, which the European Union authorities have apparently adopted, a country that has accumulated too much debt must be punished, so as not to encourage “bad behavior.” But punishing an entire country for the past mistakes of some of its leaders, while morally satisfying to some, is hardly the basis for sound policy.

There is also the idea that Greece — as well as Ireland, Spain and Portugal — can recover by means of an “internal devaluation.” This means increasing unemployment so much that wages fall enough to make the country more internationally competitive. The social costs of such a move, however, are extremely high and it rarely if ever works. Unemployment has doubled in Greece (to 14.7 percent), more than doubled in Spain (to 20.7 percent) and more than tripled in Ireland (to 14.7 percent). But recovery is still elusive.

You can be sure that the European authorities would offer Greece a better deal under a credible threat of leaving the euro zone. In fact, there are indications that they may have already moved in response to last week’s threat.

But the bottom line is that Greece cannot afford to settle for any deal that does not allow it to grow and make its way out of the recession. Loans that require what economists call “pro-cyclical” policies — cutting spending and raising taxes in the face of recession — should be off the table. The attempt to shrink Greece’s way out has failed. If that’s all that the European authorities have to offer, then it is time for Greece, and perhaps others, to say goodbye to the euro.

Mark Weisbrot is the co-director of the Center for Economic and Policy Research.

 

High & Low Finance: Inevitability of a Default in Greece

“It would have a tremendous cost, with no benefit,” the minister, George Papaconstantinou, said in an interview on Greek television. “Greece would be out of markets for 10, 15 years.”

To financial markets, and to many other observers, it is more than thinkable. It is very close to a sure thing. When, how, and how messy it will be are open to question.

It was just a year ago this weekend that Europe bailed out Greece, amid much self-congratulatory talk. Olli Rehn, the European commissioner for monetary policy, said the move was “particularly crucial for countries under speculative attacks in recent weeks,” a reference to Spain and Portugal.

Markets — described by Anders Borg, Sweden’s finance minister, as “wolf packs” — returned to their lairs on the Monday after the bailout. The yield on three-year Greek government bonds plunged to 7.7 percent from 17.5 percent, as the price of such bonds soared 28 percent in a single day.

And how have things gone since then? Just fine in Germany, where growth is accelerating and unemployment is lower than at any time since German unification. The European Central Bank is even raising interest rates to curb inflation there. It’s going more or less acceptably in France and Italy, each of which recorded G.D.P. growth of 1.5 percent in 2010, well below Germany’s 4.0 percent. But it’s not going well at all in the country that supposedly was rescued. Greece’s economy shrank 6.6 percent, far more than the 1.9 percent decline in 2009.

The market wolves are howling again. The yield on Greek three-year bonds is more than 23 percent, not that anyone thinks that yield will really be received. The yields on similar Portuguese and Irish bonds have also soared into double digits. Investors are a little more skittish about Spanish and Italian bonds than they had been, but there is no sense of impending disaster.

Longer-term rates on Portuguese debt did slide a little this week after a tentative agreement on a bailout, but they remain at levels that show widespread doubts about the country’s ability to pay.

The trading patterns of Greek bonds indicate that traders expect a restructuring, and they think it will be messy.

That yields are as low as they are — if you can call 23 percent low — is a reflection of the fact that the bailout has been going on below the surface. The European Central Bank has been lending money to Greek banks, accepting Greek bonds as collateral on loans to other banks, and even buying bonds.

Keeping up the fiction that all will somehow be well if we just wait has its own disadvantages.

“Delays in restructurings are costly,” Alessandro Leipold, the chief economist of the Lisbon Council, a Brussels-based research group, and a former official of the International Monetary Fund, wrote in a paper this week. He warned that the longer the inevitable was delayed, the more potential economic production would be lost and the greater the amount of good money that would be thrown after bad in the form of ever larger bailouts. Ultimately, he said, the result would be larger losses for bondholders.

“The real problem is capital shortfalls in European banks,” said Whitney Debevoise, a partner in Arnold & Porter and a former executive director of the World Bank, who has been involved as a lawyer for countries and creditors in several restructurings. Until the banks have more capital, forcing them to admit to losses would be problematic, to put it mildly.

Stalling has worked before. In the early 1980s, major American banks could not afford to admit that they had lost huge sums in the Latin American debt crisis. “There was,” Mr. Debevoise said in an interview, “a five-year period of temporizing while Citibank and other banks rebuilt capital.” Finally, there was a debt restructuring and the banks admitted to their losses.

Currently, some European banks would probably be hard pressed to take losses, a group that may include some of the German landesbanks, which are generally owned by state governments and are badly in need of new capital.

The European Central Bank itself would hate to report losses, which is one reason that the first Greek restructuring, when it comes, may avoid forcing bondholders to accept “haircuts,” or reductions in principal. Instead, cutting interest rates and postponing maturities could allow the central bank to pretend it had not lost money. Eventually, however, haircuts seem inevitable.

Although there have been plenty of defaults and restructurings by national governments in recent decades — a partial list includes Argentina, Brazil, Uruguay, Russia, Ukraine, Pakistan and Ecuador — there is no agreement on the way to arrange a restructuring. Nearly a decade ago, the I.M.F. tried to put together what it called a “sovereign debt restructuring mechanism,” a sort of international bankruptcy law. The effort collapsed.

As a result, restructurings can be messy. Some bondholders can try to hold out on approving a plan, hoping they will be paid more than those who agree. Lawsuits will be filed.

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