How Greece Became a Lesson in the Perils of No Rules
A whole continent is now making things up as it goes along — all because Brussels was unwilling to face the possibility of failure.
Plenty of people will tell you what is going to happen with Greece in the coming week. The truth is, no one knows for sure. And that’s exactly the problem — with no rules to go by, the financial system is at the mercy of personalities, politics, and posturing.
After years of supposed deadlines and last-minute extensions, Greece is finally at the last-chance saloon. Its owes $1.7 billion to the International Monetary Fund on June 30, and the European Central Bank has refused to extend further aid to its banks. Default is looming, and bank runs and closures have already begun, even before Greece’s July 5 referendum on the European Union’s latest proposal — a 10-page list of actions Greece must take to receive continued funding, from reforming its labor market and tax system to privatizing state assets and cutting corruption.
This is uncharted territory for the European Union, the eurozone, and even for the long history of governments defaulting on their debts. Greece is a country that entered a flawed monetary union under false pretenses and issued more debt than it could handle without any restraint from the monetary union’s central authorities. There’s plenty of blame to go around, and intelligent people can disagree about who should foot the bill for Greece’s profligacy, which was funded so eagerly in the good times by its fellow members of the eurozone.
Disagree they have, including at the negotiating table — and that’s dangerous. If you’re convinced that you’re right, you’ll naturally expect your counterparts on the other side to come around to your view eventually. When they don’t, you may well decide that they’re being unreasonable, that they’ll never see the light, and that it’s time to walk away.
This, apparently, is what Greek Prime Minister Alexis Tsipras did in calling for the referendum last week even as his team continued to negotiate in Brussels. It is what the European Central Bank did by choosing not to offer more support to Greek banks. It is also what the European Commission did by publishing its latest proposal, as if to say, “See? We’re the rational ones here.”
And this is how defaults happen. Greece had not yet exhausted all the available options for prolonging its financial limbo. As Willem Buiter of Citigroup and others have said, defaults in the eurozone happen when governments won’t pay, not when they can’t pay.
That a country in the eurozone would face this decision is not a surprise. The monetary union was not set up to deal with disparate economic cycles and divergent futures. Yet the descent into dissension still could have been avoided with three sets of firm and enforced rules: rules about how to get into the eurozone, rules about what countries could do in the eurozone, and, yes, rules about how to get out of the eurozone.
The first set of rules already existed when Greece joined in 2001, but they were not enforced. Instead, compelled by overriding political imperatives, Europe’s auditors were easily fooled by Greece’s fudged fiscal numbers. The second set of rules would have set stricter limits on budget deficits and debt — to be enforced even when flouted by countries like France and Germany. Even in the absence of the first set, the second set of rules would have stopped Greece from running up enormous euro-denominated debts. These rules only became a reality after the crisis that spread across the eurozone made their necessity obvious.
The third set of rules still does not exist, because the European Union refuses to countenance the idea that a country could leave the monetary union — the same monetary union that all EU members, bar those with special dispensations, are eventually expected to join. The politicians in Brussels and the bankers in Frankfurt have preferred to keep their vision pristine rather than making it complete, and now they are paying the price.
In a way, the world has been down this road before. After the failed bailout of Argentina in 2001 and its government’s subsequent dispute with its creditors — a dispute that continues today — financial authorities including the IMF considered the idea of a bankruptcy process for countries, sometimes called a sovereign debt workout mechanism. Under the mechanism, a central international agency would follow an established method for deciding who would be paid, in what order, how much, and when. The idea was that a country in default could restructure its debts in an orderly way without doing excessive harm to its economy. The rules would be transparent and applied equally to all.
The mechanism was opposed mainly by the United States and its financial allies, as well as Wall Street institutions fearing that it would favor debtors from poor countries over creditors from rich ones. Former President George W. Bush’s administration was hostile to the idea of an international authority — much as it was to the International Criminal Court and other such entities — preferring to allow the private market to resolve its own problems through the terms attached to government bonds. Yet that same reliance on the private market is what has allowed Argentina’s debt crisis to drag on until today, with no possibility of the country returning to global credit markets until it is resolved. The fate of the government and the holders of its bonds has been bogged down in court proceedings in New York that even Washington has formally criticized.
If — or when — Greece defaults, the aftermath could last just as long. Hedge funds from around the world, hoping for a better outcome, rushed to buy Greek bonds in recent months, and there’s no reason to believe they’ll be any less tenacious than the ones now battling Argentina. The claims will wind their way through the courts once again, and all because no one stepped in to enforce rules and impose order.
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