The Arguments Against Greek Debt Restructuring

♠ Posted by Emmanuel in ,, at 5/11/2010 12:04:00 AM
Some commentators believe it's inevitable that Greece will not be able to stomach tough conditionalities imposed by the EU and IMF and cry uncle sooner rather than later. As with other probabilities of default, odds are being placed on how long Greece can stave off restructuring. What could a restructuring entail? These can range from comparatively mild measures such as lengthening the repayment period to those which can spook markets more such as unilaterally giving bondholders haircuts (e.g., a 30% haircut would mean reducing the amount owed to 70% of the principal).

For its part, however, IMF officialdom still believes that Greece can, presumably with a lot of perseverance and quite a bit of luck in improving background conditions, avoid a debt restructuring. While we of course wait for the fate of Greece, here are some arguments marshalled by the IMF as to why a restructuring at this point in time is inadvisable. What's more, the IMF still believes that its current conditionalities are kinder and gentler than before. In particular, it brings up the notion of "ownership" insofar as it says the current Greek government helped draw up the conditionalities it must meet. From an IMF Survey...

Asked why Greece should not opt for restructuring its debt, [IMF First Deputy Managing Director] Lipsky said debt restructuring would create more problems than it could potentially solve, with a default making things much worse.
  • Restructuring debt would not help Greece’s capacity to grow. The type of fiscal and structural reforms being put in place under the Government’s program are designed to do that – to bring down costs, to make the labor market more flexible and to improve the business and investment climate.
  • The web of economic and political inter-linkages—including that Greek bonds are held by a wide variety of private investors and public entities—severely complicates alternatives to the program the government has put in place. Any perceived positive near term effects of a debt restructuring need to be weighed against contagion effects.
  • Most of the adjustment in Greece is needed to eliminate its large primary deficit (the deficit net of interest payments). This is the main issue for Greece, not the level of the debt.
But prudent debt management is part of the government’s strategy and it is updating its tools to ensure that risk is adequately managed.

Questions about conditions

Asked by reporters if the Greece Stand-By Arrangement marked a return by the IMF to earlier times of a “laundry list” of conditions attached to loans, Lipsky said that these were well targeted conditions that would help correct the imbalances in the Greek economy.
  • The program is focused on Greece's two key problems: high debt and a lack of competitiveness. Conditionality is very much focused on these issues.
  • The Greek authorities have strong ownership and leadership and it is their program.
  • The program includes measures to protect the most vulnerable, which are a critical component to effective implementation.
Has this turn of events made John Lipsky more cautious in his assertions? I certainly hope so. Prior to the credit crisis--so very long ago when I was but a wee lad, it seems--there was no greater cheerleader for financial innovation than he was [1, 2]. Circumspection is now the order of the day as the euphorias of yesteryear have fallen by the wayside on the boulevard of broken dreams we call subprime globalization.